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 endedJune 30, 20122015
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______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)
Registrant’s telephone number, including area code:27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, | |
par value $0.001 per share | NASDAQ Global Select Market |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
[ ] | Large accelerated filer | [X] | Accelerated filer |
[ ] | Non-accelerated filer | [ ] | Smaller reporting company |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant as of December 31, 20112014 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of the common stock as reported by The Nasdaq Global Select Market on such date, was $286,757,561.$270,658,800. This calculation does not reflect a determination that persons are affiliates for any other purposes.
As of August 21, 2012, 45,548,90218, 2015, 46,679,565 shares of the registrant’s common stock, par value $0.001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 20122015 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KYear Ended June 30, 2012
NET 1 UEPS TECHNOLOGIES, INC. |
INDEX TO ANNUAL REPORT ON FORM 10-K |
Year Ended June 30, 2015 |
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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 1A—“Risk 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 induring our 20132016 fiscal year, which runs from July 1, 20122015 to June 30, 2013.2016.
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 now 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 new UEPS/EMV technology is currently beinghas 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, health carehealthcare management, international money transfers, voting and identification.
We also provide secure transaction technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony, and integrated circuit card (chip/smart card) technologies.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 recipientsrecipient cardholders across the entire country, process debit and credit card payment transactions on behalf of retailers that we believe represent nearly 65%a wide range of retailers within the formal retail sector in South Africa through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service that processes monthly payments for approximately 1,250 employer groups representing over 850,000 employees. Our MediKredit service providesservice. 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 majority of funders and providers of healthcaretop three value-added network, or VAN, processors in South Africa with an on-line real-time management system for healthcare transactions. We perform a similar service in the US through our XeoHealth subsidiary.
Internationally, though KSNET, the second largest transaction processor by volume in Korea, and we offer card processing, payment gateway and banking value-added services in that country. The acquisitionOur XeoHealth service provides funders and providers of KSNET during the second quarter of fiscal 2011, expands our international footprint as well as diversifies our revenue, earnings and product portfolio. We have also concluded dealshealthcare in United States with an on-line real-time management system for healthcare transactions.
Our ZAZOO business unit is responsible for the provisionworldwide technical development and commercialization of our array of web and mobile applications and payment technologies, such as Mobile Virtual Card, or MVC, services and/Chip and GSM licensing and Virtual Top Up, or licenses with customersVTU, and has deployed solutions in Mexico, Spainmany countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and India.Colombia.
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All references to “the Company,” “we,” “us,” or “our” are references to Net 1 UEPS Technologies, Inc. and its consolidated subsidiaries, collectively, and all references to “Net1” are to Net 1 UEPS Technologies, Inc. only, except as otherwise indicated or where the context indicates otherwise.
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Market Opportunity
Services for the Under-banked:under-banked: According to the World Bank, three quarters of the world'sworld’s poor, living on less than $2 a day, have no bank account. As a result, 2.5 billion adults around the world, or 50% of the world’s 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 individual’s income, a bank account provides little or no meaningful benefit or there is insufficient infrastructure to provide financial services economically in the individual’s geographic location. We refer to these people as the unbanked and the under-banked. These individuals typically receive wages, welfare benefits, money transfers or loans in the form of cash, and conduct commercial transactions, including the purchase of food and clothing, in cash.
The use of cash, however, presents significant risks. In the case of recipients,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 2530 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 rapidcontinued global growth of retail credit and debit card transactions is reflected in the April 2012March 2015 Nilson Report, according to which worldwide annual general purpose card purchase dollar volume increased 17.5%16.5% to $15.4$23.8 trillion in 2011,2014, while transaction volume increased by 11.7%13.2% to 161.3230 billion transactions and cards issued increased by 12.4%12.9% to 6.59.5 billion cards during the same period. General purpose cards include the major card network brands such as MasterCard, Visa, China UnionPay and American Express. In South Africa, we operate the largest bank-independent transaction processing service through EasyPay, where we have developed a suite of value-added services such as bill payment, airtime top-up, gift card, money transfer and pre-paidprepaid utility purchases that we offer as a complete solution to merchants and retailers. In South Korea, through KSNET, we operateare one of the second largest transaction processor by volume, wheretop three VAN processors, and we provide card processing, banking value-added services and payment gateway functionality to the retail industry.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: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 Bank’s 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 to 16 percent of the market in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure problems.
Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access to formal financial and other services. Today, most mobile payment solutions offered by various participants in the industry largely provide access to information and basic services, such as allowing consumers to check account balances or transfer funds between existing accounts with the financial institution, but they offer limited functionality and ability to use the mobile device as an actual payments and banking instrument. Our UEPS solution isand MVC solutions are enabled to run on the SIM cards in or as applications on mobile phones and providesprovide 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 MediKredit and XeoHealth servicesservice we combine our payments expertise withutilize our real-time rules engine and claims processing technology to offer governments, funders and providers of healthcare a comprehensive solution that offers a completely automated healthcare rules adjudication and payment system, reducing both cost and time.
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Our Key ProductsCore Proprietary Technologies
The UEPS Technologyand UEPS/EMV
UEPS
We developed our core UEPS technology to enable the affordable delivery of financial products and services to the world’s unbanked and under-banked populations. Our native UEPS technology is designed to provide the secure delivery of these products and services in the most under-developed or rural environments, even in those that have little or no communications infrastructure. Unlike a traditional credit or debit card where the operation of the account occurs on a centralized computer, each of our smart cards effectively operates as an individual bank account for all types of transactions. All transactions that take place through our system occur between two smart cards at the point of service, or POS, as all of the relevant information necessary to perform and record transactions reside on the smart cards.
The transfer of money or other information can take place without any communication with a centralized computer since all validation, creation of audit records, encryption, decryption and authorization take place on, or are generated between, the smart cards themselves. Importantly, the cards are protected through the use of biometric fingerprint identification, which is designed to ensure the security of funds and card holder information. Transactions are generally settled by merchants and other commercial participants in the system by sending transaction data to a mainframe computer on a batch basis. Settlements can be performed online or offline. The mainframe computer provides a central database of transactions, creating a complete audit trail that enables us to replace lost smart cards while preserving the notional account balance, and to identify fraud.
Our UEPS technology includes functionality that allows the following:
• | Transparent and automatic recovery of transactions; | |
• | Transaction cancellation; | |
• | Refunds; | |
• | Multiple audit trails; | |
• | Offline loading and spending; | |
• | Biometric identification; | |
• | Continuous debit; | |
• | Multiple wallets; | |
• | “Morphing” of other common payment systems, such as EMV; | |
• | Automatic credit; | |
• | Automatic debit; | |
• | Interest calculations; and | |
• | “Milking” / batching of large transaction volumes in an off-line environment. |
Our UEPS technology incorporates the software, smart cards, payment terminals, back-end 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.
UEPS/EMV
Our latest version of the UEPS technology is interoperable with the global EMV standard, allowing the cards to be used wherever EMV cards are accepted, while also providing all the additional functionality offered by UEPS. This UEPS/EMV functionality is especially relevant in areas where there is an established payment system and provides flexibility to our customers to be serviced at any POS, including point of service.
Payment Transaction Management
sale devices and ATMs. Our UEPS/EMV solution therefore expands our addressable market to include developed economies with established payment transaction management service incorporatesnetworks. The UEPS/EMV technology removes the entire electronic funds transfer,hurdle, often perceived in developed economies, of operating a proprietary or EFT, and non-EFT transactions suites, allowing merchants to accept“closed-loop” system by providing a range oftruly inter-operable payment tokens/instruments and banks to acquire those payment tokens/instruments. This encompasses conventional magnetic-stripe cards, credit, debit and private label cards, and contact and contact-less smart cards with PIN and/or biometric cardholder verification.
The service utilizes a complex set of processing rules defined by the card associations, central banks and local issuers governing the acceptance or rejection of the payment token/instrument presented to a merchant. These rules are applied for goods or services and vary by merchant category as background tasks of the transaction management service.solution.
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We provide a complete end-to-end reconciliation and settlement service to our business partners, including dynamic reconciliation, report and screen-query tools for down-to-store-level management and control purposes, backed by 24x7x365 monitoring and support, reconciliation, settlement, reporting, full disaster recovery and redundancy services.
Our flexible transaction management solutions enable simple integration to various hardware platforms and pay-point applications within large retail groups, smaller stores and franchises. These platforms include: retail POS, EFT terminals, standalone PCs, self service terminals and kiosks, ATMs, mobile phones and the internet.
We also provide a range of value-added services as part of our transaction management offering, such as bill payments, gift cards, prepaid airtime, prepaid utilities and money transfers.
Healthcare Transaction Management
We offer financial and clinical risk management solutions to both funders and providers of healthcare, through online real-time management of healthcare transactions. Our adaptable healthcare claims processing and managed care services are designed to accommodate the complex benefit design as well as other processing requirements of our clients and our functionality extends to all healthcare claim types, including pharmacy, doctor, public and private hospital claims. Our service is enabled by our proprietary claims processing and managed care systems that adjudicate medical claims allowing patients and healthcare providers to have immediate and accurate information on the financial and clinical impacts of, and payment responsibilities for services and products provided by healthcare providers.
Our proprietary software allows for real-time claim adjudication involving the submission of an electronic data interchange claim and receipt of a response with the adjudication details within seconds. Our system allows for real-time messaging with an immediate response to an enquiry within a single, synchronous communication session. Our intellectual property incorporates “rule stacking” technology that allows for the creation of a rule for a specific patient for a specific healthcare product or service, which rule is then used to adjudicate against in real-time. This unique technology offers complex rule applications in a scalable and flexible manner on all medical claim types – it is a heuristic computerized framework that dynamically creates scenario-specific rules.
Payroll Transaction Management
Our payroll transaction management service offers employers an easy and flexible method of making payments to creditors arising from payroll processing. Our solution enhances the electronic movement of money in the business and financial community, assisting our clients to manage net pay, third party, garnishee order and creditor payments correctly, promptly and securely. In addition, we provide the relevant information to the recipient organization via predefined schedules or payment remittance advices, thus simplifying the process of reconciliation.
Mobile Virtual Card
We have developed MVC, an innovative mobile phone-based payment solution MVC, that enables secure purchases with no disruption to existing merchant infrastructures and provides significant incentives for all stakeholders.
The MVC solution utilizes existing and traditional payment methods but enhances them by replacing or tokenizing plastic card data with a one-time-use virtual card data, hence eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual card data replaces, digit-for-digit, the credit (or debit) card number, the expiration date and the card verification value with only the issuer bank identification number (first 6-digit) remaining constant.
The MVC solution uses the mobile phone to generate virtual cards offline. The mobile phone is the most available, cost-effective, secure and portable platform for generating virtual cards for remote payments (online purchasing, money transfers, phone and catalogue orders).
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 presentcard-not-present transactions for internet payments in our initial deployments, we haveare constantly expanding the ability to customizeapplicability of the software as industry acceptance increases to incorporate new trends such as presentation through near field communication, or NFC, or Quick Response, or QR, Codes.
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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 subscriber’s 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 via direct deposit.other electronic wallets.
The benefits of MVC include, for:
Financial services
We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are able to provide our customers with competitive microfinance, life insurance and money transfer products based on our understanding of their risk profiles, earning and spending patterns, demographics and lifestyle requirements.
Hardware solutions
We provide hardware solutions that have been developed to optimize the performance of our payment and transaction processing solutions. These hardware solutions include;
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Our Strategy
We intend to provide the leading transacting system for the billions of unbanked and under-banked people in the world to engage in electronic transactions, as well asto 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 new secure mobile payment technologies and health carehealthcare processing services globally. To achieve these goals, we are pursuing the following strategies:
Build on our significant and established infrastructures—We control significant components of the payment infrastructure in South African infrastructure—InAfrica, 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, as the national provider of social welfare payment distribution services to the country’s large unbanked and under-banked population, the largest third-party processor of retail merchant transactions and the leading processor of third-party payroll payments and the leading processor of health care claims.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.
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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 economies—While our business has traditionally focused on marketing products and services to the world’s 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 processor’s 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 well-positionedmore 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 gainpursue acquisition opportunities and partnerships that provide us with an entry point for our existing products into a new market, shareor 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 build upon the critical mass that we have developed in South Africaits participants, such as China UnionPay and have identified the following opportunities to continue to drive growth in our South African business:Alipay.
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Our Clusters and Business Units
Our company is organized into the following “clusters” and within each cluster, separate business units.units:
Transactional Solutions ClusterZAZOO
Cash Paymaster Services (“CPS”)
Our CPSZAZOO business unit deploys our UEPS – Social Grant Distribution technology to distribute social welfare grants on a monthly basis to over nine million beneficiariesis managed from London, United Kingdom with business development support branches in South Africa. These social welfare grants are distributed on behalf of SASSA. During our 2012, 2011Africa, the United States and 2010 fiscal years, we derived 41%, 47%,India. This business unit is responsible for the technical development and 66%commercialization of our revenues respectively, from CPS’ social welfare grant distribution business.array of web and mobile applications and payment technologies.
CPS provides a secureZAZOO offers an array of products and affordable transacting channel between social welfare grant beneficiaries, SASSA and formal businesses. CPS enrolls social welfare grant beneficiaries by issuing them a UEPS/EMV smart cardservices that digitally stores their biometric fingerprint templates oncater for the smart card, enabling them to access their social welfare grants securely at any time or place. The smart card is issued to the beneficiary on site and utilizes optical fingerprint sensor technology to identify and verify a beneficiary. The beneficiary simply inserts a smart card into the POS device and is prompted to present his fingerprint. If the fingerprint matches the one stored on the smart card, the smart card is loaded with the value created for that particular smart card. Additionally, during enrolment we capture the beneficiary’s voice print to perform biometric verification when using channels such as ATMs and traditional POS terminals that normally do not have fingerprint readers.
The smart card provides the holder with access to allneeds of the UEPS functionality, which includesglobal market and comprises of the ability to have the smart card funded with pension or welfare payments, make retail purchases, enjoy the convenience of pre-paid facilities and qualify for a range of affordable financial services, including insurance and short-term loans as well as standard EMV transactional capabilities to operate wherever MasterCard is accepted. The smart card also offers the card holder the ability to make debit order payments to a variety of third parties, including utility companies, schools and retail merchants, with which the holder maintains an account. The card holder can also use the same smart card as a savings account.following key business lines:
• | MVC & Verification—Our internationally patented MVC technology is a market leading innovation which addresses the needs of the modern mobile payment market. It is the easiest, most secure and most convenient way to pay for goods and services online directly from a mobile phone. Our MVC technology provides a completely secure, off-line payment solution for card-not-present transactions, such as payments made for internet purchases. The MVC technology runs as an application on any mobile phone and utilizes our patented cryptographic card generator to secure any payment transaction. The advent of new technologies such as NFC or QR Codes also enables the utilization of our MVC technology for card present payments. | |
• | Third Party Payments—Through 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. | |
• | 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. | |
• | MNOs Solutions—We 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. |
Our UEPS - Social Grant Distribution technology provides numerous benefits to government agencies and beneficiaries. The system offers government a reliable service at a reasonable price. For beneficiaries, our smart card offers convenience, security, affordability, flexibility and accessibility. They can avoid long waiting lines at payment locations and do not have to get to payment locations on scheduled payment dates to receive cash. They do not lose money if they lose their smart cards, since a lost smart card is replaceable and the biometric fingerprint or voice identification technology helps prevent fraud. Their personal security risks are reduced since they do not have to safeguard their cash. Beneficiaries have access to affordable financial services, can save and earn interest on their smart cards and can perform money transfers to friends and relatives living in other provinces. Finally, beneficiaries pay no transaction fees when they use our infrastructure to load their smart cards, perform balance inquiries, make purchases or downloads, or effect monthly debit orders. For us, the system allows us to reduce our operating costs by reducing the amount of cash we have to transport.
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• | Chip & SIM—Through 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. | |
• | Custom Development—The 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). | |
• | Cryptography—Our 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. |
This business unit has been allocated to our South African transaction-based activitiesprocessing, International transaction processing, and smart card accountsFinancial 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 in Korea,provider. KSNET has the broadest product offering in the country,South Korean payment solutions market, a base of approximately 220,000225,000 merchants and an extensive direct and indirect sales network. KSNET is based in Seoul, Korea. KSNET’s core operations comprise of three project offerings, namely card value-added network, or VAN, payment gateway, or PG, and banking VAN. KSNET is able to realize significant synergies across these core operations because it is the only payment solutions provider that offers all three of these offerings in South Korea. Over 90% of KSNET’s revenue comes from the provision of payment processing services to merchants and card issuers through its card VAN.
KSNET’s core product offerings are described in more detail below:
• | Card VAN—KSNET’s 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. | |
• | PG—KSNET 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. | |
• | Banking VAN—KSNET’s 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
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This business unit has been allocated to our International transaction processing reporting segment.
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Cash Paymaster Services (“CPS”)
Our CPS business unit is based in Johannesburg, South Africa, and deploys our UEPS/EMV–Social 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/EMV–Social 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. EasyPay’s infrastructure connects into all major South African banks and switches both debit and credit card EFT transactions for some of South Africa’s leading retailers and petroleum companies. It is a South African Reserve Bank, or SARB, approved third-party payment processor.
In addition to its core transaction processing and switching operations, EasyPay provides a complete end-to-end reconciliation and settlement service to its customers. This service includes dynamic reconciliation as well as easy-to-use report and screen-query tools for down-to-store-level, management and control purposes.
The EasyPay suite of services includes:
• | EFT—EasyPay switches credit, debit and fleet card transactions for leading South African retailers and petroleum | |
• | EasyPay bill payment—EasyPay offers consumers a point-of-sale bill payment service which is integrated into a large number of national retailers, the internet, self service kiosks and mobile handsets. EasyPay processes monthly account payment transactions for | |
• | EasyPay prepaid electricity— |
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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.
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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 has been allocated to our South African transaction-based activities reporting segment.
MediKredit/ XeoHealth
Our MediKredit business unit operates and markets our Healthcare Transaction Management systems and solutions in South Africa and is based in Johannesburg, South Africa. We estimate that MediKredit’s products affect 4.2 million of the seven million health-insured lives in South Africa. We also service the claims-processing needs of certain public hospitals, 100 medical scheme plans and ten of the major healthcare administrators in South Africa. Our functionality caters for all healthcare claim types which include pharmacy, doctor, private and public hospital claims.
MediKredit has been allocated to our South African transaction-based activities reporting segment.
Our XeoHealth business unit operates from Frederick, Maryland, and offers our XeoRules real time adjudication, or RTS, solutions for the end-to-end electronic processing of medical claims information in the U.S. XeoHealth has recently won a number of projects in the U.S. either as the primary contractor for the provision of our RTS solution to customers, or as a subcontractor to parties contracted to provide an adjudication solution.
XeoHealth has been allocated to our international transaction-based activities reporting segment.
FIHRST
FIHRST offers South African employers our payroll transaction management service and is based in Johannesburg, South Africa. FIHRST currently processes payments exceeding R77.7 billion on behalf of our clients every year, enabling salaries departments to achieve greater levels of efficiency and employee service. We have been chosen as the preferred payments partner by more than 1,250 employer groups of all sizes across all sectors of the economy, representing 850,000 employees. FIHRST is recognized by and works in partnership with the majority of third party payroll organizations including pension fund and medical aid administrators.
This business unit has been allocated to our South African transaction-based activities reporting segment.
Universal Electronic Technological Solutions (“UETS”)
Our UETS business unit is based in Johannesburg, South Africa and focuses on the sale, implementation and support of our UEPS technology, ranging from large scale, national projects to smaller, product specific regional projects. UETS focuses on identifying, defining and activating an entry point to commence operations in Africa (excluding South Africa), and in Iraq.
UETS markets the following solutions and products:
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Our UETS team also provides business development support in territories where UEPS systems have been sold and implemented, such as Ghana, Malawi, Namibia and Botswana.
This business unit has been allocated to our international transaction-based activities and hardware, software and related technology sales reporting segments.
Mobile Virtual Card
Our Net1 Virtual Card business unit is managed from Johannesburg, South Africa with business development support branches in the USA, Austria, India and Indonesia. Our MVC technology provides a completely secure, off-line payment solution for card not present transactions, such as payments made for internet purchases, The MVC technology runs as a application on any mobile phone and utilizes Net1’s patented cryptographic card generator to secure any payment transaction. The advent of new technologies such as NFC or QR Codes also enables the utilization of our MVC technology for card present payments.
Our launch customer in the US, MetroPCS, is one of the top five US wireless carriers. MetroPCS offers our MVC technology under the VCPayTM brand as an application that is pre-loaded on new smart phones. We believe our VCPay application is the first mobile phone-based prepaid program with no requirement for the user to have a physical card or bank account. In addition, we have entered into agreements with MoneyGram International, a global money transfer company, and GreenDot Corporation, a major issuer of prepaid credit cards in the United States, to enable subscribers to load their prepaid virtual accounts with cash at any of MoneyGram’s and GreenDot’s 100,000 US agents, which are located in most communities including many grocery, pharmacy and convenience store chains, or electronically via their bank accounts or via direct deposit.
We have also concluded deals for the provision of MVC services and/or licenses with customers in Mexico, Spain and India.
This business unit has been allocated to our international transaction-based activities reporting segments.
Hardware and Software Sales Cluster
We have dedicated business units responsible for the development, production, marketing, maintenance and support of our Hardware Solutions. These business units are:
These business units have been allocated to our hardware, software and related technology sales reporting segment.
Financial Services Cluster
Finance Holdings
This business unit is responsible for identifying financial services products that can be provided to our UEPS cardholders in South Africa and then marketing and implementing the provision of those products. We currently provide micro-loans to our UEPS cardholders who receive social welfare grants through our system in the KwaZulu-Natal and Northern Cape provinces. We provide the loans ourselves and generate revenue from the service fees charged on these loans.
Our wage payment system offers wage earners a UEPS card that allows them to receive payment, transact and access other financial services in a secure, cost-effective way.
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SmartLife
SmartLife is a licensed South African life insurance company and provides us with an opportunity to offer relevant insurance products directly to our existing customer and employee base in South Africa. We intend to offer this customer base a full spectrum of products applicable to this market segment, including credit life, group life, funeral and education insurance policies. SmartLife commenced activities in the second quarter of fiscal 2012.
Prior to its acquisition by us, Smart Life had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not written any new insurance business for a number of years and had reinsured all of its risk exposure under its life insurance products. SmartLife has been allocated to our financial services operating segment.
These business units have been allocated to our financial services reporting segment.
Corporate Cluster
The Corporate Cluster provides global support services to our business units, joint ventures and investments for the following activities:
• | Group executive— | |
• | Finance and administration— | |
• | Group information technology— | |
• | Joint ventures and investments unit—
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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 SASSA’s 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 SASSA’s latest tender process, we will remain the service provider unless and until a new contractor is appointed and our services have been phased out
EasyPay’s 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.
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We believe that SASSA considers the technology utilized, pricing of the payment service rendered and other factors such as black economic empowerment, or BEE, rating as the most important factors when considering potential service providers. We compete with other service providers on these aspects through SASSA’s tender processes, when applicable, or through contract extension negotiations. Following the award of the SASSA tender to us in January 2012 to pay all social welfare grants in South Africa for a period of five years commencing April 1, 2012, we believe that the next competitive tender process will commence during 2016.
We have identified 10 major card VAN companies in Korea, of which KSNET is one of the four largest. The other three large VAN companies are NICE Information & Telecommunication Inc., First Data Korea Limited and Korea Information & Communications Company, Limited. Entities operating in the VAN industry in Korea compete on pricing and customer service.
EasyPay’s competitors include BankservAfrica, UCS, eCentric and Transaction Junction. BankservAfrica is the largest transaction processor in South Africa which processes all transactions on behalf of the South African banks and claims to process in excess of 2.6 billion transactions valued at trillions of rands annually. During fiscal 2012, EasyPay processed 425 million transactions with a total value of ZAR 92.9.
In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities in the mobile payments industry. While the industry is still in its infancy, a number of entities are establishing their presence in this space. Specifically identified entities include traditional payment networks such as Visa, MasterCard and American Express; commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google, 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 2012, 20112015, 2014 and 2010,2013, we incurred research and development expenditures of $3.9$2.4 million, $5.7$2.2 million and $7.6$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 andas well as the design and development of our MVC concept.concept and mobile payment applications. For example, we continually advanceimprove our security protocols and algorithms as well as develop new UEPS features that we believe will enhance the attractiveness of our product and service offerings. Our research and development efforts also focus on taking advantage of improvements in the hardware platforms that are not proprietary to us but which form part of our system.
Intellectual Property
Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a number of trademarks in various countries.
Financial Information about Geographical Areas and Operating Segments
Note 2223 to our consolidated financial statements included in this annual report contains detailed financial information about our operating segments for fiscal 2012, 20112015, 2014 and 2010. During fiscal 2012, we reallocated certain of our operating activities among these segments, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 | ||||||||||||||||||
2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||
South Africa | $ | 272,063 | $ | 264,485 | $ | 267,478 | $ | 140,308 | $ | 115,809 | $ | 111,430 | |||||||
Korea | 114,096 | 68,392 | - | 224,272 | 258,791 | - | |||||||||||||
Europe | 2,413 | 10,465 | 12,301 | 38 | 139 | 42,489 | |||||||||||||
Rest of world | 1,692 | 78 | 585 | 6,873 | 6,817 | 8,081 | |||||||||||||
Total | $ | 390,264 | $ | 343,420 | $ | 280,364 | $ | 371,491 | $ | 381,556 | $ | 162,000 |
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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, 2012,2015, we had 4,851 employees, which included approximately 2,500 temporary employees contracted to assist with our SASSA implementation.4,764 employees. On a segmental basis, 206217 employees were part of our management, 4,0802,579 were employed in South African transaction-based activities, 178transaction processing, 242 were employed in international transaction-based activities, 12International transaction processing, and 1,726 were employed in financial servicesFinancial inclusion and 375 were employed in smart card, hardware, softwareapplied technologies and related technology sales and corporatecorporate/eliminations activities.
We expect our employee base to remain at approximately 5,000 people for most of fiscal 2013 until we have concluded the implementation of our SASSA contract. Once complete, we expect our permanent employee base to stabilize around approximately 3,000 employees.
On a functional basis, four of our employees were part of executive management, 181122 were employed in sales and marketing, 225208 were employed in finance and administration, 321327 were employed in information technology and 4,1204,103 were employed in operations.
As of June 30, 2012,2015, approximately 9076 of the 4,0802,579 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 157169 of the 179221 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.
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Corporate history
Net1 was incorporated in Florida in May 1997. Until June 2004, Net1 was a development stage company and its business consisted only of holding a license to payment systems intellectual property and an exclusive marketing agreement for the UEPS technology outside South Africa, Namibia, Botswana and Swaziland. In June 2004, Net1 acquired Net1 Applied TechnologiesTechnology Holdings Limited, or Aplitec, a public company listed on the JSE Limited,Johannesburg Stock Exchange, or JSE. Aplitec owned the payment systems intellectual property in South Africa, Namibia, Botswana and Swaziland and one of its subsidiaries was the other party to the marketing agreement described above. The primary purpose of the Aplitec transaction was to consolidate all intellectual property into one company, to establish a first-mover advantage in developing economies for the commercialization of the UEPS technology, and to exploit market opportunities for growth through strategic alliances and acquisitions. The transaction permitted Aplitec’s shareholders to reinvest the sale proceeds in Net1, but under South African exchange control regulations, those shareholders were not permitted to hold Net1’s securities directly. In 2005, Net1 completed an initial public offering and listed on the Nasdaq Stock Market. In October 2008, Net1 listed on the JSE in a secondary listing, which enabled the former Aplitec shareholders (as well as South African residents generally) to hold Net1 common stock directly.
Available information
We maintain an Interneta 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 postedcontained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.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 | Chief | |
Mr. Herman G. | Chief | |
Mr. Phil-Hyun Oh | Chief | |
Mr. Nitin Soma | Senior |
Dr. Belamant is one of the founders of our company and has been our chief executive officerChief Executive Officer since October 2000 and the chairmanChairman of our board since February 2003. He was also chief executive officerChief Executive Officer of Aplitec. Dr. Belamant also serves on the boards of a number of other companies that perform welfare distribution services and the provision of microfinance to customers. Dr. Belamant spent ten years working as a computer scientist for Control Data Corporation where he won a number of international awards. Later, he was responsible for the design, development, implementation and operation of the Saswitch ATM network in South Africa that still rates today as one of the third largest ATM switching systemsystems 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, ranging from biometrics to gaming-related inventions.
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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. KotzeKotzé has been our chief financial officer, secretaryChief Financial Officer, Secretary and treasurerTreasurer since June 2004. From January 2000 until June 2004, he served on the board of Aplitec as group financial director.Group Financial Director. Mr. Kotzé joined Aplitec in November 1998 as a strategic financial analyst. Prior to joining Aplitec, Mr. Kotzé iswas 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.Accountants at KPMG.
Mr. Oh has served as chief executive officerChief Executive Officer and presidentPresident 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 officerChief Executive Officer and presidentPresident is instrumental in setting and implementing its strategy and objectives.
Mr. Soma has served as our Senior Vice President of Information Technology since June 2004. Mr. Soma joined Aplitec in 1997. He specializes in transaction switching and interbank settlements. Mr. Soma represented Nedcor Bank in assisting with the technical specifications for the South African Interbank Standards. He is also responsible for the ATM settlement process to balance ATMs with the host as well as balance the host with different card users. Mr. Somasettlements and designed the Stratus Back-End Systemback-end system for Aplitec, and is responsible for the Nedbank Settlement System for the Point of Sales Devices.Aplitec. Mr. Soma has over 15 years of experience in the development and design of smart card payment systems.
Significant employees
Business Functions:
Dr. Gerhard Claassen (53): General Manager – Cryptographic Solutions – Dr. Claassen joined us in August 2000 and is responsible for the marketing and business development of our cryptographic solutions consisting of the internally developed Incognito range of security solutions, as well as ToDos authenticators and the Cybertrust PKI products.
Wimpie du Plessis (60): Managing director: MediKredit – Mrs. du Plessis joined us in January 1999 and is responsible for the marketing and business development of our MediKredit and XeoHealth offerings worldwide.
K. H. Kang (46): Division Director - Marketing Division 2 – Mr. Kang joined us in December 1994 and is responsible for KSNET’s market division that focuses primarily on banking VAN, PG and market development.
M. B. Lee (47): Division Director - Marketing Division 1 – Mr. Lee joined us in August 1994 and is responsible for KSNET’s market division that focuses primarily on card VAN.
Igor Medan(39): Joint Managing Director: Net1 UTA – Mr. Medan has been the Joint Managing Director of Net1 UTA since 2011. Net1 UTA is responsible for the marketing and business development of our payment solutions in Russia, the CIS, Oman, India, Asia and Latin America.
Nanda Pillay (41): General Manager: CPS and EasyPay – Mr. Pillay joined us in May 2000 and is responsible for our South African operations, consisting of CPS and EasyPay.
Armando Piedra (39): Joint Managing Director: Net1 UTA – Mr. Piedra has been the Joint Managing Director of Net1 UTA since 2011. Net1 UTA is responsible for the marketing and business development of our payment solutions in Russia, the CIS, Oman, India, Asia and Latin America.
James Sneedon (43): Business Unit Leader: VTU – Mr. Sneedon joined us January 2001 and is responsible for the marketing and business development of our VTU products.
Brenda Stewart (54): Managing director: Net1 Universal Electronic Technological Solutions – Mrs. Stewart joined us in 1997 and is responsible for the marketing and business development of our UEPS solutions in Africa (excluding South Africa) and Iraq.
Trevor Smit (54): Managing director: FIHRST – Mr. Smit joined us in May 2007 and is responsible for the marketing and business development of our FIHRST offering.
Chris van der Walt (50): Managing director: SmartLife – Mr. van der Walt joined us in July 2011 and is responsible for the marketing and business development of our insurance offerings through SmartLife.
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Support functions:
Chris Britz (51): Vice President - Group production, repairs & maintenance – Mr. Britz joined us in April 2001 and is responsible for the group’s production facilities, as well as all internal and external repairs and maintenance of terminals and other hardware.
Lawrie Chalmers (51): Vice President - Group Human Resources – Mr. Chalmers joined us in April 1998 and is responsible for the group’s South African human resources activities, including recruitment, payroll, training and industrial relations.
Y. H. Cho (46): Head of research director – Mr. Cho joined us in July 1999 and is responsible for KSNET’s information technology department.
M. Y. Jun (44): Head of Strategy, Planning and Finance – Mr. Jun joined us in September 2000 and is responsible for KSNET’s financial function, including financial accounting, taxation and statutory reporting.
Dhruv Chopra (38): Vice President: Investor Relations – Mr. Chopra is responsible for managing our investor relations function globally.
Paul Encarnacao (36): Vice President – Finance – Mr. Encarnacao joined us in June 2004 and is responsible for the preparation of the group’s generally accepted accounting principles in the United States of America, or US GAAP, consolidated accounts and statutory reports.
Alan Keschner (51): Vice President: Joint Ventures and Investments – Mr. Keschner joined us in January 2012 and provides governance support to our joint ventures as our representative on the various boards of directors.
Warren Segall (47): Vice President: Compliance – Mr. Segall joined us in July 2006 and is our compliance officer.
Cara van Straaten (51): Group Financial Controller – Ms. Van Straaten joined us in July 2004 and is responsible for the group’s South African financial function, including financial accounting, taxation and statutory reporting.
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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 derivehave historically derived a majoritysubstantial portion of our revenues from our newSASSA 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 distributionpayment of pensionsocial 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 welfare benefitsservices 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 allSouth 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 Africa’s nine provinces. WhileAfrican 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 has substantially increasedrelating to the numberpayment of beneficiariessocial grants. The Court’s ruling does not require SASSA to whomaward a new tender, though we distribute benefits,expect that any decision not to make an award would be subject to judicial review and scrutiny.
We have determined that it has also increasedis not in our dependence on our pension and welfare business while also reducing our operating margin, at leastbest interest to participate in the short term. Further,tender process. We cannot predict what the timing or ultimate outcome of the tender process will be, or if we cannot successfully leverage an expanded beneficiary base to provide recipients with additional financial and other services, our financial performance may suffer.
On January 17, 2012,a new tender award will be made at all after the process is complete. Our current contract would terminate in the event that SASSA awarded us a tender to provide payment services for social grants in all of South Africa’s nine provinces for a period of five years. On February 3, 2012, we entered intoawards a new contract togetherto 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 related service level agreement,valid contract, or during any transitional period required for the orderly transfer of our current services to a successful bidder.
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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 SASSA. Underthe 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 SASSA’s 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 3—Legal 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 priorSASSA contract. These amounts were paid in full settlement of the claim we submitted to SASSA for these additional costs. We believe that Corruption Watch’s 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 provided payment serviceswill 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 only five provinces.2012 contained in South African media reports.
AlthoughAs 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 revenues from our new2012 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 increasedbeen costly for us. We incurred significant legal costs during fiscal 2013 and 2014 in responding to the U.S. government’s requests for information, management’s 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 Life’s insurance license. Even though the SEC has concluded its investigation and Smart Life’s 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.
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We have disclosed competitively sensitive information as a result of the larger number of beneficiaries we now serve, we also have incurred and will continue to incur significant increases in operating expenses. We have made significant capital expenditures to build out our infrastructure across South Africa, primarily in the additional four provinces. As a result, despite the higher volumes of payments, these additional expenses have resulted in lower operating margins in our pension and welfare business. We could also encounter delays or unexpected expenses during the implementation phase of the contract, which could adversely affect us and require additional management time and attention. While our goal is to offset the additional increases in operating expenses and capital expenditures by expanding the scope and volumes of financial and other services we can provide to our beneficiaries, we may not be successful in doing so,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 resultsinformation. As a result of operations, operating cash flowthis disclosure, our existing and financial condition.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.
Moreover, the expansion of our service offering to all nine South African provinces has increased our dependence on our contract with SASSA, which is and will continue to be our largest customer. For the fiscal year ended June 30, 2012, our pension and welfare accounted for approximately 41% of our revenues. If we were to lose all or part of these revenues for any reason, our business would suffer significantly.
In order to meet our obligations under our 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'institutions’ operations, including their internal information technology structures, capital structures, risk management, business continuity and disaster recovery programs, or their regulatory compliance systems, we are exposed to counterparty risk.
Two of the unsuccessful tenderors have challenged SASSA’s award of the tender to us.
On February 8, 2012, AllPay filed an application in the North Gauteng High Court of South Africa seeking to set aside the award of the SASSA tender to us. AllPay was one of the unsuccessful bidders during the recent SASSA tender process and was a former contractor to SASSA. We are included as one of several respondents in this proceeding. As a respondent, we are entitled to oppose the application, which we are doing. When SASSA publicly announced the award of the tender to us in January 2012, it stated that it had conducted the tender in accordance with all relevant legislation. The matter was argued before the High Court on May 29 to 31, 2012, and we expect that judgment will be handed down during the first quarter of fiscal 2013. Any of the parties to the proceeding will thereafter be entitled to apply to the High Court for leave to appeal the judgment and, provided that such leave is granted, the appeal process could take several months to be finalized. We cannot predict when the proceeding will be resolved or its ultimate outcome.
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On February 3, 2012, another unsuccessful bidder and former SASSA contractor, Empilweni Payout Services (Pty) Ltd, requested SASSA to provide it with all reasons for the award and information that we provided to SASSA in connection with the tender process. Empilweni filed a High Court application to compel SASSA to provide such reasons and information. We opposed the application but SASSA provided certain of the requested information to Empilweni pursuant to an agreed court order. No further action is expected in this proceeding.
In addition, on March 22, 2012, Empilweni filed an urgent High Court application to interdict and restrain SASSA from taking any steps to implement our appointment as a service provider of SASSA in the province of Mpumalanga, pursuant to the award of the tender. On March 27, 2012 the High Court ruled that the matter was not urgent and accordingly it was struck from the court roll. If Empilweni wants to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no further steps to advance this proceeding since March 27, 2012.
If AllPay’s challenge is successful, the contract could be set aside. If Empilweni advances proceedings and is successful a portion of the contract could be set aside. It is also possible that other unsuccessful bidders may challenge the award. Our management may be required to expend significant time and resources in an attempt to defeat these challenges.
We have disclosed competitively sensitive information as a result of the AllPay litigation, which could adversely affect our competitive position in the future.
In connection with the AllPay litigation discussed above challenging the award of the SASSA tender to us, we have included our entire SASSA tender submission in the court record, which court record is in the public domain. Our tender submission contains competitively sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information which could adversely affect our competitive position in any future similar tender submissions to the extent that such information continues to remain competitively sensitive.
We may undertake acquisitions that could increase our costs or liabilities or be disruptive to our business.
Acquisitions are a significant part of our long-term growth strategy as we seek to grow our business internationally and to deploy our technologies in new markets both inside and outside South Africa. However, we may not be able to locate suitable acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. These transactions may require debt financing or additional equity financing, resulting in additional leverage or dilution of ownership.
Acquisitions of businesses or other material operations and the integration of these acquisitions will require significant attention from our senior management which may divert their attention from our day to day business. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting our acquisition candidates.
In addition, we may need to record write-downs from future impairments of goodwill or other intangible assets, which could reduce our future reported earnings. Finally, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.
We have a significant amount of indebtedness that requires us to comply with restrictive and financial covenants. If we are unable to comply with these covenants, we could default on this debt, which would have a material adverse effect on our business and financial condition.
As of June 30, 2012,2015, we had approximately $94$59.6 million of outstanding indebtedness, which we incurred to finance theour acquisition of KSNET acquisition.in October 2010. These loans are secured by substantially all of KSNET’s assets, a pledge by Net1 Korea of its entire equity interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest in Net1 Korea. The terms of the loan facility require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict theirNet1 Korea’s ability to make certain distributions with respect to theirits capital stock, prepay other debt, encumber theirits assets, incur additional indebtedness, make capital expenditures above specified levels,or engage in certain business combinations and engage in other corporate activities.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.
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A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could harm our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A recessionary economic environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce the level of transactions we process and the take-up of financial services we offer, which would, in turn, negatively impact our financial results. If financial institutions and retailers experience decreased demand for their products and services our hardware, software and related technology sales will reduce, resulting in lower revenue.
The loss of the services of Dr. Belamant or any of our other executive officers would adversely affect our business.
Our future financial and operational performance depends, in large part, on the continued contributions of our senior management, in particular, Dr. Serge Belamant, our Chief Executive Officer and Chairman and Herman Kotze, our Chief Financial Officer. Many of our key responsibilities are performed by these two individuals, and the loss of the services of either of them could disrupt our development efforts or business relationships and our ability to continue to innovate and to meet customers’ needs, which could have a material adverse effect on our business and financial performance. We do not have employment agreements with these executive officers and they may terminate their employment at any time.
In addition, the success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh and the other senior members of the KSNET management team. We do not maintain any “key person” life insurance policies.
We face a highly competitive employment market and may not be successful in attracting and retaining a sufficient number of skilled employees, particularly in the technical and sales areas and senior management.
Our future success depends on our ability to continue to develop new products and to market these products to our target users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require is high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors in South Africa have led, and continue to lead, numerous qualified individuals to leave the country, thus depleting the availability of qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain highly qualified managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate capabilities and experience and effectively integrate these people into our business, it could negatively affect our product development and marketing activities.
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked market segment, which could limit growth in our transaction-based activities segment.
The incumbentCertain South African retail banks have created a commonalso developed their own low-cost banking product, generally referred to as a “Mzansi” account, forproducts targeted at the unbanked South Africans, which offers limited transactional capabilities at reduced charges, when compared to the accounts traditionally offered by these banks.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, approximately 4.4 million and 3.5 million peoplethere has been a significant increase in South Africa claimedthe banked population at the bottom of the pyramid as LSM 1-5 increased from 32% in 2004 to use a Mzansi account66% in 2009 and 2008, respectively.2014. As the competition to bank the unbanked in South Africa intensifies, with the Mzansi account and other similar product offerings, we may not be successful in marketing our low-cost bankingEasyPay Everywhere product to our target population.
Moreover, as our product offerings increase, and 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 funds transfertransactional 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.
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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.
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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.
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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 customer’s 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.
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Defending our intellectual property rights or defending ourselves in infringement suits that may be brought against us is expensive and time-consuming and may not be successful.
Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs and devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.
System failures, including breaches in the security of our system, could harm our business.18
We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers.
Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new applications and services. Finally, because our customers may use our products for critical transactions, any system failures could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim could be time consuming and costly for us to address.
Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud in electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any security breaches affecting our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
Our strategy of partnering with companies outside South Africa may not be successful.
In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering arrangements with companies outside South Africa, such as the onesone we have establishedco-established in Namibia Botswana and Colombia.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 minoritynon-controlling interest. MinorityNon-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.
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We may have difficulty managing our growth, especially as we expand our business internationally.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, especially as a result of our recent SASSA tender award and as we expand our business internationally.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 recipientsrecipient cardholders of social welfare grants.
Many social welfare recipientsrecipient 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 recipientsrecipient 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 deliverycash 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.
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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.
22Our 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.
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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 entity’s 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 BVI’s 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 USU.S. dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the ZAR against the USU.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 USU.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 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Currency 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 USU.S. dollars or euros. We have used forward contracts in order to hedge our economic exposure to the ZAR/USU.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.
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South Africa’s 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.
If we do not achieve applicable black economic empowerment objectives in our South African businesses, we risk losing our government and private contracts. In addition, it is possible that we may be required to achieve black shareholding of our company in a manner that could dilute your ownership.
The South African government, through the Broad-Based Black Economic Empowerment Act, 2003, established a legislative framework for the promotion of BEE. The law recognizes two distinct mechanisms for the achievement of BEE objectives—compliance with codes of good practice, which have already been issued, and compliance with industry-specific transformation charters. Although the charter that will likely apply to our company has not yet been finalized, we believe it is likely that the charter will not differ substantially from the codes of good practice. Achievement of BEE objectives is measured by a “scorecard” which establishes a weighting to various components of BEE. One component of BEE is achieving a certain percentage of shareholdings by black South Africans in South African businesses over a period of years. This shareholding component carries the highest BEE scorecard weighting. Other components include procuring goods and services from black-owned businesses or from businesses that have earned good BEE scores and achieving certain levels of black South African employment. Compliance with the codes and applicable charters are not enforced through civil or criminal sanction, but compliance does affect the ability of a company to secure contracts in the public and private sectors.
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Thus, it will be important for us to achieve applicable BEE objectives. Failing to do so could jeopardize our ability to maintain existing business, including our South African pension and welfare business, or to secure future business.
In 2012, we entered into a Broad Based Black Economic Empowerment transaction pursuant to which we granted an option to purchase up to 8,955,000 shares of our common stock to a special purpose vehicle that represents a consortium of black South Africans, community groups and the Net1 Foundation (the “BBBEE consortium”). The option is exercisable at a price of US$8.96 per share at any time until April 19, 2013. One of the primary purposes of entering into this transaction was to improve our BEE score. However, to date the option granted to the BBBEE consortium has not been exercised and if it expires unexercised or it is exercised only in part, we may not achieve the objectives we sought to achieve when we entered into the transaction. Refer to Note 16 to our consolidated financial statements.
We have taken a number of actions as a company to increase empowerment of black South Africans, including the BBBEE transaction discussed above. However, it is possible that these actions may not be sufficient to enable us to achieve applicable BEE objectives. In that event, in order to avoid risking the loss of our government and private contracts, we may have to seek to comply through other means, including by selling or placing additional shares of Net1 or of our South African subsidiaries to black South Africans. Such sales of shares could have a dilutive impact of your ownership interest, which could cause the market price of our stock to decline.
South African exchange control regulations could hinder our ability to make foreign investments and obtain foreign-denominated financing.
South Africa’s 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 USU.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, 2012,2015, approximately 59%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; and (v)operations. These regulations could also limit our businessability to utilize profits of one foreign business to finance operations of a different foreign business.
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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 Africa’s major industries are unionized, and the majority of employees belong to trade unions. We face the risk of disruption from labor disputes and new South African labor laws.
In the past, tradeTrade 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.
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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:
- | political and economic instability, including higher rates of inflation and currency fluctuations; | |
- | high levels of corruption, including bribery of public officials; | |
- | loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection; | |
- | a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property and contractual rights; | |
- | logistical, utilities (including electricity and water supply) and communications challenges; | |
- | potential adverse changes in laws and regulatory practices, including import and export license requirements and restrictions, tariffs, legal structures and tax laws; | |
- | difficulties in staffing and managing operations and ensuring the safety of our employees; | |
- | restrictions on the right to convert or repatriate currency or export assets; | |
- | greater risk of uncollectible accounts and longer collection cycles; | |
- | indigenization and empowerment programs; | |
- | exposure to liability under the United Kingdom’s Bribery Act 2010; and | |
- | exposure to liability under |
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.
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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 Moneyline’s 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 NCR’s 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 NCR’s application. However, if the NCR’s 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 USU.S. laws and regulations, including the Foreign Corrupt Practices ActFCPA as well as economic and trade sanctions, which could adversely impact our future growth.
We must comply with the FCPA, which prohibits USU.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 USU.S. foreign policy and national security goals.
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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 recipientsrecipient 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 flowsflows..
We do not have a South African banking license and, therefore, we provide our social welfare grant distribution and wage paymentEasyPay 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 wage paymentEasyPay Everywhere business without alternate means of access to a banking licenselicense.
The South African retail banking market is highly regulated. Under current law and regulations, our South African social welfare grant distribution and wage paymentEasyPay Everywhere business activities in the unbanked market requires us to be registered as a bank in South Africa or to have access to an existing banking license.
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We are not currently so registered, but we have entered into an agreement with Grindrod Bank Limited, or Grindrod, that enables us to implement our social welfare grant distribution and wage paymentEasyPay 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 give advice regarding the purchase of financial products or who act as intermediaries between financial product suppliers and consumers in South Africa to register as financial service providers. Smart Life was granted an Authorized Financial Service Provider, or FSP, license on June 9, 2015. We have appliedare in the process of applying for a licenseseveral other FSP licenses under this Act in order to continue to provide advice and intermediary services in respect of thesell other financial products on which we adviseas a registered FSP. If our status as juristic representative were to be cancelled and the payment processing services we provide in South Africa on behalf of insurers and other financial product suppliers. Ifif we fail to obtain thisour 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.
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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 20122015 fiscal year, our stock price ranged from a low of $5.77$10.21 to a high of $11.21.$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:
- | government or regulatory investigations, including developments in the | |
- | fluctuations in currency exchange rates, particularly the | |
- | announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity securities or dilution of our existing business in South Africa; | |
- | quarterly variations in our operating results, especially if our operating results fall below the expectations of securities analysts and investors; | |
- | announcements of acquisitions, disposals or impairments of intangible assets; | |
- | the timing of or delays in the commencement, implementation or completion of major projects; | |
- | large purchases or sales of our common stock; | |
- | general conditions in the markets in which we operate; and | |
- | economic and financial conditions. |
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A majority of our common stock is beneficially owned by a small number of shareholders. The interests of these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership of our outstanding common stock because approximately 41%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 investment entities affiliated with General Atlantic LLCAllan Gray Proprietary Limited, beneficially owned 27.2%approximately 28% and 14.1%19% of our outstanding common stock, respectively. General Atlantic also has the right to representation on our board of directors although it is not currently exercising that right.
In addition, pursuant to a Broad Based Black Economic Empowerment transaction described above, we have granted an option to purchase up to 8,955,000 shares of our common stock, equal to 19.7% of our current issued and outstanding shares, to the BBBEE consortium. The option is exercisable at US$8.96 per share at any time until April 19, 2013. The BBBEE consortium is currently represented on our board by invitation and has the right to representation on our board if and so long as it owns more than 10% of our outstanding common stock.
The interests of IVA the BBBEE consortium and General AtlanticAllan Gray may be different from or conflict with the interests of our other shareholders. As a result of the ownership by IVA the BBBEE consortium and General Atlantic, as well as the BBBEE consortium’s and General Atlantic’s right to board representation,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.
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We may have difficulty raising necessary capital to fund operations or acquisitions as a result of market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent upon our ability to obtain financing through debt and equity or other means.
Issuances of significant amounts of stock in the future could potentially dilute your equity ownership and adversely affect the price of our common stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could sell additional shares to raise capital to fund our operations or to acquire other businesses, issue 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.
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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 market’s 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 company’s assets are located outside the United States.
In addition, all of Net1’s directors and officers reside outside of the United States and our experts, including our independent registered public accountants, are based in South Africa.
As a result, even though you could effect service of legal process upon Net1, as a Florida corporation, in the United States, you may not be able to collect any judgment obtained against Net1 in the United States, including any judgment based on the civil liability provisions of the U.S. federal securities laws, because substantially all of our assets are located outside the United States. Moreover, it may not be possible for you to effect service of legal process upon the majority of our directors and officers or upon our experts within the United States or elsewhere outside South Africa and any judgment obtained against any of our foreign directors, officers and experts in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by a South African court.
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A foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which will be enforced by South African courts provided that:
• | the court or arbitral body which pronounced the judgment had international jurisdiction and competence to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts; | |
• | the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it); | |
• | the judgment has not lapsed; | |
• | the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal; | |
• | the judgment was not obtained by improper or fraudulent means; | |
• | the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive damages; and | |
• | the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of 1978 (as amended), of the Republic of South Africa. |
It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its management. Although the award of punitive damages is generally unknown to the South African legal system, that does not mean that such awards are necessarily contrary to public policy.
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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 Africa’s exchange control laws, the approval of SARB is required before a defendant resident in South Africa may pay money to a nonresidentnon-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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We lease our corporate headquarters facility which consists of approximately 83,00093,000 square feet in Johannesburg, South Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park a 14,230 square foot manufacturing facility in Brakpan and 96153 depot facilities. We also lease additional office space in Johannesburg, Pretoria, Cape Town and Durban, South Africa; Vienna, Austria;London, United Kingdom; Seoul, Republic ofSouth Korea; Moscow, Russia; New York, New YorkMumbai, India; and Fredrick,Frederick, Maryland. These leases expire at various dates through 2017.2018.
We own land and buildings in Ahnsung,Kyung-gi, Republic ofSouth Korea, which facilitythat 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 February 8, 2012, AllPay Consolidated Investment Holdings (Pty) LtdMarch 25, 2015, Corruption Watch, a South African non-profit civil society organization, filed an application ina Notice of Motion with the North Gauteng High Court of South Africa, seekingnotifying the Court that it intends to apply for an order by the Court to review and set aside the decision of SASSA’s 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 SASSA’s 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 Watch’s 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:
• | 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; | |
• | 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; | |
• | causing an unfounded report to be made to the Johannesburg Stock Exchange, or JSE, regarding disclosure that we made in relation to the SASSA contract; | |
• | making a report to the DOJ, bringing to the attention of the DOJ the corruption allegations and the South African media reports and repeating the allegations made in the report to the JSE; and | |
• | falsely seeking to create the impression in media reports and radio interviews that it had been found in the South African court proceedings described above that the tender process was tainted by corruption. |
In the lawsuit, we are seeking damages in the aggregate amount of ZAR 478 million (approximately US$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 AllPay’s 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.
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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 to us. AllPay was one of the unsuccessful bidders during the recent SASSA tender process and was a former contractor to SASSA. We are included as one of several respondents in this proceeding. As a respondent, we are entitled to oppose the application, which we are doing. When SASSA publicly announced the award of the tenderJanuary 2012. The Hawks have confirmed to us in January 2012, it stated that it had conducted the tender in accordance with all relevant legislation. The High Court heard this matter on May 29 to 31, 2012.our Section 34 application has been accepted for investigation. We expect that it will hand down a decision during the first quarter of fiscal 2013. Any of the partieshave provided certain electronic information to the proceedingHawks at their request, and we will thereafter be entitled to apply tocooperate with the High Court for leave to appeal the judgment and, provided that such leave is granted, the appeal process could take several months to be finalized.Hawks in their investigation. We cannot predict when the proceedingHawks investigation will be resolvedcompleted or its ultimate outcome.the impact or outcome of that investigation.
NCR application for the cancelation of Moneyline’s registration as a credit provider
On February 3, 2012, another unsuccessful bidder and former SASSA contractor, Empilweni PayoutSeptember 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, requested SASSAor Moneyline, for breach of the NCA based on an investigation concluded by it. Pursuant to providethe investigation, the NCA also issued two Compliance Notices – one to CPS and one to Moneyline. The Compliance Notice issued to Moneyline accused it with all reasons forof “having access into the awardGrindrod Bank Accounts of social grant beneficiaries which enables them(sic)to see the spending patterns of beneficiaries and informationdeposit 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 we providedboth CPS and Moneyline take the appropriate steps to SASSA in connectionaddress the alleged non-compliance with the tender process. Empilweni filed a High Court applicationNCA and to compel SASSAreport in writing to provide such reasons and information. the NCR, along with an independent audit report, that they were no longer non-compliant as alleged by the Compliance Notices.
We opposed the application but SASSA provided certainissuance of the Compliance Notices and the Tribunal granted our requested orders that both Compliance Notices be set aside.
Regarding the NCR’s 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 NCR’s 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 Empilweni pursuantdismiss plaintiff’s amended complaint for failure to state a claim. On March 6, 2015, plaintiff filed an agreed court order. No further action is expected in this proceeding.
In addition,opposition to our motion to dismiss its complaint, and we filed a reply brief on March 22, 2012, Empilweni filed an urgent High Court application27, 2015. No motion for class certification has been filed. We believe this lawsuit has no merit and intend to interdict and restrain SASSA from taking any steps to implement our appointment as a service provider of SASSA in the province of Mpumalanga, pursuant to the award of the tender. On March 27, 2012 the High Court ruled that the matter was not urgent and accordinglydefend it was struck from the court roll. If Empilweni wants to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no further steps to advance this proceeding since March 27, 2012.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.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Informationinformation
Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol “UEPS” and on the JSE in South Africa under the symbol “NT1.” The Nasdaq is our principal market for the trading of our common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by Nasdaq.
Period | High | Low | ||
Quarter ended September 30, 2010 | $15.04 | $10.72 | ||
Quarter ended December 31, 2010 | $12.97 | $10.35 | ||
Quarter ended March 31, 2011 | $12.31 | $8.24 | ||
Quarter ended June 30, 2011 | $8.92 | $7.29 | ||
Quarter ended September 30, 2011 | $9.00 | $5.77 | ||
Quarter ended December 31, 2011 | $8.59 | $5.80 | ||
Quarter ended March 31, 2012 | $11.21 | $6.71 | ||
Quarter ended June 30, 2012 | $10.33 | $7.79 |
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 17, 2012,14, 2015, there were 1911 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 Purchasespurchases of Equity Securitiesequity securities
We did not purchase anyAs described in detail in footnote 14 to our consolidated financial statements, in August 2014, we repurchased 1,837,432 shares of our common stock during the fourth quarterfrom BVI, one of fiscal 2012. We currently have $97,848,570 available under our $100 millionBEE 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 approved shareauthorized the repurchase authorization.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 table below presentsrepurchase of shares described in the previous paragraph were effected pursuant to a separate authorization by our common stock purchased during fiscal 2012 per quarter:Board of Directors.
Average price | ||||||
Total number | paid per | |||||
of shares | share | |||||
Period | purchased | (US dollars) | ||||
First | 180,656 | 6.25 | ||||
Second | - | - | ||||
Third | - | - | ||||
Fourth | - | - | ||||
Total fiscal 2012 | 180,656 | 6.25 |
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Share performance graph
The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2007,2010, in each of our common stock, the S&P 500 companies, and the companies in the NASDAQ Industrial Index.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read together with Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8—“Financial Statements and Supplementary Data.” The following selected historical financial data as of June 30, 20122015 and 2011,2014, and for the three years ended June 30, 20122015 have been derived from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2010, 20092013, 2012 and 20082011 and for the years ended June 30, 20092012 and 2008,2011, 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 USU.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 | Year Ended June 30 | |||||||||||||||||||||||||||||
2012 | 2011(1) | 2010 | 2009 | 2008 | 2015 | 2014(1) | 2013(1) | 2012(1) | 2011(2) | |||||||||||||||||||||
Revenue | $ | 390,264 | $ | 343,420 | $ | 280,364 | $ | 246,822 | $ | 254,056 | $ | 625,979 | $ | 581,656 | $ | 452,147 | $ | 390,264 | $ | 343,420 | ||||||||||
Cost of goods sold, IT processing, servicing and support | 141,000 | 109,858 | 72,973 | 70,091 | 67,486 | 297,856 | 260,232 | 196,834 | 141,000 | 109,858 | ||||||||||||||||||||
Selling, general and administrative | 137,404 | 119,692 | 80,854 | 64,833 | 65,362 | 158,919 | 168,072 | 191,552 | 137,404 | 119,692 | ||||||||||||||||||||
Equity instrument granted pursuant to BBBEE transaction (3) | 14,211 | - | - | - | - | |||||||||||||||||||||||||
Equity instruments granted pursuant to BEE transactions (3) | - | 11,268 | - | 14,211 | - | |||||||||||||||||||||||||
Depreciation and amortization | 36,499 | 34,671 | 19,348 | 17,082 | 10,822 | 40,685 | 40,286 | 40,599 | 36,499 | 34,671 | ||||||||||||||||||||
Profit on sale of microlending business | - | - | - | 455 | - | |||||||||||||||||||||||||
Impairment losses(4) | - | 41,771 | 37,378 | 1,836 | - | |||||||||||||||||||||||||
Impairment losses | - | - | - | - | 41,771 | |||||||||||||||||||||||||
Operating income | 61,150 | 37,428 | 69,811 | 93,435 | 110,386 | 128,519 | 101,798 | 23,162 | 61,150 | 37,428 | ||||||||||||||||||||
Foreign exchange gain related to short-term investment(5) | - | - | - | 26,657 | - | |||||||||||||||||||||||||
Interest (expense) income, net | (769 | ) | (1,018 | ) | 9,069 | 10,828 | 15,722 | |||||||||||||||||||||||
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 | 60,381 | 36,410 | 78,880 | 130,920 | 126,108 | 140,418 | 109,142 | 27,279 | 60,381 | 36,410 | ||||||||||||||||||||
Income tax expense(6) | 15,936 | 33,525 | 40,822 | 42,744 | 39,192 | |||||||||||||||||||||||||
Income from continuing operations | 44,651 | 2,647 | 38,990 | 86,601 | 86,695 | |||||||||||||||||||||||||
Income tax expense | 44,136 | 39,379 | 14,656 | 15,936 | 33,525 | |||||||||||||||||||||||||
Net income attributable to Net1 | 44,651 | 2,647 | 38,990 | 86,601 | 86,695 | 94,735 | 70,111 | 12,977 | 44,651 | 2,647 | ||||||||||||||||||||
Income from continuing operations per share: | ||||||||||||||||||||||||||||||
Basic | $ | 0.99 | $ | 0.06 | $ | 0.84 | $ | 1.53 | $ | 1.50 | $ | 2.03 | $ | 1.51 | $ | 0.28 | $ | 0.99 | $ | 0.06 | ||||||||||
Diluted | $ | 0.99 | $ | 0.06 | $ | 0.84 | $ | 1.53 | $ | 1.49 | $ | 2.02 | $ | 1.50 | $ | 0.28 | $ | 0.99 | $ | 0.06 |
(1) KSNET was acquired effective November 1, 2010,Includes revenue and our reported results for fiscal 2011 include KSNET revenues of $68.4 million and a net loss of $4.1 million, after acquisition-related intangible assets amortization, deferred taxesimplementation costs related to acquisition-related intangible asset amortization and interestour 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 financing obtained to partially fund the acquisition.(2) Selling, general and administrative expensecommon stock issued in our BEE transactions. In addition, 2012 includes a non-cash charge of $2.8approximately $14.2 million (2012), $1.7 million (2011), $5.5 million (2010), $4.9 million (2009) and $3.8 million (2008), respectively, in respectconnection with the issuance of stock-based compensation.(3) On April 19, 2012, we issued ana now-expired option to purchase 8,955,000 shares of our common stock toin a previous BEE consortium pursuant to a BBBEE transaction that we entered into on January 25, 2012. The fair value of the option was determined as approximately $14.2 million and has been expensed in full.(4) Customer relationships acquired in the acquisition of Net1 UTA were impaired in fiscal 2011. Goodwill related to the hardware, software and related technology sales segment was impaired during fiscal 2010, and goodwill related to the financial services segment was impaired during fiscal 2009.(5) The foreign exchange gain related to a short-term investment in the form of an asset swap arrangement which matured during fiscal 2009.(6) The fully-distributed tax rate for fiscal 2012 was 28%, for fiscal 2011, 2010 and 2009 it was 34.55% and for fiscal 2008 it was 35.45% . Our income tax expense for fiscal 2012 includes the effects of the change in South African tax law to impose a 15% dividends withholding tax (a tax levied and withheld by a company on distributions to its shareholders) to replace the 10% Secondary Taxation on Companies (a tax levied directly on a company on dividend distributions) (“STC”) (refer to Note 19 of our consolidated financial statements). Our income tax expense for fiscal 2012 also includes a valuation allowance of $8.2 million related to foreign tax credits we believe we may not recover (refer to Note 19 of our consolidated financial statements). Our income tax expense for fiscal 2011 includes valuation allowances related to our Net1 UTA business of $8.9 million and a reversal of $10.4 million related to the customer impairment loss. Our income tax expense for fiscal 2009 and 2008 includes the impact of the change in the fully-distributed rate during those fiscal years of approximately $3.5 million and $5.4 million, respectively.transaction.
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Additional Operating Data:
(in thousands, except percentages)
Year ended June 30, | Year ended June 30, | |||||||||||||||||||||||||||||
2012(1) | 2011(1) | 2010(1) | 2009 | 2008 | 2015(1) | 2014(1) | 2013(1) | 2012(1) | 2011(1) | |||||||||||||||||||||
Cash flows provided by operating activities | $ | 20,406 | $ | 66,223 | $ | 68,683 | $ | 106,768 | $ | 118,760 | $ | 135,258 | $ | 37,145 | $ | 55,917 | $ | 20,406 | $ | 66,223 | ||||||||||
Cash flows used in investing activities | $ | 292,539 | $ | 323,685 | $ | 90,186 | $ | 107,856 | $ | 3,903 | $ | 59,483 | $ | 21,640 | $ | 447,816 | $ | 292,539 | $ | 323,685 | ||||||||||
Cash flows provided by (used in) financing activities . | $ | 231,907 | $ | 183,269 | $ | (48,478 | ) | $ | (40,248 | ) | $ | 2,864 | ||||||||||||||||||
Cash flows (used in) provided by financing activities. | $ | (4,516 | ) | $ | (13,378 | ) | $ | 409,716 | $ | 231,907 | $ | 183,269 | ||||||||||||||||||
Operating income margin | 16% | 11% | 25% | 38% | 43% | 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.
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Consolidated Balance Sheet Data:
(in thousands)
As of June 30, | As of June 30, | |||||||||||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||
Cash and cash equivalents | $ | 39,123 | $ | 95,263 | $ | 153,742 | $ | 220,786 | $ | 272,475 | $ | 117,583 | $ | 58,672 | $ | 53,665 | $ | 39,123 | $ | 95,263 | ||||||||||
Total current assets before settlement assets | 175,236 | 213,421 | 226,429 | 290,294 | 345,734 | 329,307 | 282,908 | 184,723 | 175,236 | 213,421 | ||||||||||||||||||||
Goodwill | 182,737 | 209,570 | 76,346 | 116,197 | 76,938 | 166,437 | 186,576 | 175,806 | 182,737 | 209,570 | ||||||||||||||||||||
Intangible assets | 93,930 | 119,856 | 68,347 | 75,890 | 22,216 | 47,124 | 68,514 | 77,257 | 93,930 | 119,856 | ||||||||||||||||||||
Total assets | 955,893 | 781,645 | 472,090 | 499,487 | 454,071 | 1,286,430 | 1,350,945 | 1,276,322 | 955,893 | 781,645 | ||||||||||||||||||||
Total current liabilities before settlement obligations | 75,367 | 104,396 | 57,927 | 77,809 | 76,503 | 82,198 | 81,823 | 76,859 | 73,377 | 102,406 | ||||||||||||||||||||
Total long-term debt | 79,760 | 111,776 | 4,343 | 4,185 | 3,766 | 50,762 | 62,388 | 66,632 | 79,760 | 111,776 | ||||||||||||||||||||
Total Net1 equity | $ | 341,515 | $ | 323,006 | $ | 285,878 | $ | 373,217 | $ | 340,328 | ||||||||||||||||||||
Total equity | $ | 478,785 | $ | 441,748 | $ | 339,969 | $ | 346,811 | $ | 328,010 |
(1) Refer to Note 9 to our consolidated financial statements for discussion- Remainder of the movement in our goodwill and intangible assets during fiscal 2011.this page left blank -
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Item 6—“Selected Financial Data” and Item 8—“Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A— “Risk Factors” and “Forward Looking Statements.”
Overview
We are a leading provider of payment solutions and transaction processing services across multiple industries and in a number of emerging economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Our universal electronic payment system, or UEPS, 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 now been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The new UEPS/EMV technology is currently beinghas 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, health carehealthcare management, international money transfers, voting and identification.
We also provide secure transaction technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony, and integrated circuit card (chip/smart card) technologies.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 recipientsrecipient cardholders across the entire country, process debit and credit card payment transactions on behalf of retailers that we believe represent nearly 65%a wide range of retailers within the formal retail sector in South Africa through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service that processes monthly payments for approximately 1,250 employer groups representing over 850,000 employees. Our MediKredit service providesservice. 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 majority of funders and providers of healthcaretop three VAN processors in South Africa with an on-line real-time management system for healthcare transactions. We perform a similar service in the US through our XeoHealth subsidiary.
Internationally, though KSNET, the second largest transaction processor by volume in Korea, and we offer card processing, payment gateway and banking value-added services in that country. The acquisitionOur XeoHealth service provides funders and providers of KSNET during the second quarter of fiscal 2011, expands our international footprint as well as diversifies our revenue, earnings and product portfolio. We have also concluded dealshealthcare in United States with an on-line real-time management system for healthcare transactions.
Our ZAZOO business unit is responsible for the provisionworldwide technical development and commercialization of our array of web and mobile applications and payment technologies, such as MVC, services and/or licenses with customersChip and GSM licensing and VTU, and has deployed solutions in Mexico, Spainmany countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and India.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. As an example, in Ghana, we sold a complete UEPS to the Central Bank, which owns and operates the resulting transaction settlement system. The revenue and costs associated with this approach are reflected in our hardware, softwareFinancial inclusion and related technology salesapplied technologies segment.
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We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of the South African government and wages on behalf of employers on a fixed fee basis, but charge a fee on an ad valorem basis for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our smart card accounts, South African transaction-based activitiestransaction processing and financial servicesFinancial inclusion and applied technologies segments. We have adopted a variation of this approach in Iraq, where we operate a UEPS system on an outsourced basis on behalf of a consortium consisting of the Iraqi government and local Iraqi banks, in return for transaction fees based on the volume and value of transactions processed through the system.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to supply those services and products directly where the business case is compelling. For instance, we provide short-term UEPS-based loans to our smart card holders. This is an example of the third approach that we have taken. Here we can act as the principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our financialFinancial 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 segment.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 220,000225,000 merchants and to card issuers in South Korea through our value-added network.value-added-network. In the US,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 presentcard-not-present environment. The revenue and costs at KSNET, XeoHealth and VCPay as well as those from our Iraqi contract, are reflected in our international transaction-based activitiesInternational transaction processing segment.
We also generate fees from transaction processing for both funders and providers of healthcare in South Africa and from providing a payroll transaction management service to South African companies. In both cases, the revenue and costs associated with these services are reflected in our South African transaction-based activities segment.
Finally, we have entered into business partnerships or joint ventures to introduce our UEPS and VTUpayment solutions to new markets such as Botswana, Namibia and Colombia.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 the UEPSour 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 USU.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 investee’s operations, or has been sold to third-party customers, as the case may be.
We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the implementation of our technology.
Business Developments during Fiscal 20122015
South AfricaZAZOO
SASSA contractWe 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. ZAZOO’s 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.
On January 17, 2012, SASSA awarded us a tender to provide payment services for social grants in allZAZOO entered into strategic collaborations with Uber, Microsoft and Cell C (one of South Africa’s nine provinces for a period of five years. On February 3, 2012, we entered into a new contract, together with a related service level agreement, with SASSA pursuant to which we pay, on behalf of SASSA, social grants to all persons nationally who are entitled to receive such grants, for a firm price of ZAR16.44 per beneficiary paid, or ZAR 14.42 net of VAT. The new pricing terms became effective on April 1, 2012, upon the March 31, 2012 expiration of our then-existing contract with SASSA to provide social grant distribution in five provinces. Thus, our fiscal 2012 results of operations include three quarters of operations under the prior contract, which contained a standard pricing formula for all five provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum number of beneficiaries per month.
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We commenced the implementation of our new contractlargest mobile operators) during the third quarter of fiscal 2012. The implementation2015 for our VCPay mobile application. VCPay is being conducteda mobile phone-based application that generates transaction specific virtual MasterCards that can be used for online purchases, or in two phases. The first phase involved issuing approximately 2.5 million MasterCard-branded debitbrick-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 beneficiaries that we did not serve under our previous contract in order to establish the payment processnow use VCPay to pay all social grantsfor the Uber service.
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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 C’s 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 country. We commenced the national grant payment process for approximately 9.2 million beneficiaries on April 2, 2012 and thus successfully completed the first phaserollout of implementation.
The second phase requires us to re-enroll all social grant beneficiariesour business-to-consumer, or B2C, EasyPay Everywhere offering in South Africa. This enrollment processEPE is a fully transactional account created to serve the needs of South Africa’s 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 requirecontinue 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 captureimplement the personal and biometric information of each beneficiary and issue each grant recipient withsame or similar solutions in other contexts. We are currently finalizing our latest MasterCard-branded UEPS/EMV combination smart cards. These smart cards can be used across all elements of the South African National Payment System, including at ATMs and POSs, in addition to our current UEPS merchant acquiring system and mobile pay points. We commenced the second phase of the enrollment process in early July 2012 and plan to be substantially complete by March 2013.
In order to complete the first phase of the implementation on time, we hired approximately 2,500 temporary employees required to assistdeployment contract with the first phase ofWFP office based in South Africa.
Strategic investments
During the beneficiary enrollment process. Once we have completed the second phase, we expect our permanent employee base to increase from pre-new contract levels by approximately 900 people. Additionally, following the conclusion of the new service level agreement, we paid certain of our executives and key employees special bonuses of $5.4 million (ZAR 41.8 million) in recognition of their contributions to the compilation of the successful SASSA tender, the development of the new technologies and the support provided for the implementation of the tender award.
During fiscal 2012 we incurred direct implementation expenses (excluding the bonuses discussed above) of approximately $10.9 million (ZAR 83.9 million) including staff, travel, premises hire for enrollment, stationery, delivery and advertising costs. We are unable to quantify the value of time spent by our executives and pension and welfare operations managers and staff that service the five provinces in which we operated under the previous contract and that have assisted in the implementation of the national award. We also incurred approximately $21.2 million in capital expenditures, primarily to acquire registration workstations, payment vehicles and the branch infrastructure required for the national implementation. We anticipate cumulative capital expenditures related to the ramp of our national contract to be in the $45 to $50 million range, of which roughly two-thirds should be incurred by the end of the secondfourth quarter of fiscal 2013.
See Item 1A—“Risk Factors”2015, we made two strategic investments in Hong Kong and Item 3—“Legal Proceedings” for more informationNigeria, 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 risks associated with our SASSA contract, the recently initiated new tender process and for an update on litigation between us and SASSA.
Issue of option pursuant to Broad Based Black Economic Empowerment transaction
On April 19, 2012, we issued a one-year option to purchase 8,955,000 sharesintroduction of our common stock totechnology or solutions can enhance the breadth of their offerings and in turn the market opportunity.
T24
In May 2015, we acquired a BEE consortium pursuant to the previously-announced BEE transaction that we entered into on January 25, 2012. While we43.88% interest in Transact24 Limited, or T24, a specialist Hong Kong-based payment services company. We believe that thisour investment in T24’s 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 will improve our BEE rating,processing, and thereforewill provide us with additionalspecialist marketing business opportunities in South Africa, additional steps may become necessarydevelopment resources to achieve these goals.
For a discussionexpand the adoption of additional risks associated with compliance with the South African Broad Based Black Economic Empowerment Act, please see the risk factor entitled “If we do not achieve applicable black economic empowerment objectives inNet1 product range including our South African businesses, we risk losing our government and private contracts. In addition, it is possible that we may be required to achieve black shareholding of our company in a manner that could dilute your ownership.” in Item 1A.
Acquisition of SmartLife
On July 1, 2011, we acquired SmartLife, a South African long-term insurance company, for ZAR 13 million (approximately $1.8 million) in cash. Prior to its acquisition by us, Smart Life had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not written any new insurance business for a number of years and had reinsured all of its risk exposure under its life insurance products. SmartLife has been allocated to our financial services operating segment.
The acquisition of SmartLifeMobile Virtual Card product. T24 also provides us with an opportunity to offer relevant insurance products directly to our existing customerentry into the rapidly growing Chinese e-commerce and employee basetransaction processing markets through its established relationships with China UnionPay, the only domestic bank card organization and interbank network in South Africa. We intend to offer this customer base a full spectrum of products applicable to this market segment, including credit life, group life, funeralChina, and education insurance policies.AliPay, China’s leading third party online payment platform.
Acquisition of Eason prepaid airtime and electricityT24’s primary business
On October 3, 2011, we acquired the South African prepaid airtime and electricity businesses of Eason & Son, Ltd, or Eason, an Irish private limited company, for approximately $4.5 million in cash. The principal assets acquired comprise customer and supplier lists, accounts receivable books, inventory, point of service terminals and a perpetual license to utilize Eason’s internally developed transaction-based system software, namely EBOS. The business has been integrated with EasyPay and has been allocated to our South African transaction-based activities operating segment. We expect over time to integrate all of our prepaid offerings onto the EBOS system.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. |
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South African transaction processors, excluding pension and welfareOne Credit
FIHRST continuesIn 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 Credit’s 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 employerformulation and employee payment processing space viaexecution of the offeringOne 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 expandedstrategic 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 Africa’s unbanked and under-banked citizens including social grant beneficiaries, but independently and without SASSA’s 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 Court’s 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 acquisitionnew contractor.
See “Item 1A—Risk Factors—We have historically derived a substantial portion of new employer and employee groups. MediKredit signed agreements with new providers, including public hospitals, private hospitals and specialist doctors, and has commenced adjudication and processing activities for these providers.
Partnership with MasterCard
Following our EMV certification and subsequent strategic decision to issue MasterCard-branded UEPS/EMV cards to our welfare recipients in South Africa as part ofrevenues 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 Life’s 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.
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Transactions in preparation for SASSA tender commenced in late calendar 2014
On August 27, 2014, we entered into a partnershipSubscription and Sale of Shares Agreement with MasterCard to facilitate the interoperabilityBVI, one of our UEPS technologyBEE partners, in preparation for the SASSA tender that we expected would commence in late calendar 2014. Pursuant to the agreement: (i) we repurchased BVI’s 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 traditional EMV payment system to address the financial services needsCPS shareholder agreement that was negotiated as part of the unbanked population in South Africa and a number of other emerging African countries by leveraging the UEPS/EMV technology.
Partnership with Vodacom
As part of our national SASSA rollout in South Africa, we have partnered with Vodacom, one of the largest mobile operators in the country and a subsidiary of Vodafone Group, to issue welfare recipients with a free Vodacom SIM card in addition to our UEPS/EMV smart card as a way to communicate monthly with beneficiaries regarding grant information, a free phone call for voice biometric verification, and a channel to distribute customized marketing offers via SMS for various products and services.
Outside South Africa
KSNET
The KSNET management team has commenced a number of strategic initiatives in the Republic of Korea to maintain and expand our current market share and to grow into adjacent markets. In fiscal 2012, KSNET increased the number of merchants it served by 20,000 as a result of its strategic marketing initiatives to target the small and medium merchant market segment, and currently serves approximately 220,000 merchants. The competitive value added network environment in Korea has resulted in a nominal anticipated loss of operation margin, which we expect to continue for the foreseeable future, and expect further nominal margin loss in the short to medium-term. However, management expects that its efforts to penetrate the small and medium sized merchant base as well as the introduction of additional services that leverage the existing infrastructure may improve the unit’s margin profile over time.
XeoHealth
During the second quarter of fiscal 2012, we commenced processing 4010 and 5010 data, including capitation information and creating state reporting claims files for Community Behavioral Health, or CBH, a not-for-profit corporation contracted by the City of Philadelphia to provide behavioral health services for Philadelphia Medicaid recipients. XeoHealth licenses its XeoRules SaaS offering to CBH including implementation services. XeoHealth has recognized implementation revenue during the implementation phase and recurring transaction-based revenue fromoriginal December 2011 from this contract.2013 Relationship Agreement became effective.
Additionally, XeoHealth has been subcontracted by Cognosante LLC, a U.S. provider of health IT services to state and federal agencies and regional health organizations, to assist with the provision of recovery audit contractor, or RAC, services to the North Dakota Department of Human Services, Medical Services Division. XeoHealth will earn a fee based on a percentage of the final recoveries identified by our XeoRules claims auditing service for the past five years, as well as the desk review recovery referrals identified through our XeoRules engine until June 30, 2013. In addition to the North Dakota RAC, XeoHealth has also been subcontracted by Cognosante to provide both the automated audit as well the analysis services as required by the RAC for the State of Missouri Medicaid.
XeoHealth will be compensated based on a percentage of the final recoveries identified by our XeoRules claims re-adjudicating service for the audit period of three years, as well as the desk review recovery referrals identified through our XeoRules engine. We expect XeoHealth to commence providing RAC services by September 2012.
XeoRules is XeoHealth’s internally developed 5010 and ICD-10 enabled real-time claims adjudication engine. XeoRules significantly reduces the time and radically improves the efficiency and accuracy of healthcare claims adjudication and data processing. We continue to enjoy significant interest from various participants in the U.S. healthcare industry in our solution for the current and newly updated Health Insurance Portability and Accountability Act-mandated electronic data interchange transactions.
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Mobile Virtual Card
We launched our VCPay offering in the United States during fiscal 2011. Our mobile phone-based virtual payment card application is designed to eliminate fraud in card not present transactions. During the first quarter of fiscal 2012, we engaged the services of a specialist advisory firm to assist us with the general management of our VCPay initiatives in the US, the identification of the various strategic channels for VCPay deployment and the commercialization of VCPay in our targeted industry verticals.
The Banamex VCPay initiative in Mexico is currently in the system integration testing phase, with hardware having been deployed and prepared for launch in the second quarter of fiscal 2013. We believe that this first implementation of our VCPay technology in Latin America, spearheaded by one of the largest financial institutions in the region, as a catalyst to increase the footprint of VCPay services in the region.
Late in fiscal 2012, we have signed additional MVC deployments with new customers in Spain and India.
The African Continent and Iraq
During fiscal 2012, NUETS recorded revenue from transaction fees under its contract with the government of Iraq. NUETS has entered the second phase of its initiative in Ghana and now generates recurring income in the form of hardware and software maintenance fees. According to data from our customer, Ghana Interbank Payment and Settlement Systems, during the first six months of calendar 2012, value and volume of transactions involving e-Zwich increased ten-fold since January 1, 2012 and as additional payment infrastructure is deployed, usage is expected to increase further. Although we do not receive a transaction fee from our system in Ghana, we believe that the increase in usage demonstrates the attractiveness of our technology in countries outside South Africa.
NUETS continued to service its current customers on the African continent and in Iraq and continued its business development efforts, including responding to a number of tenders, in multiple countries on the African continent during the year. In addition, NUETS has developed a limited investment / software as a service business model and we expect to deploy the UEPS technology in selected African markets using this approach in the future.
Our partnership with MasterCard may also bring us additional business development opportunities for current or future MasterCard member banks who seek the offline and additional functionality incorporated in our new UEPS/EMV payment technology.
Reallocation of certain activities among reporting segments
During fiscal 2012, we made the following changes to our reporting segments:
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The tables below present our revenue and operating income, both as reported and as revised to reflect the reallocations described above, for each quarter of fiscal 2011:
Furthermore, the activities of Net1 UTA related primarily to the commercialization of our MVC offering during the first quarter of fiscal 2012 have been allocated to our international transaction-based activities operating segment.
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Refer to Note 22 to our consolidated financial statements for a description of our operating segments and segment financial information for fiscal 2012, 2011 and 2010.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with USU.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 management’s judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our operations and financial condition.
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.
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Deferred Taxation
We estimate our tax liability through the calculations done for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet. Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in future periods. In the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2012, 2011,2015 and 2010,2014, respectively, we recorded increasesa 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 of $12.0 million, $19.5 million and $5.0 million, respectively.allowance.
Stock-based Compensation and Equity Instrument issued pursuant to BBBEE transactionBEE 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. No stock options were granted during fiscal 2010. The fair value of stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was $2.8$3.2 million, $1.7$3.7 million and $5.7$3.9 million for fiscal 2012, 20112015, 2014 and 2010,2013, respectively. Net stock-based compensation expense for fiscal 2011, includes a reversal of $3.5 million related to a portion of the restricted stock granted in August 2007 that did not vest as the performance condition prescribed in the terms of the awards was not met.
Equity instrumentinstruments
We recorded $14.2non-cash charges of $11.3 million of expense associated with the issuance of equity instruments as part of the BBBEE transactionBEE transactions during fiscal 20122014, as such awardsthese equity instruments were fully vested during the period.in that year.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed acquisitions during fiscal 2012, 2011 and 2010, where we identified and recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives.
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The valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary. For instance, during fiscal 2011, we recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008.
Business Combinations and the Recoverability of Goodwill
A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques, including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities that form part of the reporting unit.
The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units, we consider the value of our business as a whole and allocate this value across our reporting units based on the weighted average of the returns of the reporting units.
We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units.
The results of our impairment tests during fiscal 2012 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units were not at risk of potential impairment.
Accounts Receivable and ProvisionAllowance for Doubtful DebtsAccounts Receivable
We maintain a provisionan allowance for doubtful debtsaccounts receivable related to our hardware, softwareFinancial inclusion and related technology salesapplied 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 management’s estimate of the recoverability of the amounts outstanding.
Management considers factors including period outstanding, creditworthiness of the customers, past payment history and the results of discussions by our credit department with the customer. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these receivables, including on-going evaluation of the creditworthiness of each customer.
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 management’s 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.
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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, 2012, 20112015, 2014 or 2010,2013, 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 group’s profitability in the period when the costs are capitalized, and in subsequent periods when the capitalized costs are amortized.
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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, 20122015
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of June 30, 2012,2015, 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 3 | Year ended June 30, | |||||||||||||||||
Table 1 | Year ended June 30, | |||||||||||||||||
2012 | 2011 (1) | 2010 | 2015 | 2014 | 2013 | |||||||||||||
ZAR : $ average exchange rate | 7.7920 | 7.0286 | 7.6117 | 11.4494 | 10.3798 | 8.8462 | ||||||||||||
Highest ZAR : $ rate during period | 8.6987 | 7.7809 | 8.3187 | 12.5779 | 11.2579 | 10.3587 | ||||||||||||
Lowest ZAR : $ rate during period | 6.6096 | 6.4925 | 7.1731 | 10.5128 | 9.6259 | 8.0444 | ||||||||||||
Rate at end of period | 8.2881 | 6.8449 | 7.6529 | 12.2854 | 10.5887 | 9.8925 | ||||||||||||
KRW : $ average exchange rate | 1,130 | 1,113 | n/a | 1,078 | 1,068 | 1,112 | ||||||||||||
Highest KRW : $ rate during period | 1,202 | 1,169 | n/a | 1,139 | 1,147 | 1,162 | ||||||||||||
Lowest KRW : $ rate during period | 1,029 | 1,059 | n/a | 1,009 | 1,014 | 1,019 | ||||||||||||
Rate at end of period | 1,159 | 1,079 | n/a | 1,128 | 1,014 | 1,144 |
(1) – KRW : $ average, highest and lowest exchange rates are from November 1, 2010 (KSNET acquisition date) to June 30, 2011.
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Translation exchange ratesExchange Rates
We are required to translate our results of operations from ZAR to USU.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the years ended June 30, 2012, 20112015, 2014 and 2010,2013, 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 | Year ended | |||||||||||||||||
Table 4 | June 30, | |||||||||||||||||
Table 2 | June 30, | |||||||||||||||||
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||
Income and expense items: $1 = ZAR | 7.7186 | 6.9962 | 7.6092 | 11.4275 | 10.3966 | 8.7105 | ||||||||||||
Income and expense items: $1 = KRW | 1,104 | 1,121 | n/a | 1,073 | 1,049 | 1,072 | ||||||||||||
Balance sheet items: $1 = ZAR | 8.2881 | 6.8449 | 7.6529 | 12.2854 | 10.5887 | 9.8925 | ||||||||||||
Balance sheet items: $1 = KRW | 1,159 | 1,079 | n/a | 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 USU.S. GAAP. We analyze our results of operations both in USU.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 USU.S. dollar and ZAR on our reported results and because we use the USU.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 20122015 results include SmartLifeexclude MediKredit and NUETS business from July 1, 2011, and Eason from October 1, 2011 and KSNET, MediKredit and FIHRST.2014. Fiscal 20112013 results include MediKreditSmartSwitch Botswana from December 1, 2012 and FIHRST for the entire period and KSNETN1MS from NovemberSeptember 1, 2010, but do not include Eason and SmartLife. Fiscal 2010 results include MediKredit and FIHRST from January 1, 2010 and March 31, 2010, respectively, and do not include KSNET, SmartLife and Eason.
The discussion below gives effect2012. Refer also to Note 3 to the reallocation of certain activities among our various operating segments as discussed above.consolidated financial statements.
Fiscal 20122015 Compared to Fiscal 20112014
The following factors had an influence on our results of operations during fiscal 20122015 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. |
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Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with USU.S. GAAP.
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The following tables show the changes in the items comprising our statements of operations, both in USU.S. dollars and in ZAR:
In United States Dollars | In United States Dollars | |||||||||||||||||
Table 5 | (US GAAP) | |||||||||||||||||
Table 3 | (U.S. GAAP) | |||||||||||||||||
Year ended June 30, | Year ended June 30, | |||||||||||||||||
2012 | 2011 | % | 2015 | 2014 | % | |||||||||||||
$ ’000 | $ ’000 | change | $ | ’000 | $ | ’000 | change | |||||||||||
Revenue | 390,264 | 343,420 | 14% | 625,979 | 581,656 | 8% | ||||||||||||
Cost of goods sold, IT processing, servicing and support | 141,000 | 109,858 | 28% | 297,856 | 260,232 | 14% | ||||||||||||
Selling, general and administration | 137,404 | 119,692 | 15% | 158,919 | 168,072 | (5% | ) | |||||||||||
Equity instrument issued pursuant to BBBEE transaction | 14,211 | - | nm | |||||||||||||||
Equity instruments issued pursuant to BEE transactions | - | 11,268 | nm | |||||||||||||||
Depreciation and amortization | 36,499 | 34,671 | 5% | 40,685 | 40,286 | 1% | ||||||||||||
Impairment of intangible assets | - | 41,771 | (100)% | |||||||||||||||
Operating income | 61,150 | 37,428 | 63% | 128,519 | 101,798 | 26% | ||||||||||||
Interest income | 8,576 | 7,654 | 12% | 16,355 | 14,817 | 10% | ||||||||||||
Interest expense | 9,345 | 8,672 | 8% | 4,456 | 7,473 | (40% | ) | |||||||||||
Income before income taxes | 60,381 | 36,410 | 66% | 140,418 | 109,142 | 29% | ||||||||||||
Income tax expense | 15,936 | 33,525 | (52)% | 44,136 | 39,379 | 12% | ||||||||||||
Net income before income (loss) from equity-accounted investments | 44,445 | 2,885 | nm | |||||||||||||||
Income (Loss) from equity-accounted investments | 220 | (339 | ) | (165)% | ||||||||||||||
Net income before income from equity-accounted investments | 96,282 | 69,763 | 38% | |||||||||||||||
Income from equity-accounted investments | 452 | 298 | 52% | |||||||||||||||
Net income | 44,665 | 2,546 | nm | 96,734 | 70,061 | 38% | ||||||||||||
Less (Add) net income (loss) attributable to non-controlling interest | 14 | (101 | ) | (114)% | ||||||||||||||
Less (add) net income (loss) attributable to non-controlling interest | 1,999 | (50 | ) | nm | ||||||||||||||
Net income attributable to Net1 | 44,651 | 2,647 | nm | 94,735 | 70,111 | 35% |
In South African Rand | In South African Rand | |||||||||||||||||
Table 6 | (US GAAP) | |||||||||||||||||
Table 4 | (U.S. GAAP) | |||||||||||||||||
Year ended June 30, | Year ended June 30, | |||||||||||||||||
2012 | 2011 | 2015 | 2014 | |||||||||||||||
ZAR | ZAR | % | ZAR | ZAR | % | |||||||||||||
’000 | ’000 | change | ’000 | ’000 | change | |||||||||||||
Revenue | 3,012,292 | 2,402,634 | 25% | 7,153,375 | 6,047,244 | 18% | ||||||||||||
Cost of goods sold, IT processing, servicing and support | 1,088,322 | 768,589 | 42% | 3,403,749 | 2,705,528 | 26% | ||||||||||||
Selling, general and administration | 1,058,190 | 837,389 | 26% | 1,816,047 | 1,745,784 | 4% | ||||||||||||
Equity instrument issued pursuant to BBBEE transaction | 112,066 | - | nm | |||||||||||||||
Equity instruments issued pursuant to BEE transactions | - | 118,740 | nm | |||||||||||||||
Depreciation and amortization | 281,722 | 242,565 | 16% | 464,928 | 418,838 | 11% | ||||||||||||
Impairment of intangible assets | - | 292,238 | (100% | |||||||||||||||
Operating income | 471,992 | 261,853 | 80% | 1,468,651 | 1,058,354 | 39% | ||||||||||||
Interest income | 66,195 | 53,549 | 24% | 186,897 | 154,046 | 21% | ||||||||||||
Interest expense | 72,130 | 60,671 | 19% | 50,921 | 77,694 | (34% | ) | |||||||||||
Income before income taxes | 466,057 | 254,731 | 83% | 1,604,627 | 1,134,706 | 41% | ||||||||||||
Income tax expense | 123,004 | 234,548 | (48% | ) | 504,364 | 409,408 | 23% | |||||||||||
Net income before income (loss) from equity-accounted investments | 343,053 | 20,183 | nm | |||||||||||||||
Income (Loss) from equity-accounted investments | 1,698 | (2,372 | ) | (172% | ) | |||||||||||||
Net income before income from equity-accounted investments | 1,100,263 | 725,298 | 52% | |||||||||||||||
Income from equity-accounted investments | 5,165 | 3,098 | 67% | |||||||||||||||
Net income | 344,751 | 17,811 | nm | 1,105,428 | 728,396 | 52% | ||||||||||||
Less (Add) net income (loss) attributable to non-controlling interest | 108 | (707 | ) | (115% | ) | |||||||||||||
Less (add) net income (loss) attributable to non-controlling interest | 22,844 | (520 | ) | nm | ||||||||||||||
Net income attributable to Net1 | 344,643 | 18,518 | nm | 1,082,584 | 728,916 | 49% |
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Analyzed in ZAR, theThe increase in revenue was primarily due to the inclusion of KSNET, incremental revenue resultinghigher contributions from our newfinancial inclusion products and growth at KSNET. These increases were offset by the recovery of implementation costs related to our SASSA contract award, higher prepaid airtime sales resulting from the Eason acquisition,received in 2014.
The increase in the number of UEPS-based loans made, and higher utilization of our UEPS system in Iraq, offset by lower hardware and software sales.
Analyzed in ZAR, cost of goods sold, IT processing, servicing and support was higher primarily due to higher expenses incurred from increased usage of the inclusion of KSNETSouth African National Payment System by beneficiaries and incremental costs resulting frommore prepaid airtime sold.
In ZAR, our new SASSA contract award.
The increase in selling, general and administration expense is the result of the KSNET acquisition and SASSA implementation costs of $10.9 million and cash bonuses of $5.4 million paid which was offset by lower stock-based compensation charge, primarily because the performance-based restricted stock granted in August 2007 was fully expensed in prior periods andincreased due to the non-cash profit related to the liquidation of SmartSwitch Nigeria of $4.0 million. During fiscal 2011, selling, generalincreases in goods and administration expense included transaction-related costs of $6.0 million (ZAR 42.3 million), primarily for the KSNET acquisition.services purchased from third parties.
The grant date fair value of the equity instrument issued pursuant to our January 2012 BBBEE transaction was $14.2 million (ZAR 112.1 million) and has been expensed in full in fiscal 2012.
Our operating income margin for fiscal 20122015 and 20112014 was 16%21% and 11%18%, respectively. We discuss the components of the operating income margin under “—Results of operations by operating segment”, however thesegment.” The increase is primarily attributable to lower stock-based compensation chargeshigher transaction volumes in South Africa, including prepaid airtime sales, lending and SASSA grants paid.
The grant date fair value of the non-cash profit relatedequity instruments issued pursuant to the liquidation of SmartSwitch Nigeria of $4.0our December 2014 BEE transactions was $11.3 million (ZAR 118.7 million) and was expensed in full in fiscal 2012 compared with fiscal 2011 and transaction-related costs during fiscal 2011.2014.
In ZAR, depreciation44
Depreciation and amortization increasedwere higher primarily as a result of an increase in depreciation related to assetsmore terminals used to service our obligations under our new SASSA contractprovide transaction processing in Korea and an increasethe roll-out of ATMs in KSNET depreciation and intangible asset amortization, butSouth Africa, which was partially offset by the full impairment of Net1 UTA intangibles in 2011. Theno Eason intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented inthese intangible assets were fully amortized at the tables below:
Table 7 | Year ended June 30, | ||||||
2012 | 2011 | ||||||
$ ’000 | $ ’000 | ||||||
Amortization included in depreciation and amortization expense: | 19,557 | 21,692 | |||||
South African transaction-based activities | 6,171 | 5,702 | |||||
International transaction-based activities | 13,015 | 8,602 | |||||
Hardware, software and related technology sales | 371 | 7,388 |
Table 8 | Year ended June 30, | ||||||
2012 | 2011 | ||||||
ZAR ’000 | ZAR ’000 | ||||||
Amortization included in depreciation and amortization expense: | 150,952 | 151,761 | |||||
South African transaction-based activities | 47,625 | 39,891 | |||||
International transaction-based activities | 100,458 | 60,181 | |||||
Hardware, software and related technology sales | 2,869 | 51,689 |
During fiscal 2011, customer relationships acquired as partend of the Net1 UTA acquisition in August 2008 were reviewed for impairment following deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows. As a consequence of this review, we recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired. In addition, we reversed the deferred tax liability of $10.4 million associated with this intangible asset.June 2014.
In ZAR, interestInterest on surplus cash increased to $8.6$16.4 million (ZAR 66.2186.9 million) from $7.7$14.8 million (ZAR 53.4154.0 million). The increase resulted, due primarily fromto higher average daily ZAR cash balances offset bybalances.
Interest expense decreased to $4.5 million (ZAR 50.9 million) from $7.5 million (ZAR 77.7 million), due to a lower deposit rates resulting from the decreaseaverage 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 prime intereststatutory rate from an averageas a result of approximately 9.29% to 9.00% per annum.
Interest expense increased to $9.3 million (ZAR 72.1 million) from $8.7 million (ZAR 60.7 million) due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense for fiscal 2012non-deductible expenses (including consulting and 2011 includes amortized debt facility fees of $0.4 million (ZAR 3.0 million) and $2.0 million (ZAR 13.7 million), respectively.
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Total tax expense for fiscal 2012 decreased to $16.0 million (ZAR 123.0 million) from $33.5 million (ZAR 234.5 million)legal). In fiscal 2012 ourOur effective tax rate decreased to 26.4% from 92.1% . Ourfor the fiscal 2012 tax2014, was 36.1% and was higher than the South African statutory rate as a result of non-deductible expenses (including the expense includes $18.3 million related to a change in South African tax law and the creation of a valuation allowance of $12.0 million related to foreign tax credits. The reduction in our effective tax rate was primarily due to the tax law change, a non-taxable profit on liquidation of SmartSwitch Nigeria, offset by an increase in non-deductible expenses, including stock-based compensation charges, an equity instrumentinstruments issued pursuant to our BEE transaction andtransactions, interest expensesexpense related to our long-term South Korean long-term debt. Our fiscal 2011 tax expense includes the effect of the reversal of $10.4 million related to deferred tax liabilities related to impaired Net1 UTA customer relationshipsborrowings and a valuation allowances of $8.9 million related to Net1 UTA deferred tax assets.stock-based compensation charges).
Net earnings from equity-accounted investments for fiscal 2012 were $0.2 million (ZAR 1.7 million) compared with a loss of $0.3 million (ZAR 2.4 million) during fiscal 2011. We sold VinaPay in fiscal 2011 and in fiscal 2012 we did not account for the equity accounted losses in VTU Colombia as the accumulated losses have exceeded our initial investments. Net earnings from equity-accounted investments for fiscal 2012 was primarily due to an increase in transaction fees generated by SmartSwitch Namibia and SmartSwitch Botswana and due to the exclusion of VinaPay and VTU Colombia loss-making results.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 9 | In United States Dollars (US GAAP) | ||||||||||||||||||
Year ended June 30, | |||||||||||||||||||
2012 | % of | 2011 | % of | % | |||||||||||||||
Operating Segment | $’000 | total | $’000 | total | change | ||||||||||||||
Consolidated revenue: | |||||||||||||||||||
South African transaction-based activities | 201,207 | 52% | 189,206 | 55% | 6% | ||||||||||||||
International transaction-based activities | 118,281 | 30% | 70,382 | 20% | 68% | ||||||||||||||
Smart card accounts | 31,263 | 8% | 33,315 | 10% | (6% | ) | |||||||||||||
Financial services | 8,121 | 2% | 7,350 | 2% | 10% | ||||||||||||||
Hardware, software and related technology sales | 31,392 | 8% | 43,167 | 13% | (27% | ) | |||||||||||||
Total consolidated revenue | 390,264 | 100% | 343,420 | 100% | 14% | ||||||||||||||
Consolidated operating income (loss): | |||||||||||||||||||
South African transaction-based activities | 49,824 | 81% | 75,668 | 202% | (34% | ) | |||||||||||||
Operating income before amortization | 55,995 | 81,370 | (31% | ) | |||||||||||||||
Amortization | (6,171 | ) | (5,702 | ) | 8% | ||||||||||||||
International transaction-based activities | 1,257 | 2% | (220 | ) | (1% | ) | (671% | ) | |||||||||||
Operating income before amortization | 14,272 | 8,382 | 70% | ||||||||||||||||
Amortization | (13,015 | ) | (8,602 | ) | 51% | ||||||||||||||
Smart card accounts | 12,820 | 21% | 15,140 | 40% | (15% | ) | |||||||||||||
Financial services | 4,636 | 8% | 4,999 | 13% | (7% | ) | |||||||||||||
Hardware, software and related technology sales | 3,619 | 6% | (48,372 | ) | (129% | ) | (107% | ) | |||||||||||
Operating income before amortization and | |||||||||||||||||||
impairment of intangibles | 3,990 | 787 | 407% | ||||||||||||||||
Impairment of intangibles | - | (41,771 | ) | nm | |||||||||||||||
Amortization of intangibles | (371 | ) | (7,388 | ) | (95% | ) | |||||||||||||
Corporate/eliminations | (11,006 | ) | (18% | ) | (9,787 | ) | (25% | ) | 12% | ||||||||||
Total consolidated operating income | 61,150 | 100% | 37,428 | 100% | 63% |
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% |
4845
Table 10 | In South African Rand (US GAAP) | |||||||||||||||||
Year ended June 30, | ||||||||||||||||||
2012 | 2011 | |||||||||||||||||
ZAR | % of | ZAR | % of | % | ||||||||||||||
Operating Segment | ’000 | total | ’000 | total | change | |||||||||||||
Consolidated revenue: | ||||||||||||||||||
South African transaction-based activities | 1,553,036 | 52% | 1,323,723 | 55% | 17% | |||||||||||||
International transaction-based activities | 912,964 | 30% | 492,406 | 20% | 85% | |||||||||||||
Smart card accounts | 241,307 | 8% | 233,078 | 10% | 4% | |||||||||||||
Financial services | 62,683 | 2% | 51,422 | 2% | 22% | |||||||||||||
Hardware, software and related technology sales | 242,302 | 8% | 302,005 | 13% | (20% | ) | ||||||||||||
Total consolidated revenue | 3,012,292 | 100% | 2,402,634 | 100% | 25% | |||||||||||||
Consolidated operating income (loss): | ||||||||||||||||||
South African transaction-based activities | 384,572 | 81% | 529,388 | 202% | (27% | ) | ||||||||||||
Operating income before amortization | 432,197 | 569,279 | (24% | ) | ||||||||||||||
Amortization | (47,625 | ) | (39,891 | ) | 19% | |||||||||||||
International transaction-based activities | 9,702 | 2% | (1,539 | ) | (1% | ) | (730% | ) | ||||||||||
Operating income before amortization | 110,160 | 58,642 | 88% | |||||||||||||||
Amortization | (100,458 | ) | (60,181 | ) | 67% | |||||||||||||
Smart card accounts | 98,952 | 21% | 105,922 | 40% | (7% | ) | ||||||||||||
Financial services | 35,783 | 8% | 34,974 | 13% | 2% | |||||||||||||
Hardware, software and related technology sales | 27,934 | 6% | (338,420 | ) | (129% | ) | (108% | ) | ||||||||||
Operating income before amortization and impairment of intangibles | 30,803 | 5,507 | 459% | |||||||||||||||
Impairment of intangibles | - | (292,238 | ) | nm | ||||||||||||||
Amortization of intangibles | (2,869 | ) | (51,689 | ) | (94% | ) | ||||||||||||
Corporate/eliminations | (84,951 | ) | (18% | ) | (68,472 | ) | (25% | ) | 24% | |||||||||
Total consolidated operating income | 471,992 | 100% | 261,853 | 100% | 80% |
South African transaction-based activitiestransaction processing
In ZAR, revenue increased in fiscal 2015 compared to fiscal 2014 (after excluding the increasesimpact of the recovery in fiscal 2014 of implementation costs related to our SASSA contract). The increase in segment revenue wererevenues exclusive of such recovery was primarily due to higher revenues earned, from April 1, 2012, under our new SASSA contract, higher prepaid airtime sales resulting primarily from the Eason acquisition and increased transaction volumes at MediKredit, offset by a lower contribution from EasyPay. Segment revenues include themore low-margin transaction fees we earn through our merchant acquiring system and reflect the elimination of inter-company transactions.
Our operating income margin for the fiscal 2012 and 2011 was 25% and 40%, respectively, and has declined primarily due to SASSA implementation costs and cash bonuses paid and higher low-margin prepaid airtime sales and higher intangible asset amortization attributable to the Eason acquisition.
Pension and welfare operations:
Our new contract discussed under “—Business Developments during Fiscal 2012—South Africa—SASSA contract” had a positive impact on revenue but decreased our operating margin. Our pension and welfare operations continue to generate the majority of our revenues and operating income in this operating segment and overall.
South African transaction processors:
The table below presents the total volume and value processed during fiscal 2012 and 2011 by our transaction processors:
Table 11 | ||||||||||||||||||
Transaction | Total volume (‘000s) | Total value $ (‘000) | Total value ZAR (‘000) | |||||||||||||||
processor | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||
EasyPay(1) | 443,227 | 715,945 | 12,171,663 | 24,307,247 | 93,948,192 | 165,500,752 | ||||||||||||
Remaining core | 418,831 | 493,018 | 11,383,734 | 15,662,653 | 87,866,487 | 106,642,308 | ||||||||||||
Discontinued | 24,396 | 222,927 | 787,929 | 8,644,594 | 6,081,705 | 58,858,444 | ||||||||||||
MediKredit | 10,677 | 9,805 | 620,439 | 513,503 | 4,788,923 | 3,592,572 | ||||||||||||
FIHRST | 24,266 | 21,954 | 10,069,927 | 9,792,178 | 77,725,741 | 68,508,034 |
|
49
We are refocusing EasyPay’s activities on higher-margin value-added services and have terminated certain inefficient activities such as the hosting of processing servers for financial institutions. We have reclassified the 2011 transaction volumes and values in the table above to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities.
Our results for fiscal 2012 include intangible asset amortization related to our Eason acquisitiongenerated from October 2011 and MediKredit and FIHRST for the full year. Our results for fiscal 2011 include intangible asset amortization related to our MediKredit and FIHRST acquisitions for the full year.
Continued adoption of our merchant acquiring system:
The key statistics and indicators of our merchant acquiring system on a quarterly basis during the last 18 months in each of the five South African provinces where we distributed social welfare grants during the quarter are summarized in the table below.
The increase in the number of POS devices since June 30, 2011, is due to increased rental or purchase of POS devices by current merchants requesting additional equipment and new merchants joining our UEPS merchant acquiring system. The decrease in the number of participating UEPS retail locations is due to us cancelling contracts due to non-payment by the merchants. Under our normal credit control procedures we regularly scrutinize and review long outstanding debtors accounts, and after all efforts have been exhausted, we cancel our relationship with these defaulting merchants. The cancellation of these contracts has not, and should not, have a significant impact on our results of operations and as demonstrated by the key statistics below, we believe that our merchant acquiring system is functioning optimally.
Table 12 | Three months ended | |||||||||||||||||
Mar 31, | Jun 30, | Sep 30, | Dec 31, | Mar 31, | Jun 30, | |||||||||||||
2011 | 2011 | 2011 | 2011 | 2012 | 2012 | |||||||||||||
Total POS devices installed as of period end | 4,835 | 4,921 | 4,867 | 5,034 | 4,976 | 6,353 | ||||||||||||
Number of participating UEPS retail locations as of period end | 2,541 | 2,482 | 2,438 | 2,485 | 2,416 | 2,477 | ||||||||||||
Value of transactions processed through POS devices during the quarter (1) (in $ ’000) | 411,233 | 446,068 | 493,760 | 404,551 | 484,862 | 349,392 | ||||||||||||
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in $ ’000) | 401,723 | 444,750 | 471,942 | 415,369 | 459,495 | 463,555 | ||||||||||||
Value of transactions processed through POS devices during the quarter (1) (in ZAR ’000) | 2,920,454 | 3,037,006 | 3,523,339 | 3,282,747 | 3,773,295 | 2,843,719 | ||||||||||||
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in ZAR ’000) | 2,852,913 | 3,028,036 | 3,367,648 | 3,370,534 | 3,575,890 | 3,772,900 | ||||||||||||
Number of grants paid through POS devices during the quarter (1) | 4,804,540 | 4,850,146 | 5,091,858 | 4,687,607 | 5,320,585 | 3,942,781 | ||||||||||||
Number of grants paid through POS devices during the completed pay cycles for the quarter (2) | 4,739,062 | 4,839,106 | 4,960,121 | 4,820,153 | 5,088,020 | 5,191,904 | ||||||||||||
Average number of grants processed per terminal during the quarter (1) | 995 | 994 | 1,040 | 947 | 1,063 | 696 | ||||||||||||
Average number of grants processed per terminal during the completed pay cycles for the quarter (2) | 981 | 992 | 1,014 | 974 | 1,017 | 917 |
(1) Refers to events occurring during the quarter (i.e., based on three calendar months). (2) Refers to events occurring during the completed pay cycle.
Under our previous contract with SASSA to distribute social welfare grants in five South African provinces, we established a dedicated UEPS merchant acquiring system where our beneficiaries could load and spend their grants. Following SASSA’s award of the new tender to us for the payment of all social grants in South Africa, we will issue each grant recipient with our latest MasterCard-branded UEPS/EMV combination smart cards. These smart cards can be used across all elements ofusing the South African National Payment System including at ATMs and POSs, inmore inter-segment transaction processing activities. In addition, to our current UEPS merchant acquiring system and mobile pay points.
50
We will continue to supply our merchant acquiring solution to those merchants who are not already acquired, but givenrevenue from the availabilitydistribution of all EMV-enabled POS devices and ATMs to our beneficiaries on a national basis, we do not expect any further growth insocial welfare grants grew modestly during the number and value of transactions processed through our own merchant acquiring network. We believe that the continued presentation of the above metrics in fiscal 2013 will not provide any meaningful information and will therefore discontinue this disclosure.
International transaction-based activities
KSNET continues to contribute the majority of our revenues in this operating segment. Operating margin for the segment is lower than most of our South African transaction-based businessesyear and was negatively impacted by start-up expenditures related to our XeoHealth launchin-line with the increase in the United States, MVC activities at Net1 UTAunique welfare cardholder recipients, net of removal of invalid and on-going losses at Net1 Virtual Card, but these expenses were partiallyfraudulent beneficiaries, offset by revenue contributions from KSNET, and to a lesser extent from XeoHealth and NUETS’ initiative in Iraq. Operating income margin for fiscal 2012 and 2011 was 1% and 0%, respectively.
Our results for fiscal 2012 include the intangible asset amortization related to our KSNET acquisition for the full year and for fiscal 2011 from November 1, 2011.
Smart card accounts
In ZAR, ourloss of MediKredit revenue from this operating segment was higher because the number of smart card-based accounts has increased as a result of the SASSA award, however, our revenue per account has decreased. We have reduced our pricing for smart card accounts after taking into consideration the lower price and higher volumessale of the new SASSA contract. The new pricing, effective from April 1, 2012, reduced the average revenue from R5.50 to R4.00 and thethat business.
Our operating income margin from 45.45% to 28.50% . Operating income margin from providing smart card accounts for fiscal 20122015 and 20112014 was 41%22% and 45%23%, respectively.
In ZAR, revenue from Our operating margin for fiscal 2014 was positively impacted by the provisionrecovery of smart card-based accounts increased in proportionimplementation costs related to the increased number of beneficiaries serviced through our SASSA contract. A total numberExcluding the impact of 5,578,518 smart card-based accounts were active at June 30, 2012 compared to 3,561,105 active accounts as at June 30, 2011.
Financial services
UEPS-based lending contributes the majority of the revenue andthis $26.6 million recovery from SASSA, our operating income in thismargin for fiscal 2014 was 15%. Our fiscal 2015 operating segment. Revenue increased primarilyincome 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 granted. Our currentas 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 portfolio comprises loans made to qualifying old age grant recipients in someoffering and the establishment of the provinces where we distribute social welfare grants. We continue to incur start-up expenditures related to our SmartLife business and other financial services offerings. SmartLifeallowance for doubtful finance loans in fiscal 2014. Smart Life did not contribute significantly to our operating income in fiscal 2012 as it had not commenced2015 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 activities under its new business model.
Operating income margin for the financial servicesFinancial inclusion and applied technologies segment decreased to 57%27% from 68%29%, primarily as a result of start-up expenditures related to SmartLifemore low-margin prepaid airtime and other financial services offerings, which was offset by increased UEPS-based lending activities.
Hardware, software and related technology sales
In ZAR, the decrease in revenue was due to a lower contribution from all drivers of hardware and software sales. However, the increase in operating margin to 13% from 2% (before the intangible asset impairment) is attributable to the sale of more software and license revenues in 2012, which contribute higher margins comparedcompetitively-priced financial inclusion products to hardware sales. UETS was impacted by significantly lower hardware sales, primarily terminals and cards, as these sales are generally made on an ad hoc basis. The majority of these sales occur withinaddress the first two years after the commencement of a project, such as in Ghana and Iraq.
During fiscal 2011, customer relationships of $41.8 million acquired as partneeds of the Net1 UTA acquisition was impaired.broader market.
Amortization of Prism intangible assets during fiscal 2012 and 2011, respectively, was approximately $0.4 million (ZAR 2.9 million) and $0.7 million (ZAR 4.6 million) and reduced our operating income.
51
As we expand internationally, whether through traditional selling arrangements to provide products and services (such as in Ghana and Iraq) or through joint ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect to receive revenues from sales of hardware and from software customization and licensing to establish the infrastructure of POS terminals and smart cards necessary to enable utilization of the UEPS technology in a particular country. To the extent that we enter into joint ventures and account for the investment as an equity investment, we are required to eliminate our portion of the sale of hardware, software and licenses to the investees. The sale of hardware, software and licenses under these arrangements occur on an ad hoc basis as new arrangements are established, which can materially affect our revenues and operating income in this segment from period to period.
Corporate/ Eliminations
The increasedecrease in our corporate expenses resultedwas primarily fromdue to the non-cash charge in fiscal 2014 related to the equity instrumentinstruments issued pursuant to our BBBEE transaction, offset byBEE transactions, lower stock-based compensation charges, primarily because the performance-based restricted stock granted in August 2007 was fully expensed in prior periodsU.S. government investigations-related and due to the $4.0 million profit related to the liquidation of SmartSwitch Nigeria. These expense reductions were offset by higherU.S. lawsuit expenses, audit fees and other corporate head office-related expenses. In addition, the fiscal 2011 results include transaction related expenditures of $6.0 million (ZAR 42.3 million), primarily related to the acquisition of KSNET.
Our corporate expenses also include acquisition-related intangible asset amortization; expenditure related to compliance with Sarbanes; non-executivenon-employee directors’ fees; employee and executive salaries and bonuses; stock-based compensation; legal and audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.
46
Fiscal 20112014 Compared to Fiscal 20102013
The following factors had an influence on our results of operations during fiscal 20112014 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. |
52
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with USU.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in USU.S. dollars and in ZAR:
In United States Dollars | In United States Dollars | |||||||||||||||||
Table 13 | (US GAAP) | |||||||||||||||||
Table 7 | (U.S. GAAP) | |||||||||||||||||
Year ended June 30, | Year ended June 30, | |||||||||||||||||
2011 | 2010 | % | 2014 | 2013 | % | |||||||||||||
$ ’000 | $ ’000 | change | $ | ’000 | $ | ’000 | change | |||||||||||
Revenue | 343,420 | 280,364 | 22% | 581,656 | 452,147 | 29% | ||||||||||||
Cost of goods sold, IT processing, servicing and support | 109,858 | 72,973 | 51% | 260,232 | 196,834 | 32% | ||||||||||||
Selling, general and administration | 119,692 | 80,854 | 48% | 168,072 | 191,552 | (12% | ) | |||||||||||
Equity instruments issued pursuant to BEE transactions | 11,268 | - | nm | |||||||||||||||
Depreciation and amortization | 34,671 | 19,348 | 79% | 40,286 | 40,599 | (1% | ) | |||||||||||
Impairment loss | 41,771 | 37,378 | 12% | |||||||||||||||
Operating income | 37,428 | 69,811 | (46)% | 101,798 | 23,162 | 340% | ||||||||||||
Interest income | 7,654 | 10,116 | (24)% | 14,817 | 12,083 | 23% | ||||||||||||
Interest expense | 8,672 | 1,047 | nm | 7,473 | 7,966 | (6% | ) | |||||||||||
Income before income taxes | 36,410 | 78,880 | (54)% | 109,142 | 27,279 | 300% | ||||||||||||
Income tax expense | 33,525 | 40,822 | (18)% | 39,379 | 14,656 | 169% | ||||||||||||
Net income before earnings (loss) from equity-accounted investments | 2,885 | 38,058 | (92)% | |||||||||||||||
(Loss) Earnings from equity-accounted investments | (339 | ) | 93 | (465)% | ||||||||||||||
Net income before income from equity-accounted investments | 69,763 | 12,623 | 453% | |||||||||||||||
Income from equity-accounted investments | 298 | 351 | (15% | ) | ||||||||||||||
Net income | 2,546 | 38,151 | (93)% | 70,061 | 12,974 | 440% | ||||||||||||
Add: net loss attributable to non-controlling interest | (101 | ) | (839 | ) | (88)% | |||||||||||||
Add net loss attributable to non-controlling interest | (50 | ) | (3 | ) | nm | |||||||||||||
Net income attributable to Net1 | 2,647 | 38,990 | (93)% | 70,111 | 12,977 | 440% |
47
In South African Rand | In South African Rand | |||||||||||||||||
Table 14 | (US GAAP) | |||||||||||||||||
Table 8 | (U.S. GAAP) | |||||||||||||||||
Year ended June 30, | Year ended June 30, | |||||||||||||||||
2011 | 2010 | 2014 | 2013 | |||||||||||||||
ZAR | ZAR | % | ZAR | ZAR | % | |||||||||||||
’000 | ’000 | change | ’000 | ’000 | change | |||||||||||||
Revenue | 2,402,634 | 2,133,374 | 13% | 6,047,244 | 3,938,426 | 54% | ||||||||||||
Cost of goods sold, IT processing, servicing and support | 768,589 | 555,274 | 38% | 2,705,528 | 1,714,523 | 58% | ||||||||||||
Selling, general and administration | 837,389 | 615,243 | 36% | 1,745,784 | 1,668,514 | 5% | ||||||||||||
Equity instruments issued pursuant to BEE transactions | 118,740 | - | nm | |||||||||||||||
Depreciation and amortization | 242,565 | 147,225 | 65% | 418,838 | 353,637 | 18% | ||||||||||||
Impairment loss | 292,238 | 284,420 | 3% | |||||||||||||||
Operating income | 261,853 | 531,212 | (51)% | 1,058,354 | 201,752 | 425% | ||||||||||||
Interest income | 66,177 | 76,976 | (14)% | 154,046 | 105,249 | 46% | ||||||||||||
Interest expense | 72,111 | 7,967 | nm | 77,694 | 69,388 | 12% | ||||||||||||
Income before income taxes | 254,731 | 600,221 | (58)% | 1,134,706 | 237,613 | 378% | ||||||||||||
Income tax expense | 234,548 | 310,627 | (24)% | 409,408 | 127,661 | 221% | ||||||||||||
Net income before earnings (loss) from equity-accounted investments | 20,183 | 289,594 | (93)% | |||||||||||||||
(Loss) Earnings from equity-accounted investments | (2,372 | ) | 708 | (435)% | ||||||||||||||
Net income before income from equity-accounted investments | 725,298 | 109,952 | 560% | |||||||||||||||
Income from equity-accounted investments | 3,098 | 3,057 | 1% | |||||||||||||||
Net income | 17,811 | 290,302 | (94)% | 728,396 | 113,009 | 545% | ||||||||||||
Add: net loss attributable to non-controlling interest | (707 | ) | (6,384 | ) | (89)% | |||||||||||||
Add net loss attributable to non-controlling interest | (520 | ) | (26 | ) | nm | |||||||||||||
Net income attributable to Net1 | 18,518 | 296,686 | (94)% | 728,916 | 113,035 | 545% |
Analyzed in ZAR, theThe 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 for fiscal 2011 was primarily due to higher expenses incurred from increased usage of the inclusion of KSNET, FIHRSTSouth African National Payment System by beneficiaries and MediKredit, an increase in the number of UEPS-based loans madehigher prepaid airtime, terminal and increased transaction volumes at EasyPay. This increase was partiallycard sales. These increases were offset by lower revenues fromthe substantial elimination of expenses related to our SASSA contract and fewer sales fromimplementation, which we completed in the fourth quarter of fiscal 2013.
In USD, our hardware, software and related technology sales segment.
Included in fiscal 2011 selling, general and administration expense are transaction-related costs of $6.0 million (ZAR 42.3 million), primarily relateddecreased due to the KSNET acquisition. The increasesubstantial elimination of SASSA contract implementation costs and lower legal fees in selling, general and administration expenseconnection with the U.S. government investigations in the current year, which was offset by a reversal of stock-based compensation charge of $3.5 million (ZAR 24.5 million), primarily as a result of forfeitures (based on failure to achieve the required vesting conditions) of a portion of performance-based restricted stock grantedincreases in August 2007. The net fiscal 2011 stock-based compensation charge was $1.7 million (ZAR 12.0 million), which is significantly lower than the fiscal 2010 charge of $5.7 million (ZAR 43.1 million). Fiscal 2010 selling, generalgoods and administration expenses include acquisition-related costs of $0.6 million (ZAR 4.7 million).services purchased from third parties.
53
Our operating income margin decreased to 11% from 25% resulting primarily from the impairment of intangibles, as well as from the pricefor fiscal 2014 and volumes reductions under our SASSA contract.2013 was 18% and 5%, respectively. We discuss the components of the operating income margin in more detail under “—Results of operations by operating segment”.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 increased during fiscal 2011were 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 related toas the KSNET, MediKredit and FIHRST acquisitions. Thethese intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented inassets were fully amortized at the tables below:
Table 15 | Year ended June 30, | ||||||
2011 | 2010 | ||||||
’000 | ’000 | ||||||
Amortization included in depreciation and amortization expense: | 21,692 | 14,138 | |||||
South African transaction-based activities | 5,702 | 4,205 | |||||
International transaction-based activities | 8,602 | - | |||||
Hardware, software and related technology sales | 7,388 | 9,933 |
Table 16 | Year ended June 30, | ||||||
2011 | 2010 | ||||||
ZAR ’000 | ZAR ’000 | ||||||
Amortization included in depreciation and amortization expense: | 151,761 | 107,588 | |||||
South African transaction-based activities | 39,891 | 31,999 | |||||
International transaction-based activities | 60,181 | - | |||||
Hardware, software and related technology sales | 51,689 | 75,589 |
During fiscal 2011, customer relationships acquired as partend of the Net1 UTA acquisition in August 2008 were reviewed for impairment following deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows. As a consequence of this review, we recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired. In addition, we reversed the deferred tax liability of $10.4 million associated with this intangible asset.June 2013.
During fiscal 2010, we recognized an impairment loss of approximately $37.4 million on goodwill allocated to the hardware, software and related technology sales segment as a result of deteriorating trading conditions of this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact future cash flows.
Interest on surplus cash for fiscal 2011 decreasedincreased to $7.7$14.8 million (ZAR 53.4154.0 million) from $10.1$12.1 million (ZAR 77.0105.2 million) for fiscal 2010. The decrease resulted, due primarily from lowerto higher average daily ZAR cash balances during fiscal 2011 asbalances.
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 result of the payment of a portion of the KSNET purchase price in cashlower average long-term debt balance on our South Korean debt as well as lower deposit ratesinterest rate resulting from the decreaseour refinancing concluded in the South African prime interest rate from an average of approximately 10.43% per annum for fiscal 2010 to 9.29% per annum for fiscal 2011.October 2013.
Fiscal 2011 interest2014 tax expense increased to $8.7was $39.4 million (ZAR 60.5409.4 million) from $1.0compared to $14.7 million (ZAR 8.0 million) for fiscal 2010 due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense includes amortized debt facility fees of $2.0 million (ZAR 13.7 million).
Total tax expense for fiscal 2011 decreased to $33.5 million (ZAR 234.5 million) from $40.8 million (ZAR 310.6127.7 million) in fiscal 2010. Deferred tax assets and liabilities are measured utilizing the enacted fully-distributed tax rate. Excluding the impact of reversal of the Net1 UTA customer relationships deferred tax liability and the Net1 UTA valuation allowances, our total tax expense decreased primarily due to lower taxable income resulting from the SASSA price and volume reductions and a decrease in overall profitability. As discussed above, our tax expense was reduced by the reversal of $10.4 million related to deferred tax liabilities related to impaired Net1 UTA customer relationships. Our tax expense increased due to valuation allowances of $8.9 million related to Net1 UTA deferred tax assets.2013. Our effective tax rate for fiscal 20112014, was 92.08%, compared36.1% and was higher than the South African statutory rate as a result of non-deductible expenses (including the expense related to 51.8% for fiscal 2010. The change inthe 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 due to an increase inas a result of non-deductible expenses including stock-based compensation charges,(including interest expensesexpense related to our long-term South Korean debt facilitiesborrowings and acquisition-related expenses,stock-based compensation charges) and the Net1 UTA valuation allowance.South African dividend withholding taxes.
Net1 loss from equity-accounted investments for fiscal 2011 were $0.3 million (ZAR 2.4 million) compared with earnings of $0.1 million (ZAR 0.7 million) during fiscal 2010. Net loss from equity-accounted investments for fiscal 2011 was primarily due to waiver of interest and related currency effects at SmartSwitch Botswana offset by an increase in transaction fees generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and VinaPay incurred losses during fiscal 2011 and 2010, respectively. VinaPay was sold in April 2011.
54
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below.below
Table 17 | In United States Dollars (US GAAP) | ||||||||||||||||||
Year ended June 30, | |||||||||||||||||||
2011 | % of | 2010 | % of | % | |||||||||||||||
Operating Segment | $ ’000 | total | $ ’000 | total | change | ||||||||||||||
Consolidated revenue: | |||||||||||||||||||
South African transaction-based activities | 189,206 | 55% | 191,362 | 68% | (1)% | ||||||||||||||
International transaction-based activities | 70,382 | 20% | - | - | nm | ||||||||||||||
Smart card accounts | 33,315 | 10% | 31,971 | 11% | 4% | ||||||||||||||
Financial services | 7,350 | 2% | 4,023 | 1% | 82% | ||||||||||||||
Hardware, software and related technology sales | 43,167 | 13% | 53,008 | 20% | (17)% | ||||||||||||||
Total consolidated revenue | 343,420 | 100% | 280,364 | 100% | 22% | ||||||||||||||
Consolidated operating income (loss): | |||||||||||||||||||
South African transaction-based activities | 75,668 | 202% | 106,036 | 152% | (30)% | ||||||||||||||
Operating income before amortization | 81,370 | 110,241 | (27)% | ||||||||||||||||
Amortization | (5,702 | ) | (4,205 | ) | 36% | ||||||||||||||
International transaction-based activities | (220 | ) | (1)% | - | - | nm | |||||||||||||
Operating income before amortization | 8,382 | - | nm | ||||||||||||||||
Amortization | (8,602 | ) | - | nm | |||||||||||||||
Smart card accounts | 15,140 | 40% | 14,532 | 21% | 4% | ||||||||||||||
Financial services | 4,999 | 13% | 2,881 | 4% | 96% | ||||||||||||||
Hardware, software and related technology sales | (48,372 | ) | (129)% | (42,524 | ) | (61)% | 17% | ||||||||||||
Operating income before amortization and | |||||||||||||||||||
impairment of intangibles | 787 | 4,787 | (116)% | ||||||||||||||||
Impairment of intangibles | (41,771 | ) | (37,378 | ) | 12% | ||||||||||||||
Amortization of intangibles | (7,388 | ) | (9,933 | ) | (26)% | ||||||||||||||
Corporate/eliminations | (9,787 | ) | (25)% | (11,114 | ) | (16)% | (12)% | ||||||||||||
Total consolidated operating income | 37,428 | 100% | 69,811 | 100% | (46)% |
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% |
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Table 18 | In South African Rand (US GAAP) | ||||||||||||||||||
Year ended June 30, | |||||||||||||||||||
2011 | 2010 | ||||||||||||||||||
ZAR | % of | ZAR | % of | % | |||||||||||||||
Operating Segment | ’000 | total | ’000 | total | change | ||||||||||||||
Consolidated revenue: | |||||||||||||||||||
South African transaction-based activities | 1,323,723 | 55% | 1,456,131 | 68% | (9)% | ||||||||||||||
International transaction-based activities | 492,406 | 20% | - | - | Nm | ||||||||||||||
Smart card accounts | 233,078 | 10% | 243,277 | 11% | (4)% | ||||||||||||||
Financial services | 51,422 | 2% | 30,612 | 1% | 67% | ||||||||||||||
Hardware, software and related technology sales | 302,005 | 13% | 403,354 | 20% | (23)% | ||||||||||||||
Total consolidated revenue | 2,402,634 | 100% | 2,133,374 | 100% | 13% | ||||||||||||||
Consolidated operating income (loss): | |||||||||||||||||||
South African transaction-based activities | 529,388 | 202% | 806,860 | 152% | (35)% | ||||||||||||||
Operating income before amortization | 569,279 | 838,859 | (33)% | ||||||||||||||||
Amortization | (39,891 | ) | (31,999 | ) | 25% | ||||||||||||||
International transaction-based activities | (1,539 | ) | (1)% | - | - | Nm | |||||||||||||
Operating income before amortization | 58,642 | - | Nm | ||||||||||||||||
Amortization | (60,181 | ) | - | Nm | |||||||||||||||
Smart card accounts | 105,922 | 40% | 110,578 | 21% | (4)% | ||||||||||||||
Financial services | 34,974 | 13% | 21,922 | 4% | 81% | ||||||||||||||
Hardware, software and related technology sales | (338,420 | ) | (129)% | (323,578 | ) | (61)% | 8% | ||||||||||||
Operating income before amortization and | |||||||||||||||||||
impairment of intangibles | 5,507 | 36,431 | (85)% | ||||||||||||||||
Impairment of intangibles | (292,238 | ) | (284,420 | ) | 3% | ||||||||||||||
Amortization of intangibles | (51,689 | ) | (75,589 | ) | (32)% | ||||||||||||||
Corporate/eliminations | (68,472 | ) | (25)% | (84,570 | ) | (16)% | (19)% | ||||||||||||
Total consolidated operating income | 261,853 | 100% | 531,212 | 100% | (51)% |
South African transaction-based activitiestransaction processing
In ZAR, the decreasesincrease in revenue weresegment revenues was primarily due the recovery of implementation costs related to a newour SASSA contract thatand 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 effectunique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries.
Our operating income (loss) margin for fiscal 2011 at lower economics than the previous contract, which2014 and 2013 was partially offset by23% and (9)%, respectively, and has increased transaction volumes at EasyPay and the inclusion of MediKredit and FIHRST.
Revenues for South African transaction-based activities include the transaction fees we earn through our merchant acquiring system and reflect the elimination of inter-company transactions.
Operating income margin of our South African transaction-based activities decreased to 40% from 55% a year ago. The decrease was primarily due to the lower revenues generated underrecovery of implementation costs related to our SASSA contract additional intangible asset amortization relatedand the substantial elimination of SASSA implementation costs in fiscal 2014.
49
International transaction-based activities
Revenue increased primarily due to the acquisition of MediKredit and FIHRST and lower marginshigher transaction volume at MediKredit and FIHRST compared with legacy South African transaction-based activities.
Pension and welfare operations:
Our revenue and operating income related to our pension and welfare operations were negatively impacted by a new contract with SASSA that was in effect for fiscal 2011. During fiscal 2011, our pension and welfare operations continued to generate the majority of our revenues and operating income in this operating segment and for us as a whole.
South African transaction processors:
The table below presents the total volume and value processedKSNET during fiscal 2011 and 2010 by our transaction processors:
Table 19 | ||||||||||||||||||
Transaction | Total volume (‘000s) | Total value $ (‘000) | Total value ZAR (‘000) | |||||||||||||||
processor | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||
EasyPay | 715,945 | 655,176 | 24,307,247 | 18,904,176 | 165,500,752 | 143,847,549 | ||||||||||||
Remaining core | 493,018 | 439,767 | 15,662,653 | 12,143,835 | 106,642,308 | 92,406,087 | ||||||||||||
Discontinued | 222,927 | 215,409 | 8,644,594 | 6,760,341 | 58,858,444 | 51,441,462 | ||||||||||||
MediKredit | 9,805 | 5,411 | 513,503 | 227,881 | 3,592,572 | 1,734,015 | ||||||||||||
FIHRST | 21,954 | 5,260 | 9,792,178 | 1,858,590 | 68,508,034 | 14,142,572 |
56
Our results for fiscal 2011 include intangible asset amortization related to our MediKredit and FIHRST acquisitions but exclude RMT’s intangible assets which were fully amortized during fiscal 2010. Fiscal 2010 includes amortization related to the RMT intangible assets for three quarters, MediKredit intangible assets for two quarters and FIHRST’s intangible assets for one quarter.
International transaction-based activities
For fiscal 2011, KSNET contributed the majority of our revenues in this operating segment. Operating margin for the segment was lower than our legacy South African transaction-based businesses and was negatively impacted by start-up expenditures related to our Virtual Card launch in the United States,2014 but was partially offset by improving profitabilitythe expiration and non-renewal of NUETS’ initiativecontract with its Iraqi customer in Iraq. 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 fiscal 2011 was 0%.
Our resultsthe segment is lower than for fiscal 2011 include the intangible asset amortization related tomost of our KSNET acquisition from November 1, 2010.
Smart card accounts
South African transaction processing businesses. Operating income margin from providing smart card accountsfor the year to date fiscal 2014 and 2013 was constant at 45% for each of fiscal 201114% and 2010.10%, respectively.
In ZAR,Financial inclusion and applied technologies
Financial inclusion and applied technologies revenue from the provision of smart card-based accounts increased in proportion to the increased number of beneficiaries serviced through our SASSA contract. A total number of 3,561,105 smart card-based accounts were active at June 30, 2011, compared to 3,532,620 active accounts as at June 30, 2010.
Financial services
Revenue from UEPS-based lendingand 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 granted. During fiscal 2011,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 portfolio comprised loans made to elderly pensioners in somenational rollout expenses and the establishment of the provinces where we distribute social welfare grants. We insureallowance for doubtful finance loans. Smart Life did not contribute to operating income in fiscal 2014 due to the UEPS-based lending book against default and thus no allowance is required.FSB suspension of our license.
Operating income margin for the financial servicesFinancial inclusion and applied technologies segment decreased to 68%29% from 72%.
Hardware, software and related technology sales
In ZAR, the decrease in revenue and operating income was53%, primarily due to lower revenues by all major contributors to this operating segment as a result of challenging trading conditions. Net1 UTA failed to retainmore low-margin prepaid airtime and expand hardware and software sales to its existing customer base and certain of our South African businesses were impacted by increased competition. UETS was impacted by significantly lower hardware sales, primarily terminals and cards, as these sales are generally made on an ad hoc basis. The majority of these sales occur within the first two years after the commencement of a project, such as in Ghana and Iraq.sales.
During fiscal 2011, customer relationships of $41.8 million acquired as part of the Net1 UTA acquisition were impaired. During fiscal 2010, we recognized a goodwill impairment loss of approximately $37.4 million (ZAR 284.4 million) as a result of deteriorating trading conditions of this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact future cash flows.
Amortization of Prism intangible assets during fiscal 2011 and 2010, respectively, was approximately $0.7 million (ZAR 4.6 million) and $0.6 million (ZAR 4.6 million) and reduced our operating income.
Corporate/ Eliminations
The decreaseincrease in our corporate expenses resulted primarily from the reversal of stock-based compensation charges of $3.5 million (ZAR 24.5 million), primarily as a result of forfeitures (based on failurenon-cash charge related to achieve the required vesting conditions) of performance-based restricted stockequity instruments issued pursuant to our BEE transactions, increases in August 2007. These reductions were offset by highergeneral 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 including the effects of inflation in South Africa, and transaction related expenditures of $6.0 million (ZAR 42.3 million), primarily related to the acquisition of KSNET.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.
57
Liquidity and Capital Resources
At June 30, 2012,2015, our cash balances were $39.1$117.6 million, which comprised mainly ZAR-denominated balances of ZAR 179.4 million1.3 billion ($21.6104.8 million), KRW-denominated balances of KRW 13.87.9 billion ($11.97.0 million) and USU.S. dollar-denominated balances of $4.1$4.0 million and other currency deposits, primarily euro, of $1.5$1.8 million. The decreaseincrease in our cash balances from June 30, 2011, has resulted2014, 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 to expand operations as we implement our new SASSA contract,and the scheduled Korean debt repayment of our long-term debt and strengthening in the USD against the ZAR, offset by an increase in cash generated from operations (before interest received and paid and net taxes paid).October 2014.
We currently believe that our cash and credit facilities are sufficient to fund our future operations including our SASSA implementation, for at least the next four quarters.
We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at South African banking institutions, and surplus cash held by our non-South African companies in the USU.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 short-term credit facility with Nedbank Limited of approximately ZAR 250400 million ($30.232.6 million), which remained fully undrawn asconsists of June 30, 2012.(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.
During the second quarter of fiscal 2012 we received $4.9 million, net, in cash, in final settlement of any and all claims and contractual adjustments between us and the former shareholders of KSNET. Our Korean debt agreement required us to use the settlement proceeds to repay a portion of our outstanding debt thereunder. We made the prepayment on January 30, 2012.50
As of June 30, 2012,2015, 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 108.7KRW 67.3 billion KRW (approximately $93.8$59.6 million translated at exchange rates applicable as of June 30, 2012)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 (3.54%(1.80% as of June 30, 2012)2015) plus a margin of 4.10% . Semi-annual principal payments3.10% for one of approximately $7.0 million (translated at exchange rates applicable asthe term loan facilities and the revolver and a margin of June 30, 2012) were due starting2.90% for the other term loan facility. We repaid the KRW 15 billion other term loan facility in full in October 2011,2014 in accordance with final maturity scheduled for October 2015.
The loans are secured by substantially all of KSNET’s assets, a pledge by our subsidiary, Net1 Korea, of its entire equity interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest in Net1 Korea. The Facilities Agreement contains customary covenants that require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict their ability to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make capital expenditures above specified levels, engage in certain business combinations and engage in other corporate activities. As of June 30, 2012, we were in compliance with allrepayment schedule. Scheduled remaining repayments of the required covenantsterm loans and loan under the Facilities Agreement. Therevolving 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 Facilities Agreement are without recourse to, andconsolidated financial statements for more information about the covenants and other agreements contained therein do not apply to, us or anyterms of our subsidiaries (other than Net1 Korea and its subsidiaries, including KSNET).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 beneficiaries.recipient cardholders.
In addition, as a transaction processor, and in certain instances as a claims adjudicator, we receive cash from:
• health care plans which we disburse to health care service providers once we have adjudicated claims;
• customers on whose behalf we processes off payrolloff-payroll payments that we will disburse to customer employees, payroll-related payees and other payees designated by the customer; and
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• 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 2012 decreased2015 increased to $20.4$135.3 million (ZAR 157.5 million)1.5 billion) from $66.2$37.1 million (ZAR 463.4386.2 million) for fiscal 2011.2014. 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 provided byfrom operating activities resulted from the timingexpansion of receiptsour UEPS-based lending book, offset by cash inflows from improved trading activity, the recovery of accounts receivable in our South African transaction-based activities operating segmentimplementation costs from SASSA and an increase in prefunding to merchants participating in our merchant acquiring system as described above. We have also incurred significantthe substantial elimination of implementation costs related to our SASSA contract and, due to the timing of the opening of the July 2012 pay cycle, we did not have any significant amounts due to non-prefunded merchants participating in our merchant acquiring system as of June 30, 2012.fiscal 2014. During fiscal 2012,2014, we paid interest of $5.2 million under the Facilities Agreement of $8.7 million.our South Korean debt facility.
Cash flows from operating activities for fiscal 2011 decreased to $66.2 million (ZAR 463.4 million) from $68.7 million (ZAR 522.1 million) for fiscal 2010. Our net cash from operating activities decreased primarily due to the SASSA price and volume reductions which were effective July 1, 2010. During fiscal 2011, we paid interest under the Facilities Agreement of $4.1 million.
During fiscal 2012,2015, we made a first provisional tax payment of $15.0$18.9 million (ZAR 123.3217.2 million), and a second provisional payment of $8.5 million (ZAR 71.5 million) related to our 2012 tax year in South Africa and paid STC of $1.8 million (ZAR 14.6 million) related to cross-border intercompany dividends paid. We made an additional second provisional tax payment of $3.3$16.2 million (ZAR 24.8199.8 million) related to our 20102015 tax year in South Africa. We also paid taxes totaling $2.4$7.6 million in other tax jurisdictions, primarily South Korea.
During fiscal 2011,2014, we made a first provisional tax payment of $16.6$13.3 million (ZAR 113.7137.8 million), and a second provisional payment of $12.3 million (ZAR 84.0 million) related to our 2011 tax year in South Africa and paid STC of $15.2 million (ZAR 106.5 million) related to cross-border intercompany dividends paid. We made an additional second provisional tax payment of $1.8$25.0 million (ZAR 12.7266.6 million) related to our 20102014 tax year in South Africa. We also paid taxes totaling $2.6$3.9 million in other tax jurisdictions, primarily South Korea.
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Taxes paid during fiscal 20122015, 2014 and 20112013 were as follows:
Table 20 | Year ended June 30, | |||||||||||||||||||||||||||||
Table 11 | Year ended June 30, | |||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||||
$ | $ | ZAR | ZAR | $ | $ | $ | ZAR | ZAR | ZAR | |||||||||||||||||||||
‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | |||||||||||||||||||||
First provisional payments | 15,014 | 16,565 | 123,271 | 113,708 | 18,910 | 13,292 | 6,757 | 217,241 | 137,773 | 58,693 | ||||||||||||||||||||
Second provisional payments | 8,486 | 12,331 | 71,458 | 84,019 | 16,234 | 25,004 | 7,228 | 199,779 | 266,573 | 72,451 | ||||||||||||||||||||
Third provisional payments | - | 335 | - | 2,296 | ||||||||||||||||||||||||||
Taxation paid related to prior years | 3,326 | 1,774 | 24,803 | 12,716 | 2,408 | 228 | 3,072 | 26,395 | 2,360 | 25,517 | ||||||||||||||||||||
Taxation refunds received | (287 | ) | (213 | ) | (2,121 | ) | (1,577 | ) | (468 | ) | (36 | ) | (65 | ) | (5,396 | ) | (400 | ) | (480 | ) | ||||||||||
Secondary taxation on companies | 1,811 | 15,216 | 14,615 | 106,500 | ||||||||||||||||||||||||||
Dividend withholding taxation | 737 | - | 1,610 | 8,702 | - | 14,916 | ||||||||||||||||||||||||
Total South African taxes paid | 28,350 | 46,008 | 232,026 | 317,662 | 37,821 | 38,488 | 18,602 | 446,721 | 406,306 | 171,097 | ||||||||||||||||||||
Foreign taxes paid, primarily Korea | 2,355 | 2,622 | 18,288 | 18,098 | ||||||||||||||||||||||||||
Foreign taxes paid, primarily South | ||||||||||||||||||||||||||||||
Korea | 7,638 | 3,929 | 3,298 | 86,857 | 41,506 | 29,468 | ||||||||||||||||||||||||
Total tax paid | 30,705 | 48,630 | 250,314 | 335,760 | 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
During fiscal 2012, we received a net settlement of $4.9 million from the former shareholders of KSNET. During fiscal 2011, we paid approximately $230.2 million (ZAR 1.6 billion), net of cash received, for 98.73% of KSNET. We also paid $4.5 million (ZAR 34.8 million) for the Eason prepaid electricity and airtime business during fiscal 2012. During fiscal 2010, we paid $1.0 million (ZAR 7.3 million), net of cash received, for 100% of the outstanding ordinary capital of MediKredit and all claims outstanding and $9.4 million (ZAR 69.0 million), net of cash received for the FIHRST business and software.
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Cash used in investing activities for fiscal 20122015 includes capital expenditure of $39.2$36.4 million (ZAR 302.2 million), primarily for payment vehicles for our SASSA contract, acquisition of payment processing terminals in Korea and POS devices to service our merchant acquiring system in South Africa.
Cash used in investing activities for fiscal 2011 includes capital expenditure of $15.1 million (ZAR 105.6416.4 million), primarily for the acquisition of payment processing terminals in Korea kiosks to service our EasyPay Kiosk pilot project, the acquisition of POS devices to service our merchant acquiring system, the replacement of computer and electronic hardware and the replacementrollout of motor vehicles.ATMs in South Africa.
Cash used in investing activities for fiscal 20102014 includes capital expenditure of $2.7$23.9 million (ZAR 20.7248.5 million), primarily for the acquisition of POS devices to servicepayment 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 merchant acquiring system, improvements to leasehold propertySASSA contract and the acquisition of computer equipment.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 2012,2015, we made long-terma scheduled Korean debt repaymentsrepayment of $19.2$14.1 million, and acquired 180,656repurchased BVI’s remaining 1,837,432 shares of ourNet1 common stock for $1.1 million.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 20112014, we obtained long-termrefinanced our South Korean debt and used $70.6 million of these new borrowings and $16.4 million of our surplus cash to fund a portion ofrepay the KSNET purchase price. We also repaid KSNET’s outstanding debt of $7.1 million.$87.0 million due under our old facility. In addition, we paid the facility feefees related to our new South Korean borrowings of approximately $3.1$0.9 million. During fiscal 2014, we utilized approximately $2.1 million of these new borrowings to pay quarterly interest due in October 2010 and acquired 125,392South 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 common stock for $1.0 million.South African short-term facility during fiscal 2014 and have repaid the full amount outstanding as of June 30, 2014.
During fiscal 20102013, we repurchased, using our ZAR reserves, 9,221,526 shares of our common stock from Brait S.A.’s investment affiliates for $13.50 (ZAR 105.98) per share, for an aggregate repurchase price of $124.5made a scheduled $14.5 million (ZAR 977.3 million). In addition, we incurred costs of approximately $0.5 million (ZAR 3.9 million) related to the repurchase of these shares. We also paid $1.3 million on account of shares we repurchased on June 30, 2009, under our 2009 share buy-back program and received $0.7 (ZAR 5.5 million) from employees exercising stock options and repaying loans.long-term debt repayment.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Capital Expenditures
Capital expenditures for the years ended June 30, 2012, 20112015, 2014 and 20102013 were as follows:
Table 21 | Year ended June 30, | |||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||
2012 | 2011 | 2010 | ZAR | ZAR | ZAR | |||||||||||||
Operating Segment | $’000 | $’000 | $’000 | ’000 | ’000 | ’000 | ||||||||||||
South African transaction-based activities | 23,408 | 2,423 | 2,177 | 180,678 | 16,952 | 16,565 | ||||||||||||
International transaction-based activities | 14,978 | 12,113 | - | 115,610 | 84,745 | - | ||||||||||||
Smart card accounts | - | - | - | - | - | - | ||||||||||||
Financial services | 620 | 400 | 302 | 4,786 | 2,798 | 2,298 | ||||||||||||
Hardware, software and related technology sales . | 161 | 117 | 251 | 1,243 | 819 | 1,910 | ||||||||||||
Corporate / Eliminations | - | - | - | - | - | - | ||||||||||||
Consolidated total | 39,167 | 15,053 | 2,730 | 302,317 | 105,314 | 20,773 |
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 2012, 20112015, 2014 and 2010,2013, are discussed under “—Liquidity and Capital Resources—Cash flows from investing activities.”
All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had outstanding capital commitments as of June 30, 2012,2015, of $5.0$3.4 million related mainly to computer equipment required to maintain and cards to implement our new SASSA contract.expand operations. We expect to fund these expenditures through internally-generated funds.
We expect that our capital expenditures will increase significantly over the next 12 months as we transition into our new SASSA contract. In addition to these capital expenditures, we expect that capital spending for fiscal 20132016 will also relate to providing a switching service through EasyPay and expanding our operations in Korea.South Korea and South Africa.
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Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2012:2015:
Table 22 | Payments due by Period, as of June 30, 2012(in $ ’000s) | |||||||||||||||||||||||||||||
Table 13 | Payments due by Period, as of June 30, 2015 (in $ ’000s) | |||||||||||||||||||||||||||||
Less | More | Less | More | |||||||||||||||||||||||||||
than 1 | 1-3 | 3-5 | than 5 | than 1 | 1-3 | 3-5 | than 5 | |||||||||||||||||||||||
Total | year | years | years | years | Total | year | years | years | years | |||||||||||||||||||||
Long-term debt obligations (A) | 111,256 | 20,916 | 90,340 | - | - | 66,906 | 3,554 | 22,409 | 40,943 | - | ||||||||||||||||||||
Operating lease obligations | 10,211 | 3,785 | 4,657 | 1,769 | - | 7,176 | 3,828 | 2,927 | 421 | - | ||||||||||||||||||||
Purchase obligations | 13,724 | 13,724 | - | - | - | 5,029 | 5,029 | - | - | - | ||||||||||||||||||||
Capital commitments | 5,019 | 5,019 | - | - | - | 3,391 | 3,391 | - | - | - | ||||||||||||||||||||
Other long-term obligations (B) | 25,791 | - | - | - | 25,791 | 2,205 | - | - | - | 2,205 | ||||||||||||||||||||
Total | 166,001 | 43,444 | 94,997 | 1,769 | 25,791 | 84,707 | 15,802 | 25,336 | 41,364 | 2,205 |
(A) | – Includes | |
(B) | – Includes policy holder liabilities | |
(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. |
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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 USU.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 USU.S. dollar and the euro, on the other hand. As of June 30, 2012,2015, and 2011,2014, our outstanding foreign exchange contracts were as follows:
As of June 30, 20122015
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 |
None.
As of June 30, 20112014
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 |
None.
Translation Risk
Translation risk relates to the risk that our results of operations will vary significantly as the USU.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 and generate a significant amount of revenue and related and operating expenses in KRW. The US dollarexchange rate has fluctuated significantly over the past three years, including against the ZAR and KRW.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 Facilities Agreement bearslong-term South Korean debt facilities bear interest at the South Korean CD rate plus 4.10% .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, 2012,2015, the South Korean CD rate was 3.54% 1.80%.
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The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of June 30, 2012,2015, 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, 2012,2015, is shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
As of June 30, 2012 | |||||||||
Table 23 | Estimated | ||||||||
annual | |||||||||
expected | |||||||||
Annual | interest charge | ||||||||
expected | Hypothetical | after change in | |||||||
interest | change in | Korean CD | |||||||
charge | Korean CD | rate | |||||||
($ ’000) | rate | ($ ’000) | |||||||
Interest on Facilities Agreement | 7,165 | 1% | 8,102 | ||||||
(1% | ) | 6,227 |
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.
62
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties. We maintain credit risk policies with regard to our counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty’s 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 & Poor’s, Moody’s 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, 2012,2015, 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.
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The following table summarizes our exchange-traded equity securities with equity price risk as of June 30, 2011.2015. The effects of a hypothetical 10% increase and a 10% decrease in market prices as of June 30, 2012,2015, is also shown. The selected 10% hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far worse due both to the nature of equity markets and the aforementioned liquidity risk.
As of June 30, 2012 | ||||||||||||
Table 24 | ||||||||||||
Hypothetical | ||||||||||||
Estimated fair | Percentage | |||||||||||
value after | Increase | |||||||||||
Fair | hypothetical | (Decrease) in | ||||||||||
value | Hypothetical | change in price | Shareholders’ | |||||||||
($ ’000) | price change | ($ ’000) | Equity | |||||||||
Exchange-traded equity securities . | 8,679 | 10% | 9,547 | 0.25% | ||||||||
(10% | ) | 7,811 | (0.25% | ) |
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-52F-54 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.2015.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, the company’s chief executive officer and chief financial officer, 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 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 company’s 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.
Management’s 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.Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2012.2015. 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, 2012,2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
6457
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Thethe 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, 2012,2015, based on criteria established inInternal Control—Integrated 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 Management’s reportReport on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012,2015, based on the criteria established inInternal Control—Integrated 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, 20122015 of the Company and our report dated August 23, 2012,20, 2015, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche (South Africa)Per PJ SmitJohannesburg, South AfricaPartner
Registered Auditors
August 23, 201220, 2015
National Executive: LL*LL Bam Chief Executive AE*AE Swiegers Chief Operating Officer GM*GM Pinnock Audit
DL Kennedy Risk Advisory NB*NB Kader Tax L GeeringhTP Pillay Consulting &S Gwala Business Process Solutions
*K Black Clients & IndustriesJK *JK Mazzocco Talent & Transformation CR Beukman*MJ Jarvis Finance M*M Jordan Strategy S Gwala Special Projects
*TJ Brown Chairman of the Board MJ*MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request *Partner and Registered Auditor
6558
ITEM 9B. OTHER INFORMATION
None.
66- 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 20122015 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 20122015 annual meeting of shareholders entitled “Executive Compensation,” “Board of Directors and Corporate Governance—Compensation 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 20122015 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 20122015 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 20122015 annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
6760
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.
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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 | ||||||
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3.2 | Amended and Restated By-Laws of Net 1 UEPS Technologies, Inc. | 8-K | 3.2 | November 5, 2009 | ||||||
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4.1 | Form of common stock certificate | S-1 | 4.1 | June 20, 2005 | ||||||
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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 | ||||||
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10.2 | Patent and Technology Agreement, dated June 19, 2000, by and between Net 1 Holdings S.a.r.1. and Net 1 UEPS Technologies, Inc. | S-4 | 10.2 | February 3, 2004 | ||||||
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10.3 | Technology License Agreement between Net 1 Investment Holdings (Proprietary) Limited and Visa International Service Association | S-1 | 10.12 | May 26, 2005 | ||||||
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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 | ||||||
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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 | ||||||
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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 | ||||||
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10.7 | Agreement between Nedcor Bank Limited and Net 1 Products (Proprietary) Limited | S-1/A | 10.16 | July 19, 2005 | ||||||
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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 |
6861
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 | 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 | |||||
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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 | 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 | |||||
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10.11 | Banking Facility between Nedbank Limited and Net 1 Applied Technologies South Africa Limited dated as of April 30, 2010 | 10-K | 10.13 | August 26, 2010 | |||||||||
10.11* | Amended and Restated Stock Incentive Plan of Net 1 UEPS Technologies, Inc. | 14A | A | October 28, 2009 | |||||||||
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10.12* | Amended and Restated Stock Incentive Plan of Net 1 UEPS Technologies, Inc. | 14A | A | October 28, 2009 | Form of Restricted Stock Agreement | 10-K | 10.13 | August 23, 2012 | |||||
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10.13* | Form of Restricted Stock Agreement | X | Form of Stock Option Agreement | 10-K | 10.14 | August 23, 2012 | |||||||
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10.14* | Form of Stock Option Agreement | X | Form of Restricted Stock Agreement (non- employee directors) | 10-K | 10.15 | August 23, 2012 | |||||||
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10.15* | Form of Restricted Stock Agreement (non- employee directors) | X | |||||||||||
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 | |||||||||
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10.16 | Share Purchase Agreement, dated as of September 14, 2010, by and among Net 1 UEPS Technologies, Inc., Payment Services Asia LLC and H&Q NPS Van Investment, Ltd. | 8-K | 2.1 | September 17, 2010 | Contract for the Payment of Social Grants dated February 3, 2012 between CPS and SASSA | 8-K | 99.1 | February 6, 2012 | |||||
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10.17 | Senior Facilities Agreement dated October 29, 2010, between Net 1 Applied Technologies Korea, as borrower, Hana Daetoo Securities Co., Ltd., as mandated lead arranger, Shinhan Bank and Woori Bank, as co-arrangers, the financial institutions listed therein as original lenders and Hana Bank, as agent and security agent | 8-K | 10.51 | November 3, 2010 | Service Level Agreement dated February 3, 2012 between CPS and SASSA | 8-K | 99.2 | February 6, 2012 | |||||
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10.18† | Service Level Agreement, dated as of August 24, 2010, between the South African Social Security Agency and Cash Paymaster Services (Pty) Limited | 10-Q | 10.52 | November 9, 2010 | |||||||||
10.18 | 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 | |||||||||
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10.19* | Employment agreement dated September 17, 2010 between KSNET, Inc. and Phil-Hyun Oh | 10-K | 10.19 | August 25, 2011 | |||||||||
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 | |||||||||
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10.20 | Registration Rights Agreement dated November 10, 2011 between the Company and shareholders affiliated with General Atlantic LLC | 8-K | 99.1 | November 10, 2011 | 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 | |||||
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10.21 | Relationship Agreement dated January 25, 2012 by and among the Company, Business Venture Investments No 1567 (Proprietary) Limited (RF), Mosomo Investment Holdings (Proprietary) Limited and Brian Kgomotso Mosehla | 8-K | 99.1 | January 26, 2012 | 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 | |||||
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10.22 | Form of Option to be issued by the Company to Business Venture Investments No 1567 (Proprietary) Limited (RF) | 8-K | 99.2 | January 26, 2012 | 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 | |||||
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10.23 | Contract for the Payment of Social Grants dated February 3, 2012 between CPS and SASSA | 8-K | 99.1 | February 6, 2012 | 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 | |||||
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10.24 | Service Level Agreement dated February 3, 2012 between CPS and SASSA | 8-K | 99.2 | February 6, 2012 | 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 | |||||
12 | Statement of Ratio of Earnings to Fixed Charges | X | |||||||||||
14 | Amended and Restated Code of Ethics | 8-K | 14 | August 27, 2009 | |||||||||
21 | Subsidiaries of Registrant | X | |||||||||||
23 | Consent of Independent Registered Public Accounting Firm | X | |||||||||||
31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended | X |
6962
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 | ||||
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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 | ||||
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10.27* | Service Agreement between KSNET, Inc. and Phil- Hyun Oh dated June 30, 2014 | 8-K | 10.1 | July 2, 2014 | ||||
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10.28* | Service Agreement between Net1 Applied Technologies Korea and Phil-Hyun Oh dated June 30, 2014 | 8-K | 10.2 | July 2, 2014 | ||||
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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 | ||||
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12 | Statement of Ratio of Earnings to Fixed Charges | X | ||||||
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14 | Amended and Restated Code of Ethics | 10-K | 14 | August 28, 2014 | ||||
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21 | Subsidiaries of Registrant | X | ||||||
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23 | Consent of Independent Registered Public Accounting Firm | X | ||||||
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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 | ||||||
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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 | ||||||
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32 | Certification pursuant to 18 USC Section 1350 | X | ||||||
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101.INS | XBRL Instance Document | X | ||||||
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101.SCH | XBRL Taxonomy Extension Schema | X | ||||||
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase | X | ||||||
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101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||||
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101.LAB | XBRL Taxonomy Extension Label Linkbase | X | ||||||
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase | X | ||||||
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* Indicates a management contract or compensatory plan or arrangement. |
† Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 24b-2 of the Exchange Act, and thus, such portions have been omitted.* Indicates a management contract or compensatory plan or arrangement.
7063
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director
Date: August 23, 201220, 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, | August | |
/s/ Serge C.P. Belamant | ||
Serge C.P. Belamant | ||
Chief Financial Officer, Treasurer and Secretary and | August | |
/s/ Herman Gideon Kotzé | Director (Principal Financial and Accounting Officer) | |
Herman Gideon Kotzé | ||
/s/ Paul Edwards | Director | August |
Paul Edwards | ||
/s/ Alasdair Jonathan Kemsley Pein | Director | August |
Alasdair Jonathan Kemsley Pein | ||
/s/ Christopher Stefan Seabrooke | Director | August |
Christopher Stefan Seabrooke |
7164
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Thethe 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, 20122015 and 20112014, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended June 30, 2012.2015. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe 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, 20122015 and 2011,2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012,2015 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, 2012,2015, based on the criteria established inInternal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 23, 2012,20, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche (South Africa)
Johannesburg, South Africa
Registered Auditors
Per PJ SmitPartner
August 23, 201220, 2015
National Executive: LL*LL Bam Chief Executive AE*AE Swiegers Chief Operating Officer GM*GM Pinnock Audit
DL Kennedy Risk Advisory NB*NB Kader Tax L GeeringhTP Pillay Consulting &S Gwala Managed Services
*K Black Clients & IndustriesJK *JK Mazzocco Talent & Transformation CR Beukman*MJ Jarvis Finance M*M Jordan Strategy S Gwala Special ProjectsTJ*TJ Brown Chairman of the Board MJ*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, 20122015 and 20112014
2012 | 2011 | 2015 | 2014 | |||||||||
(In thousands, except share data) | (In thousands, except share data) | |||||||||||
ASSETS | ASSETS | |||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 39,123 | $ | 95,263 | $ | 117,583 | $ | 58,672 | ||||
Pre-funded social welfare grants receivable (Note 4) | 9,684 | 4,579 | 2,306 | 4,809 | ||||||||
Accounts receivable, net (Note 5) | 101,918 | 82,780 | 148,768 | 148,067 | ||||||||
Finance loans receivable, net | 8,141 | 8,141 | ||||||||||
Deferred expenditure on smart cards | 4,587 | 51 | ||||||||||
Finance loans receivable, net (Note 5) | 40,373 | 53,124 | ||||||||||
Inventory (Note 6) | 6,192 | 6,725 | 12,979 | 10,785 | ||||||||
Deferred income taxes (Note 19) | 5,591 | 15,882 | ||||||||||
Deferred income taxes (Note 20) | 7,298 | 7,451 | ||||||||||
Total current assets before settlement assets | 175,236 | 213,421 | 329,307 | 282,908 | ||||||||
Settlement assets | 409,166 | 186,668 | 661,916 | 725,987 | ||||||||
Total current assets | 584,402 | 400,089 | 991,223 | 1,008,895 | ||||||||
PROPERTY, PLANT AND EQUIPMENT, net (Note 8) | 52,616 | 35,807 | 52,320 | 47,797 | ||||||||
EQUITY-ACCOUNTED INVESTMENTS (Note 7) | 1,508 | 1,860 | ||||||||||
EQUITY-ACCOUNTED INVESTMENTS | 14,329 | 878 | ||||||||||
GOODWILL (Note 9) | 182,737 | 209,570 | 166,437 | 186,576 | ||||||||
INTANGIBLE ASSETS, net (Note 9) | 93,930 | 119,856 | 47,124 | 68,514 | ||||||||
OTHER LONG-TERM ASSETS, including available for sale securities (Note 7) | 40,700 | 14,463 | ||||||||||
OTHER LONG-TERM ASSETS (Note 7 and Note 10) | 14,997 | 38,285 | ||||||||||
TOTAL ASSETS | 955,893 | 781,645 | 1,286,430 | 1,350,945 | ||||||||
LIABILITIES | LIABILITIES | |||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | 13,172 | 11,360 | 21,453 | 17,101 | ||||||||
Other payables (Note 11) | 42,157 | 71,265 | 45,595 | 42,257 | ||||||||
Current portion of long-term borrowings (Note 13) | 14,019 | 15,062 | 8,863 | 14,789 | ||||||||
Income taxes payable | 6,019 | 6,709 | 6,287 | 7,676 | ||||||||
Total current liabilities before settlement obligations | 75,367 | 104,396 | 82,198 | 81,823 | ||||||||
Settlement obligations | 409,166 | 186,668 | 661,916 | 725,987 | ||||||||
Total current liabilities | 484,533 | 291,064 | 744,114 | 807,810 | ||||||||
DEFERRED INCOME TAXES (Note 19) | 20,988 | 52,785 | ||||||||||
DEFERRED INCOME TAXES (Note 20) | 10,564 | 15,522 | ||||||||||
LONG-TERM BORROWINGS (Note 13) | 79,760 | 110,504 | 50,762 | 62,388 | ||||||||
OTHER LONG-TERM LIABILITIES | 25,791 | 1,272 | ||||||||||
OTHER LONG-TERM LIABILITIES (Note 10) | 2,205 | 23,477 | ||||||||||
TOTAL LIABILITIES | 611,072 | 455,625 | 807,645 | 909,197 | ||||||||
COMMITMENTS AND CONTINGENCIES (Note 23) | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 24) | ||||||||||||
EQUITY | EQUITY | |||||||||||
COMMON STOCK (Note 14) | ||||||||||||
Authorized shares: 200,000,000 with $0.001 par value; Issued and outstanding shares, net of treasury: 2012: 45,548,902; 2011: 45,152,805 | 59 | 59 | ||||||||||
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; | - | - | ||||||||||
Authorized shares: 50,000,000 with $0.001 par value; Issued and outstanding shares, net of treasury: 2015: -; 2014: - | - | - | ||||||||||
ADDITIONAL PAID-IN CAPITAL | 153,360 | 136,430 | 213,896 | 202,401 | ||||||||
TREASURY SHARES, AT COST: 2012: 13,455,090; 2011: 13,274,434 (Note 14) | (175,823 | ) | (174,694 | ) | ||||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | (75,722 | ) | (33,779 | ) | ||||||||
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 | 439,641 | 394,990 | 617,868 | 522,729 | ||||||||
TOTAL NET1 EQUITY | 341,515 | 323,006 | 478,127 | 441,771 | ||||||||
NON-CONTROLLING INTEREST | 3,306 | 3,014 | 658 | (23 | ) | |||||||
TOTAL EQUITY | 344,821 | 326,020 | 478,785 | 441,748 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 955,893 | $ | 781,645 | ||||||||
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, 2012, 20112015, 2014 and 20102013
2012 | 2011 | 2010 | 2015 | 2014 | 2013 | |||||||||||||
(In thousands, except per share data) | (In thousands, except per share data) | |||||||||||||||||
REVENUE (Note 15) | $ | 390,264 | $ | 343,420 | $ | 280,364 | ||||||||||||
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 | 19,152 | 30,130 | 36,228 | 27,698 | 29,799 | 15,266 | ||||||||||||
Loan-based interest and fees received | 8,433 | 7,276 | 4,214 | |||||||||||||||
Services rendered | 362,679 | 306,014 | 239,922 | |||||||||||||||
EXPENSE | ||||||||||||||||||
Cost of goods sold, IT processing, servicing and support | 141,000 | 109,858 | 72,973 | 297,856 | 260,232 | 196,834 | ||||||||||||
Selling, general and administration | 137,404 | 119,692 | 80,854 | 158,919 | 168,072 | 191,552 | ||||||||||||
Equity instrument issued pursuant to BBBEE transaction (Note 16) | 14,211 | - | - | |||||||||||||||
Equity instruments issued pursuant to BEE transactions (Note 17) | - | 11,268 | - | |||||||||||||||
Depreciation and amortization | 36,499 | 34,671 | 19,348 | 40,685 | 40,286 | 40,599 | ||||||||||||
IMPAIRMENT LOSSES (Note 9) | - | 41,771 | 37,378 | |||||||||||||||
OPERATING INCOME | 61,150 | 37,428 | 69,811 | 128,519 | 101,798 | 23,162 | ||||||||||||
INTEREST INCOME | 8,576 | 7,654 | 10,116 | 16,355 | 14,817 | 12,083 | ||||||||||||
INTEREST EXPENSE | 9,345 | 8,672 | 1,047 | 4,456 | 7,473 | 7,966 | ||||||||||||
INCOME BEFORE INCOME TAXES | 60,381 | 36,410 | 78,880 | 140,418 | 109,142 | 27,279 | ||||||||||||
INCOME TAX EXPENSE (Note 19) | 15,936 | 33,525 | 40,822 | |||||||||||||||
INCOME TAX EXPENSE (Note 20) | 44,136 | 39,379 | 14,656 | |||||||||||||||
NET INCOME BEFORE EARNINGS (LOSS) FROM EQUITY- ACCOUNTED INVESTMENTS | 44,445 | 2,885 | 38,058 | |||||||||||||||
NET INCOME BEFORE EARNINGS FROM EQUITY- ACCOUNTED INVESTMENTS | 96,282 | 69,763 | 12,623 | |||||||||||||||
EARNINGS (LOSS) FROM EQUITY-ACCOUNTED | ||||||||||||||||||
INVESTMENTS (Note 7) | 220 | (339 | ) | 93 | ||||||||||||||
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS | 452 | 298 | 351 | |||||||||||||||
NET INCOME | 44,665 | 2,546 | 38,151 | 96,734 | 70,061 | 12,974 | ||||||||||||
LESS (ADD): NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | 14 | (101 | ) | (839 | ) | |||||||||||||
LESS (ADD): NET INCOME (LOSS) ATTRIBUTABLE TO NON- CONTROLLING INTEREST | 1,999 | (50 | ) | (3 | ) | |||||||||||||
NET INCOME ATTRIBUTABLE TO NET1 | $ | 44,651 | $ | 2,647 | $ | 38,990 | $ | 94,735 | $ | 70,111 | $ | 12,977 | ||||||
Net income per share:(Note 20) | ||||||||||||||||||
Net income per share, in United States dollars:(Note 21) | ||||||||||||||||||
Basic earnings attributable to Net1 shareholders in $ | 0.99 | 0.06 | 0.84 | |||||||||||||||
Diluted earnings attributable to Net1 shareholders in $ | 0.99 | 0.06 | 0.84 | |||||||||||||||
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, 2012, 20112015, 2014 and 20102013
2012 | 2011 | 2010 | |||||||
(In thousands) | |||||||||
NET INCOME | $ | 44,665 | $ | 2,546 | $ | 38,151 | |||
OTHER COMPREHENSIVE (LOSS) INCOME: | |||||||||
Net unrealized (income) loss on asset available for sale, net of tax | 1,547 | (691 | ) | (684 | ) | ||||
Movement in foreign currency translation reserve | (43,617 | ) | 34,002 | (7,517 | ) | ||||
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | (42,070 | ) | 33,311 | (8,201 | ) | ||||
COMPREHENSIVE INCOME | 2,595 | 35,857 | 29,950 | ||||||
Less (Add) comprehensive income (loss) attributable to non- controlling interest | 113 | (303 | ) | 1,116 | |||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NET1 | $ | 2,708 | $ | 35,554 | $ | 31,066 |
Certain amounts for the year ended June 30, 2011 and 2010, respectively, have been reclassified to reflect the appropriate attribution of net income (loss) and other movements between Net1 and its non-controlling interest.
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 UEPSTECHNOLOGIES, INC.CONSOLIDATEDConsolidatedSTATEMENTSStatement OFofCHANGESChanges INin Equity for the year ended June 30, 2013 (dollarEQUITYamounts (ininthousands)
Net 1 UEPS Technologies, Inc. Shareholder | ||||||||||||||||||||||||||||||
Number of | Additional | Total | Non- | |||||||||||||||||||||||||||
Number of | Treasury | Treasury | Paid-In | Retained | Net1 | controlling | ||||||||||||||||||||||||
Shares | Amount | Shares | Shares | Capital | Earnings | AOC(L)I | Equity | Interests | Total | |||||||||||||||||||||
Balance – July 1, 2009 | 58,434,003 | $ | 59 | (3,927,516 | ) | $ | (48,637 | ) | $ | 126,914 | $ | 353,353 | $ | (58,472 | ) | $ | 373,217 | $ | 2,539 | $ | 375,756 | |||||||||
Options exercised | 83,338 | - | 303 | 303 | 303 | |||||||||||||||||||||||||
Restricted stock granted | 10,098 | - | - | |||||||||||||||||||||||||||
Settlement of loan note consideration for stock issued in accordance with 2004 Stock Incentive Plan | 417 | 417 | 417 | |||||||||||||||||||||||||||
Stock-based compensation charge | 5,670 | 5,670 | 5,670 | |||||||||||||||||||||||||||
Treasury shares acquired (Note 14) | (9,221,526 | ) | (125,034 | ) | (125,034 | ) | (125,034 | ) | ||||||||||||||||||||||
Income tax benefits from stock awards sold by employees | 239 | 239 | 239 | |||||||||||||||||||||||||||
Comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||
Net income (loss) | 38,990 | 38,990 | (839 | ) | 38,151 | |||||||||||||||||||||||||
Other comprehensive (loss): | ||||||||||||||||||||||||||||||
Net unrealized loss on available for sale investment, net of tax | (684 | ) | (684 | ) | (684 | ) | ||||||||||||||||||||||||
Movement in foreign currency translation reserve | (7,240 | ) | (7,240 | ) | (277 | ) | (7,517 | ) | ||||||||||||||||||||||
Balance – June 30, 2010 | 58,527,439 | $ | 59 | (13,149,042 | ) | $ | (173,671 | ) | $ | 133,543 | $ | 392,343 | $ | (66,396 | ) | $ | 285,878 | $ | 1,423 | $ | 287,301 |
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 UEPSTECHNOLOGIES, INC.CONSOLIDATEDConsolidatedSTATEMENTSStatement OFofCHANGESChanges INin Equity for the year ended June 30, 2014 (dollarEQUITYamounts (ininthousands)
Net 1 UEPS Technologies, Inc. Shareholder | ||||||||||||||||||||||||||||||
Number of | Additional | Total | Non- | |||||||||||||||||||||||||||
Number of | Treasury | Treasury | Paid-In | Retained | Net1 | controlling | ||||||||||||||||||||||||
Shares | Amount | Shares | Shares | Capital | Earnings | AOC(L)I | Equity | Interests | Total | |||||||||||||||||||||
Balance – July 1, 2010 | 58,527,439 | $ | 59 | (13,149,042 | ) | $ | (173,671 | ) | $ | 133,543 | $ | 392,343 | $ | (66,396 | ) | $ | 285,878 | $ | 1,423 | $ | 287,301 | |||||||||
Restricted stock granted | 156,956 | - | - | |||||||||||||||||||||||||||
Settlement of loan note consideration for stock issued in accordance with 2004 Stock Incentive Plan | 20 | 20 | 20 | |||||||||||||||||||||||||||
Stock-based compensation charge | 5,212 | 5,212 | 5,212 | |||||||||||||||||||||||||||
Reversal of stock-based compensation charge | (257,156 | ) | (3,492 | ) | (3,492 | ) | (3,492 | ) | ||||||||||||||||||||||
Treasury shares acquired (Note 14) | (125,392 | ) | (1,023 | ) | (1,023 | ) | (1,023 | ) | ||||||||||||||||||||||
Utilization of income tax benefits from stock awards sold by employees | (68 | ) | (68 | ) | (68 | ) | ||||||||||||||||||||||||
Acquisition of KSNET (Note 3) | - | 3,097 | 3,097 | |||||||||||||||||||||||||||
Acquisition of 19.90% non-controlling interest (Note 3) | 1,215 | (290 | ) | 925 | (1,809 | ) | (884 | ) | ||||||||||||||||||||||
Comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||
Net income (loss) | 2,647 | 2,647 | (101 | ) | 2,546 | |||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||
Net unrealized loss on available for sale investment, net of tax | (691 | ) | (691 | ) | (691 | ) | ||||||||||||||||||||||||
Movement in foreign currency translation reserve | 33,598 | 33,598 | 404 | 34,002 | ||||||||||||||||||||||||||
Balance – June 30, 2011 | 58,427,239 | $ | 59 | (13,274,434 | ) | $ | (174,694 | ) | $ | 136,430 | $ | 394,990 | $ | (33,779 | ) | $ | 323,006 | $ | 3,014 | $ | 326,020 |
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 UEPSTECHNOLOGIES, INC.
ConsolidatedStatement ofChanges in Equity for the year ended June 30, 2015 (dollaramounts inthousands)
Net 1 UEPS Technologies, Inc. Shareholder | ||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||
Number of | Additional | other | Total | Non- | ||||||||||||||||||||||||||
Number of | Treasury | Treasury | Paid-In | Retained | comprehensive | Net1 | controlling | |||||||||||||||||||||||
Shares | Amount | Shares | Shares | Capital | Earnings | (loss) income | Equity | Interest | Total | |||||||||||||||||||||
Balance – July 1, 2011 | 58,427,239 | $ | 59 | (13,274,434 | ) | $ | (174,694 | ) | $ | 136,430 | $ | 394,990 | $ | (33,779 | ) | $ | 323,006 | $ | 3,014 | $ | 326,020 | |||||||||
Restricted stock granted | 582,729 | |||||||||||||||||||||||||||||
Stock-based compensation charge | 2,909 | 2,909 | 2,909 | |||||||||||||||||||||||||||
Reversal of stock-based compensation charge | (5,976 | ) | (134 | ) | (134 | ) | (134 | ) | ||||||||||||||||||||||
Equity instrument charge (Note 16) | 14,211 | 14,211 | 14,211 | |||||||||||||||||||||||||||
Treasury shares acquired (Note 14) | (180,656 | ) | (1,129 | ) | (1,129 | ) | (1,129 | ) | ||||||||||||||||||||||
Utilization of APIC pool related to vested restricted stock | (56 | ) | (56 | ) | (56 | ) | ||||||||||||||||||||||||
Liquidation of SmartSwitch Nigeria (Note 18) | 280 | 280 | ||||||||||||||||||||||||||||
Sale of 10% of SmartLife (Note 3) | 188 | 188 | ||||||||||||||||||||||||||||
KSNET purchase accounting adjustment (Note 3) | (63 | ) | (63 | ) | ||||||||||||||||||||||||||
Comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||
Net income | 44,651 | 44,651 | 14 | 44,665 | ||||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||
Net unrealized gain on available for sale investment, net of tax | 1,547 | 1,547 | 1,547 | |||||||||||||||||||||||||||
Movement in foreign currency translation reserve | (43,490 | ) | (43,490 | ) | (127 | ) | (43,617 | ) | ||||||||||||||||||||||
Balance – June 30, 2012 | 59,003,992 | $ | 59 | (13,455,090 | ) | $ | (175,823 | ) | $ | 153,360 | $ | 439,641 | $ | (75,722 | ) | $ | 341,515 | $ | 3,306 | $ | 344,821 |
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, 2012, 20112015, 2014 and 20102013
2012 | 2011 | 2010 | |||||||
(In thousands) | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
NET INCOME | $ | 44,665 | $ | 2,546 | $ | 38,151 | |||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: | |||||||||
Depreciation and amortization | 36,499 | 34,671 | 19,348 | ||||||
Impairment of intangible asset | - | 41,771 | - | ||||||
Impairment of goodwill | - | - | 37,378 | ||||||
(Earnings) Loss from equity-accounted investments | (220 | ) | 339 | (93 | ) | ||||
Fair value adjustment | (3,375 | ) | 728 | 78 | |||||
Interest payable | 8,823 | 2,487 | 301 | ||||||
Facility fee amortized | 389 | 1,958 | - | ||||||
(Profit) Loss on disposal of property, plant and equipment | (64 | ) | (5 | ) | 69 | ||||
Net loss (profit) on sale of 10% of SmartLife (2012) and VinaPay (2011) | 81 | (14 | ) | - | |||||
Profit on liquidation of subsidiary (Note 18) | (3,994 | ) | - | - | |||||
Realized loss on sale of SmartLife investments | 25 | - | - | ||||||
Stock compensation charge, net of forfeitures | 2,775 | 1,720 | 5,670 | ||||||
Fair value of BBBEE equity instrument granted (Note 16) | 14,211 | - | - | ||||||
(Increase) Decrease in accounts and finance loans receivable, and pre- funded grants receivable | (31,974 | ) | (3,568 | ) | 4,666 | ||||
(Increase) Decrease in deferred expenditure on smart cards | (4,554 | ) | - | 8 | |||||
(Increase) Decrease in inventory | (717 | ) | 289 | 3,867 | |||||
Decrease in accounts payable and other payables | (18,496 | ) | (1,041 | ) | (27,138 | ) | |||
Decrease in taxes payable | (7,483 | ) | (1,800 | ) | (7,582 | ) | |||
Decrease in deferred taxes | (16,185 | ) | (13,858 | ) | (6,040 | ) | |||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 20,406 | 66,223 | 68,683 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Capital expenditures | (39,167 | ) | (15,053 | ) | (2,730 | ) | |||
Proceeds from disposal of property, plant and equipment | 764 | 76 | 106 | ||||||
Acquisitions, net of cash acquired (Note 3) | (6,154 | ) | (230,225 | ) | (10,319 | ) | |||
Settlement from former shareholders of KSNET (Note 3) | 4,945 | - | - | ||||||
Acquisition of available-for-sale securities (Note 7) | (948 | ) | - | - | |||||
Purchase of investments related to SmartLife | (2,320 | ) | - | - | |||||
Proceeds from maturity of investments related to SmartLife | 2,321 | - | - | ||||||
Proceeds from disposal of VinaPay | - | 150 | - | ||||||
Acquisition of and advance of loans to equity-accounted investments | - | (375 | ) | - | |||||
Repayment of loan by equity-accounted investment | 122 | 475 | - | ||||||
Other investing activities, net | (1 | ) | 35 | - | |||||
Net change in settlement assets | (252,101 | ) | (78,768 | ) | (77,243 | ) | |||
NET CASH USED IN INVESTING ACTIVITIES | (292,539 | ) | (323,685 | ) | (90,186 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Long-term borrowings (repaid) obtained (Note 13) | (19,172 | ) | 116,353 | - | |||||
Acquisition of treasury stock (Note 14) | (1,129 | ) | (1,023 | ) | (126,304 | ) | |||
Proceeds on sale of 10% of SmartLife (Note 3) | 107 | - | - | ||||||
Proceeds from issue of common stock | - | - | 720 | ||||||
Loan portion related to options | - | 20 | - | ||||||
Payment of facility fee (Note 13) | - | (3,088 | ) | - | |||||
Repayment of short-term borrowings | - | (6,705 | ) | - | |||||
Repayment of bank overdraft | - | (462 | ) | (137 | ) | ||||
Acquisition of remaining 19.9% of Net1 UTA | - | (594 | ) | - | |||||
Net change in settlement obligations | 252,101 | 78,768 | 77,243 | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 231,907 | 183,269 | (48,478 | ) | |||||
Effect of exchange rate changes on cash | (15,914 | ) | 15,714 | 2,937 | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (56,140 | ) | (58,479 | ) | (67,044 | ) | |||
CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR | 95,263 | 153,742 | 220,786 | ||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 39,123 | $ | 95,263 | $ | 153,742 |
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 FINANCINGACTIVITIES | (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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Net 1 UEPS Technologies, Inc. (“Net1” and collectively with its consolidated subsidiaries, the “Company”) was incorporated in the State of Florida on May 8, 1997. The Company provides payment solutions and transaction processing services across a wide range of industries and in various geographies. It has developed and markets a smart-card based alternative payment system for the unbanked and underbanked populations of developing economies. Its universal electronic payment system (“UEPS”) uses biometrically secure smart cards that operate in real-time but offline, which allows users to enter into transactions at any time with other card holders in even the most remote areas. The Company also develops and provides secure transaction technology solutions and services, and offers transaction processing, financial and clinical riskon-line real-time healthcare management solutions to various industries.in the United States. The Company’s technology is widely used in South Africa today, where it distributes pension and welfare payments to recipientsrecipient 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. The Company also processes third-party and associated payroll payments for employees through its FIHRST system and provides funders and providers of healthcare with an on-line real-time management system for healthcare transactions through its MediKredit service. Through KSNET, the Company offers card processing, payment gateway (“PG”) and banking value-added 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 |
2.SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The financial statements of entities which are controlled by Net1, referred to as subsidiaries, are consolidated. Inter-company accounts and transactions are eliminated upon consolidation.
The Company, if it is the primary beneficiary, consolidates entities which are considered to be variable interest entities (“VIE”). The primary beneficiary is considered to be the entity that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. No entities were required to be consolidated in terms of these requirements during the years ended June 30, 2012, 20112015, 2014 and 2010.2013.
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 USU.S. dollar. The Company also has consolidated entities which have the euro, Russian ruble,other currencies, primarily South Korean won (“KRW”) or Indian rupee, as their functional currency. The current rate method is used to translate the financial statements of the Company to US dollar. Under the current rate method, assetsAssets 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 incomeselling, general and administration expense on the Company’s 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)
Loan provisions and allowanceAllowance for doubtful debtsaccounts receivable
UEPS-based lending Allowance for doubtful finance loans receivable
Beginning in fiscal 2012, the Company no longer insures its UEPS-based lending book and provides for the principal and services fees upon default. The Company considers a UEPS-based loanregularly reviews the ageing of outstanding amounts due from borrowers and adjusts the allowance based on management’s estimate of the recoverability of the finance loans receivable. The Company writes off finance loans receivable and related service fee to befees if a borrower is in default when the borrower diesarrears with repayments for more than three months or can not be found. For the years ended June 30, 2011 and 2010 no provision was required for UEPS-based lending. The principal amount of the loan was insured and the amount due to be recovered from the insurer is recorded as a receivable once the amount is deemed unrecoverable. Once the loan was deemed unrecoverable, service fees related to the unrecoverable insured loan were not recognized.dies.
Allowance for doubtful debtsaccounts 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 company’s net income (loss). In addition, dividendsor 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 thean equity-accounted companyinvestment reduce the carrying value of the Company’s 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.
Leasehold improvement costs
Costs incurred in the adaptation of leased properties to serve the requirements of the Company are capitalized and amortized over the shorter of the estimated useful life of the asset and the remaining term of the lease.
F-11
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)Goodwill
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 Reservesreserves and Liabilitiesliabilities
Reserves for future policy benefits and claims payable: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 Company’s interest-sensitive life contracts, liabilities approximate the policyholder’s account value. For deferred annuities, the fixed option on variable annuities, guaranteed investment contracts and other investment contracts, the liability is the policyholder’s account value.
F-12
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
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 withwithin 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 seller’s price to the buyer is fixed or determinable; and | |
• | collectability is reasonably assured. |
The Company’s principal revenue streams and their respective accounting treatments are discussed below:
Fees
Pension and welfare and South African participating merchants
The Company provides a state welfare benefit distribution service to the South Africa Social Security Agency. Fee income received for these services is recognized in the statement of operations when distributions have been made to the beneficiaries.recipient cardholders.
BeneficiariesRecipient cardholders are able to load their welfare grants at merchants enrolled in the Company’s participating merchant system in certain provinces. There is no charge to the beneficiaryrecipient 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 beneficiaryrecipient 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (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 Company’s 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 Company’s 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 Company’s 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 Company’s 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway (continued)
Banking VAN is a division supporting a company’s 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 state 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 customer’s 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.
SoftwareF-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.
F-15
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Interest income
Interest income earned from micro-lending activities is recognized in the statement of operations as it falls due, using the effective interest rate method by reference to the constant interest rate stated in each loan agreement. Fees earned for establishing loans are recognized over the period of the loan as interest income.
Systems implementation projects
The Company undertakes smart card system implementation projects. The hardware and software installed in these projects are in the form of customized systems, which ordinarily involve modification to meet the customer’s 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 Company’s customer arrangements may have multiple deliverables. Generally, the Company’s 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 expendituresexpenditure is charged to net income in the period in which it is incurred. During the years ended June 30, 2012, 20112015, 2014 and 2010,2013, the Company incurred research and development expenditures of $3.9$2.4 million, $5.7$2.2 million and $7.6$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 Company’s 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 Company’s 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of changes in tax laws or enacted tax rates.
On December 20, 2011, there was a change in South African tax law to impose a dividends withholding tax (a tax levied and withheld by a company on distributions to its shareholders) to replace the Secondary Taxation on Companies (a tax levied directly on a company on dividend distributions) (“STC”). The change was effective on April 1, 2012. Therefore the Company measured its South African income taxes and deferred income taxes for the yearyears ended June 30, 2012,2015, 2014 and 2013, using the enacted statutory tax rate in South Africa of 28%. For years prior to 2012 the tax rate in South Africa varied depending on whether income was distributed. During the years ended
As of June 30, 2011 and 2010, the income tax rate was 28%, but upon distribution, STC of 10% was due based on the amount of dividends declared net of dividends received during a dividend cycle. The Company therefore measured its income taxes and deferred income taxes for the years ended June 30, 2011 and 2010 using a combined rate of 34.55% .
Currently2015, the Company intends to permanently reinvest its non-U.S. undistributed South African earnings as of June 30, 2012$442.1 million in South Africa.those non-U.S. jurisdictions. Accordingly, the Company has not recognized a deferred tax liability related to any 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 taxationtax charge if it decides notis no longer able to permanently reinvest its undistributed earnings. This may result in an increase in the Company’s effective tax rate in future periods.
In establishing the appropriate incomedeferred tax asset valuation allowances, the Company assesses the realizability of its net deferred tax assets, and based on all available evidence, both positive and negative, determines whether it is more likely than not that the net deferred tax assets or a portion thereof will be realized.
UncertainReserves 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. TheFor 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 management’s judgement, is greater than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.
The Company’s policy is to include interest related to unrecognized tax benefits in interest income, netexpense 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 Company’s income tax returns, based on the amount of compensation cost recognized and the Company’s 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 Company’s 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity instruments issued to third parties
Equity instruments issued to third parties represents the cost related to equity instruments granted. The Company measures equity instrument issued to third partiesthis 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 Company’s 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 Company’s income tax returns, based on the amount of equity instrument cost recognized and the Company’s 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 Company’s 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 beneficiariesrecipient cardholders of social welfare grants (2) cash received from health care plans which the Company disburses to health care service providers once it adjudicates claims and (3)(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 beneficiariesrecipient cardholders of social welfare grants, (2) amounts which are due to health care service providers after claims have been adjudicated and reconciled, provided that the Company shall have previously received such funds from health care plan customers and (3)(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 obligationsobligations.
Recent accounting pronouncements adopted
The following summary of recent accounting pronouncements reflects only the new authoritative accounting guidance issued that is relevant and applicable to the Company.
On July 1, 2011,In March 2013, the Company adopted the new Financial Accounting Standards Board (“FASB”) issued guidance regarding Step 2Parent’s 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 goodwill impairment test for reporting units with zeroforeign entity in which the subsidiary or negative carrying amounts. The guidance modifies Step 1group of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires the company to perform Step 2 if it is more likely than not that a goodwill impairment may exist.assets had resided. The guidance is effective for fiscal years and interim periods within those years,the Company beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements because none of its reporting units have zero or negative carrying amounts.
On July 1, 2011, the Company adopted the new FASB guidance regarding fair value measurement amendments to achieve common fair value measurement2014, and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”). The guidance improves the comparability of fair value measurements presented and disclosed in accordance with GAAP and IFRSs by changing the wording used to describe many of the requirements in GAAP for measuring fair value and disclosure of information. The amendments to this guidance provide explanations on how to measure fair value but do not require any additional fair value measurements and do not establish valuation standards or affect valuation practices outside of financial reporting. The amendments clarify existing fair value measurements and disclosure requirements to include application of the highest and best use and valuation premises concepts; measuring fair value of an instrument classified in a reporting entity’s equity; and disclosures requirements regarding quantitative information about unobservable inputs categorized within Level 3 of the fair value hierarchy. In addition, clarification is provided for measuring the fair value of financial instruments that are managed in a portfolio and the application of premiums and discounts in a fair value measurement. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2010.applied prospectively. The adoption of this guidance did not have a significantmaterial impact on the Company’s consolidated financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2015
In May 2014, the FASB issued guidance regardingRevenue 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 regardingRevenue from Contracts with Customers, Deferral of the Effective Date. This guidance defers the required implementation date specified inRevenue 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, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
2.SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements adopted (continued)
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The guidance improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The amendments to the guidance requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Entities are no longer permitted to present components of other comprehensive income as part of the statement of changes in equity. Any adjustments for items that are reclassified from other comprehensive income to net income are to be presented on the face of the entities' financial statement regardless of the method of presentation for comprehensive income. The amendments do not change items to be reported in comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor do the amendments change the option to present the components of other comprehensive income either net of related tax effects or before related tax effects. The Company currently presents its comprehensive income in two separate but consecutive statements and therefore the adoption of this guidance did not impact its presentation of comprehensive income.
Recent accounting pronouncements not yet adopted as of June 30, 20122015 (continued)
In September 2011,August 2014, the FASB issued guidance regardingTesting Goodwill for ImpairmentDisclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. TheThis guidance allowsrequires an entity to first assess qualitative factorsperform interim and annual assessments of its ability to determine whether it is necessary to performcontinue as a going concern within one year of the two-step quantitative goodwill impairment test. Under this guidance, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than notdate that its fair value is less than its carrying amount. The guidance includesfinancial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a number of events and circumstances for an entity to consider in conducting the qualitative assessment.going concern. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal yearsthe Company beginning after December 15, 2011.July 1, 2017. Early adoption is permitted. The Company is currently evaluatingassessing the impact of this guidance on its goodwill impairment testing process.financial statements disclosure.
3. ACQUISITIONSIn February 2015, the FASB issued guidance regardingAmendments 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 regardingSimplifying 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.
3. | ACQUISITIONS |
The cash paid, net of cash received related to the Company’s various acquisitions that are discussed below during the yearyears ended June 30, 2012, 20112015, 2014 and 20102013 are summarized in the table below:
2012 | 2011 | 2010 | |||||||
SmartLife | $ | 1,673 | $ | - | $ | - | |||
Prepaid business | 4,481 | - | - | ||||||
KSNET | - | 230,225 | - | ||||||
MediKredit | - | - | 981 | ||||||
FIHRST | - | - | 9,338 | ||||||
Total cash paid, net of cash received | $ | 6,154 | $ | 230,225 | $ | 10,319 |
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 |
20122015 acquisitions
Acquisition of prepaid airtime and electricity business in October 2011None.
2014 acquisitions
None.
2013 acquisitions
SmartSwitch Botswana (Proprietary) Limited
On October 3, 2011,December 7, 2012, the Company acquired 50% of the South African prepaid airtimeoutstanding and electricity businesses of Eason & Son, Ltd (“Eason”), an Irishissued ordinary shares in SmartSwitch Botswana, a Botswana private limited company, for approximately $4.5BWP 6.3 million (approximately $0.8 million) in cash. The principal assets acquired comprise prepaid airtimeAs a result of this transaction, SmartSwitch Botswana is now a wholly-owned subsidiary and electricity businesses customer list, accounts receivable books, inventory and a perpetual license to utilize Eason’s internally developed transaction-based system software (“EBOS”).
The businessis consolidated in the Company’s financial statements. SmartSwitch Botswana had previously been recorded as an equity-accounted investment. SmartSwitch Botswana has been integrated with EasyPay and allocated to the Company’s South African transaction-based activitiesInternational transaction processing operating segment. The Company believes that the acquisition will enable it to expand its prepaid customer base and over time integrate all of its prepaid offerings onto the EBOS system.
F-19
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
3. | ACQUISITIONS (continued) |
3.ACQUISITIONS (continued)
20122013 acquisitions (continued)
SmartLife N1MS (formerly Pbel)
On July 1, 2011,September 14, 2012, the Company acquired SmartLife (formerly known as Saambou Life Assurers Limited),all of the outstanding and issued ordinary shares in N1MS, a South African long-term insuranceprivate company, for ZAR 1333 million (approximately $1.8$3.8 million). ZAR 23 million of the purchase price was paid in cash.cash and the remaining ZAR 10 million was paid by issuing 142,236 shares of the Company’s 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 Company’s 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 Company’s property. Prior to itsthe acquisition, N1MS was jointly owned by the Company’s 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 SmartLife had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not written any new insurance business for a numberbelieves that the acquisition of years and had reinsured allN1MS is important in the execution of its risk exposure understrategy to commercialize and develop its life insurance products. SmartLifeworld-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 Company’s financial servicesSouth African transaction processing operating segment.
The acquisition of SmartLife provides the Company with an opportunity to offer relevant insurance products directly to its existing customer and employee base in South Africa. The Company intends to offer this customer base a full spectrum of products applicable to this market segment, including credit life, group life, funeral and education insurance policies.
In November 2011, the Company sold 10% of SmartLife to a strategic partner for $0.1 million and recognized a loss on sale of $0.08 million.
The final purchase price allocation of the prepaid businessSmartSwitch Botswana and SmartLifeN1MS acquisitions, translated at the foreign exchange rates applicable on the date of acquisition, areis provided in the table below:
Prepaid | ||||||||||
business | SmartLife | Total | ||||||||
Accounts receivable, net | $ | 1,083 | $ | 152 | $ | 1,235 | ||||
Inventory | 305 | - | 305 | |||||||
Customer relationships | 895 | - | 895 | |||||||
Software and unpatented technology | 2,449 | - | 2,449 | |||||||
Deferred tax liability | (251 | ) | - | (251 | ) | |||||
Cash and cash equivalents | - | 169 | 169 | |||||||
Financial investments (allocated to other long-term assets) | - | 3,059 | 3,059 | |||||||
Reinsurance assets (allocated to other long-term assets) | - | 28,492 | 28,492 | |||||||
Other payables | - | (185 | ) | (185 | ) | |||||
Policy holder liabilities (allocated to other long-term liabilities) | - | (29,845 | ) | (29,845 | ) | |||||
Total purchase price | $ | 4,481 | $ | 1,842 | $ | 6,323 |
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 prepaid businessSmartSwitch and SmartLifeN1MS acquisitions, individually and in the aggregate, were not material to the Company’s consolidated results of operations.Company. During the year ended June 30, 2012,2013, the Company did not incur transaction-related expendituresincurred acquisition-related expenditure of $0.1 million related to these acquisitions.
Since the closing of the SmartSwitch Botswana acquisition, the prepaid business and SmartLife acquisitions haveit has contributed revenue and net income of $14.3$0.7 million and $0.7$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, includingafter acquired intangible assetsasset amortization, net of $0.2taxation, of $1.1 million and $0.3$0.5 million, respectively.
2011 acquisitions
98.73% of KSNET Inc. (“KSNET”) in October 2010 and final settlement in December 2011
On October 29, 2010,respectively, for the Company acquired KSNET for KRW 270 billion (approximately $240 million based on exchange rates on October 29, 2010), and a post-closing working capital adjustment. The acquisition of KSNET expands the Company’s international footprint as well as diversifies the Company’s revenue, earnings and product portfolio. In December 2011, the Company received $4.9 million, in cash, in final settlement of any and all claims and contractual adjustments between the Company and the former shareholders of KSNET. This amount has been applied against the goodwill recognized on the acquisition of KSNET and has reduced the goodwill balance. As required by the Company’s Korean debt agreement, the Company has used the settlement proceeds to prepay a portion of its outstanding debt thereunder. The prepayment was made on Januaryyear ended June 30, 2012.2013.
F-20
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
3.ACQUISITIONS (continued)
2011 acquisitions (continued)
98.73% of KSNET Inc. (“KSNET”) in October 2010 and final settlement in December 2011 (continued)
Most of KSNET’s revenue is derived from the provision of payment processing services to approximately 220,000 merchants and to card issuers in Korea through its VAN. KSNET has a diverse product offering and the Company believes it is the only total payments solutions provider offering card VAN, PG and banking VAN services in Korea, which differentiates KSNET from other Korean payment solution providers and allows it to cross-sell its products across its customer base.
The following table sets forth the allocation of the purchase price:
June 30, | Fiscal 2012 | June 30, | ||||||||
2012 | settlement | 2011 | ||||||||
Cash and cash equivalents | $ | 10,507 | $ | - | $ | 10,507 | ||||
Accounts receivable, net | 28,748 | - | 28,748 | |||||||
Inventory | 2,788 | - | 2,788 | |||||||
Current deferred tax assets | 837 | (74 | ) | 911 | ||||||
Settlement assets | 13,164 | - | 13,164 | |||||||
Long-term receivable | 288 | - | 288 | |||||||
Property, plant and equipment | 24,052 | - | 24,052 | |||||||
Goodwill (Note 9) | 115,900 | (4,239 | ) | 120,139 | ||||||
Intangible assets (Note 9) | 102,829 | - | 102,829 | |||||||
Other long-term assets | 6,324 | - | 6,324 | |||||||
Trade payables | (9,643 | ) | - | (9,643 | ) | |||||
Other payables | (14,789 | ) | (696 | ) | (14,093 | ) | ||||
Income taxes payable | (3,363 | ) | - | (3,363 | ) | |||||
Settlement obligations | (13,164 | ) | - | (13,164 | ) | |||||
Long-term deferred income tax liabilities (Note 19) | (24,459 | ) | - | (24,459 | ) | |||||
Other long-term liabilities | (1,199 | ) | - | (1,199 | ) | |||||
Total net assets attributable to shareholders, including goodwill | 238,820 | (5,009 | ) | 243,829 | ||||||
Less attributable to non-controlling interest | (3,033 | ) | 64 | (3,097 | ) | |||||
Total purchase price | $ | 235,787 | $ | (4,945 | ) | $ | 240,732 |
The Company incurred transaction-related expenditures of $5.6 million during the year ended June 30, 2011.
19.9% of Net1 Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard Systems AG (“Net1 UTA”)
On December 23, 2010, the Company acquired the remaining 19.9% of the issued share capital of Net 1 Universal Technologies (Austria) AG (“Net1 UTA”) for $0.6 million in cash. The Company now owns 100% of Net1 UTA. The transaction was accounted for as an equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the Company’s consolidated statement of operations. The carrying amount of the non-controlling interest was adjusted to reflect the change in ownership interest in Net1 UTA. The difference between the fair value of the consideration paid and the amount by which the non-controlling interest was adjusted, of $0.9 million, was recognized in equity attributable to Net1.
F-21
PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE |
3.ACQUISITIONS (continued)
2010 Acquisitions
MediKredit Integrated Healthcare Solutions (Proprietary) Limited (“MediKredit”)
On January 1, 2010, the Company acquired 100% of MediKredit, a South African private company, for ZAR 74 million (approximately $10 million) in cash. MediKredit offers transaction processing, financial and clinical risk management solutions to both health care plans and health care service providers, primarily in South Africa.
FIHRST Management Services (Proprietary) Limited business and related software (collectively “FIHRST”)
On March 31, 2010, the Company acquired FIHRST, a South African business, for ZAR 70 million (approximately $9 million). FIHRST offers a third-party and associated payroll payments solution to companies in South Africa.
The final purchase price allocation of the MediKredit and FIHRST acquisitions, translated at the foreign exchange rates applicable on the date of acquisition, are provided in the table below:
MediKredit | FIHRST | Total | |||||||
Cash and cash equivalents | $ | 9,005 | $ | 77 | $ | 9,082 | |||
Accounts receivable, net | 2,940 | 640 | 3,580 | ||||||
Property, plant and equipment | 1,290 | 106 | 1,396 | ||||||
Intangible assets (see Note 9) | 6,070 | 7,983 | 14,053 | ||||||
Trade and other payables | (9,931 | ) | (337 | ) | (10,268 | ) | |||
Deferred tax assets | 2,718 | 436 | 3,154 | ||||||
Deferred tax liabilities (see Note 19) | (2,097 | ) | (623 | ) | (2,720 | ) | |||
Goodwill (see Note 9) | - | 1,187 | 1,187 | ||||||
Total purchase price | $ | 9,995 | $ | 9,469 | $ | 19,464 |
Pro forma results of operations have not been presented because the effect of the MediKredit and FIHRST acquisitions, individually and in the aggregate, were not material to the Company’s consolidated results of operations. During the year ended June 30, 2010, the Company incurred transaction-related expenditures of $0.4 million related to these acquisitions. Such expenditures were recognized in the Company’s consolidated statements of operations.
4. PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The July 20122015 payment service commenced on July 1, 2012,2015, but the Company pre-funded certain merchants participating in the merchant acquiring systems in the last two days of June 2012.2015. 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.
F-22
ACCOUNTS RECEIVABLE, net and |
5. ACCOUNTS RECEIVABLE,Accounts receivable, net
2012 | 2011 | ||||||||||
Accounts receivable, trade, net | $ | 50,406 | $ | 42,197 | |||||||
Accounts receivable, trade, gross | 51,194 | 42,925 | |||||||||
Allowance for doubtful accounts receivable, end of year | 788 | 728 | |||||||||
Allowance for doubtful accounts receivable, beginning of year re-measured at year end rates | 621 | 902 | |||||||||
Allowance reversed to statement of operations, re-measured at year end rates . | (114 | ) | (47 | ) | |||||||
Allowance acquired in acquisitions, re-measured at year end rates | 131 | 190 | |||||||||
Allowance charged to statement of operations, re-measured at year end rates | 50 | 364 | |||||||||
Amount utilized, re-measured at year end rates | 100 | (681 | ) | ||||||||
Prepaid establishment costs related to Grindrod opportunity | - | 175 | |||||||||
Other receivables | 51,512 | 40,408 | |||||||||
Total accounts receivable, net | $ | 101,918 | $ | 82,780 |
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 Company’s management has identified may be unrecoverable. Accounts receivable, trade, also includes amounts due byfrom customers from the sale of hardware, software licenses and SIM cards and provision of transaction processing services. The allowances for credit losses acquired inCompany did not record a bad debt expense during the KSNET transactions are presented in the tables above, stated at exchange rates prevailing atyear ended June 30, 2011.
Cash payments to agents in Korea are amortized over2015. During the contract period with the agent. As ofyear ended June 30, 20122014 and 2011,2013, respectively, other receivables include approximately $24.5the Company recorded a bad debt expense of $0.6 million and $16.8$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 related to these prepayments.during the year ended June 30, 2013.
6. INVENTORYF-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) |
6. | INVENTORY |
The Company’s inventory comprised the following categories as of June 30, 20122015 and 2011.2014, is presented in the table below:
2012 | 2011 | |||||
Raw materials | $ | 30 | $ | 24 | ||
Finished goods | 6,162 | 6,701 | ||||
$ | 6,192 | $ | 6,725 |
2015 | 2014 | ||||||
Finished goods | $ | 12,979 | $ | 10,785 | |||
$ | 12,979 | $ | 10,785 |
7. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs subsequent to initial recognition. These instruments are measured as set out below:costs.
Risk managementmanagement
The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.
F-23
7.FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and USU.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 USU.S. dollar and the euro, on the other hand.
The Company’s outstanding foreign exchange contracts are as follows: As of June 30, 2012 None.
As of June 30, 2011
None.
Translation risk
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the USU.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The USU.S. dollar to ZAR exchange rate has fluctuated significantly over the past twothree years. As exchange rates are outside the Company’s control, there can be no assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investment in cash equivalents and has occasionally invested in marketable securities. The Company, through its recently acquired insurance business, maintains investments in fixed maturity investments which are exposed to fluctuations in interest rates.
Credit risk
Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the Company’s 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 & Poor’s, Moody’s and Fitch Ratings.
F-24F-22
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
7. | FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
UEPS-based microlending credit risk
The Company is exposed to credit risk in its UEPS-based microlending activities, which provides unsecured short-term loans to qualifying customers, primarily its social grant recipient base.customers. The Company manages this risk by performing an affordability test for each prospective customer and assigns a “creditworthiness score,”score”, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity Priceprice and Liquidity Riskliquidity 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 Company’s 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: