Net 1 UEPS Technologies, Inc. Chairman’s Letter for 2014 Annual Report
Dear Fellow Shareholders:
The year in review
In 2014, Net1 built on its successes from 2013, and we continued to drive towards increasing and sustainable levels of growth and
profitability. The year was by no means devoid of challenges but we remained singularly focused on the execution of our strategic
plan. We are now able to turn our attention to pursuing opportunities internationally while continuing to rationalize our cost
structure and investing for the future. Our global strategy going forward is focused on mobile technologies, particularly payment-
centric ones, and will deliver solutions that incorporate a number of unique and highly innovative applications in the fields of
money transfers, loyalty programs, electronic wallets and secure card-not-present payments.
In 2012 and 2013, our undeniable focus was on the successful implementation of our SASSA contract, delivering on our
commitments and establishing the credibility to be able to implement large and complex national projects. Over a period of 15
months, we biometrically registered 22 million South Africans, or over 40% of the entire country's population, opened 10 million
new bank accounts, and operationalized a seamless, secure and inclusive social grant distribution system for the South African
government. The results of our efforts have been widely recognized by various departments in government, and annualized
government savings of ZAR 3 billion have sufficiently demonstrated that SASSA chose the most progressive and comprehensive
solution along with a service provider that has a track record to deliver on its promises.
In 2014, our focus shifted to leveraging our national infrastructure to introduce relevant, cost-effective and easy-to-access
products and services to our cardholder base. Once again, with mobile transactions posting over 400% year-over-year growth and
our financial products expanding by more than 500% in 2014, we demonstrated further success in the execution of our strategic
plan and the first steps of meaningful diversification of our business.
For Net1, it is important to be able to provide financial inclusion to the millions of previously disadvantaged South Africans. For
us, financial inclusion is about more than making it possible for people who are excluded from formal banking services to open a
bank account. Instead, we want to enable customers to access the types of products that are specifically relevant to them as a
means to make a positive and meaningful improvement in their lives. Our differentiator is our technology, security and business
model that also includes access to information, which in turn facilitates eligibility and lowers inherent risk. These factors increase
affordability and adoption. As a result, we now offer savings accounts, microfinance, insurance, prepaid services, money
transfers, loyalty programs, education services, healthcare, and e-commerce payments, to name just a few of our newly-
introduced services.
In 2015, we aim to leverage our payment processors such as KSNET and EasyPay and to a smaller extent, our switches in
Namibia and Botswana, along with our various virtual-top-up implementations across the African continent, to expand our
services and solutions in a cohesive mobile-driven set of offerings. We have already begun to see some of our efforts come to
fruition, with the early traction we are currently gaining in countries like Malawi, Nigeria, Cameroon, the United States and India.
With all of our successes this past year, we also had to contend with a number of continuing issues. During the year, the South
African Constitutional Court handed down its judgment and remedy in response to the legal challenges on SASSA's contract
award to us, ending the legal challenges related to the award of the tender. The Court ruled that SASSA must commence a new
tender process for the distribution of social grants, which, if awarded, would have to be for a period of five years. However, as
SASSA has stated numerous times both publicly and to the Courts, it has aspirations to provide these services in-house starting in
2017. Should SASSA decide not to award a new tender, we expect to continue acting under our existing contract through to its
scheduled expiration on March 31, 2017. We are ready and confident as we prepare to respond as and when SASSA issues a new
request for proposals.
Financial overview and key metrics
In 2014, our US dollar-based results were unfavorably impacted by a 19% year-over-year depreciation in the South African Rand.
In constant currency, revenue1 grew 54% and Fundamental EPS2 increased 238%. The growth in Fundamental EPS was
predominantly due to the absence of direct implementation and smart card costs related to our SASSA contract that were incurred
in 2013, the recovery of $27 million from SASSA related to additional implementation costs we incurred during the beneficiary
re-registration process in 2012 and 2013, and the substantial increases in our mobile-based prepaid and financial services
businesses. Consolidated operating margin, excluding the recovery from SASSA, was 14% in fiscal 2014 compared to 5% a year
ago.
By segment, South African transaction processing posted revenue of $262 million, or 29% higher in ZAR, driven by the SASSA
recovery and growth in our local transaction processing businesses, while segment operating margin improved to 23% from (9%)
due to the SASSA recovery and the absence of implementation and smart card costs. International transaction processing had
revenue of $153 million compared to $136 million last year, driven primarily by organic growth at KSNET. Segment operating
margin increased to 14% from 10% last year. Lastly, our financial inclusion and applied technologies segment posted revenue of
$208 million, or 129% higher in ZAR, led primarily by our mobile-based prepaid products and expansion of financial services
offering. Segment margin decreased to 29% from 53%, largely due to higher low-margin prepaid airtime and hardware sales as
well as a higher operating cost base for our lending operation.
Our business continues to maintain its cash generative profile and in 2014, cash flows excluding the expansion in our lending
book began returning to a more normalized level.
Corporate development activities
During 2014, we executed our BEE transactions that initially had Net1 issuing 4.4 million shares to our BEE partners. As a result
of various trigger events and due to a number of related subsequent transactions, our BEE partners now hold just under 1% of the
Company's common stock and 12.5% of our CPS business.
Additionally, during 2014 our Net1 Mobile Solutions (“N1MS”) business unit introduced a suite of mobile value-added services,
commencing with a prepaid airtime product in the first quarter, which demonstrated strong adoption through the rest of the year.
N1MS introduced a similar service in Malawi in March 2014, and the uptake thus far has been equally impressive.
In 2014, we also commenced with the national rollout of our financial services offering, which in turn resulted in a significant
growth in our lending book.
Lastly, we refined our go-to-market strategy that resulted in streamlining our segments to three from five and disposing of certain
non-core assets and businesses.
1 Constant currency revenue is a non-GAAP measure and is calculated as GAAP revenue multiplied by the average USD:ZAR
exchange rate during the fiscal year.
2 Fundamental EPS is a non-GAAP measure and is calculated as GAAP earnings per share adjusted for (1) the amortization of
acquisition-related intangible assets (net of deferred taxes), (2) stock-based compensation charges and (3) unusual non-recurring
items, including the amortization of KSNET debt facility fees, as well as (a) in fiscal 2014, DOJ and SEC investigations-related
expenses and a non-cash charge related to the equity instruments issued as part of our BEE transactions. Refer to —“Forward
looking statements and use of non-GAAP measures—Use of non-GAAP measures in this Annual Report” for further information
regarding these non-GAAP measures.
Continuously innovating
Innovation is in Net1’s DNA and we will continue to provide relevant and accessible solutions for our diverse global customer
base.
Our key technological breakthroughs over the past year include the development and subsequent deployment of our new EMV-
compliant version 16 M/Chip4/UEPS smart card that provides all the functionality of UEPS including biometric verification,
offline processing and multiple wallets, but also provides interoperability with traditional payment infrastructure including point-
of-sale terminals and ATMs. Additionally, to offer the same functionality to traditional bank account and debit card holders, we
introduced voice biometric verification, which was previously not available to this customer segment.
We have also developed a number of financial products and services relevant to our customer base in South Africa, along with
innovative ways of delivering them in a seamless and efficient manner. One such product is Umoya Manje, which allows our
customers in South Africa to electronically purchase prepaid airtime or hybrid contracts immediately using our mobile wallet. We
exceeded one million registered users during our second month of operation, effecting more than 250,000 transactions per day
during peak periods. As we launch new products targeted at the same customers, we aim to increase the average spend per
customer as we intend to provide them with the most affordable and convenient products and services. While the individual ticket
items are relatively small, the volume over time should result in substantial income streams.
Management and governance
We remain committed to expanding our management team and over the past year added several seasoned industry veterans
through the organic expansion of our business. During 2014, we made significant investment in the broadening of our
management and sales and marketing teams across our key growth areas and we expect this to continue in 2015. Our Board of
Directors continues to provide invaluable support to the success of the Company.
Looking ahead
We expect to focus our efforts going forward on the pursuit of our local, global and mobile strategy. Within South Africa, we plan
to continue driving the expansion of our business by introducing new, secure and relevant products and to begin to address
previously un-served market segments such as low-skilled workers, who typically are resigned to transacting in cash and face the
same challenges as our existing cardholders. Globally, in markets where Net1 has either a physical or partner presence, we intend
to directly pursue opportunities to introduce our UEPS/EMV smart card-based as well as mobile-based solutions. However, in
territories where we do not have a presence, we plan to work more closely with MasterCard and its regional sales and business
development teams, effectively using MasterCard as an indirect sales channel, to introduce our UEPS/EMV technology,
particularly in emerging countries worldwide.
We are well positioned for growth - public and private sectors around the world continue to seek increased penetration of formal
financial services and electronic payments to the vast unbanked population across multiple distribution channels, and Net1 is
better positioned to benefit from these trends than at any time before. Demand for our offline traditional UEPS payment systems
with EMV interoperability, as well as healthcare, payroll and mobile technologies, provides Net1 with strong momentum, and in
turn should fuel sustained revenue and earnings growth over the next several years. Concurrently, our focus on better leveraging
our existing infrastructure and continued migration to an electronic payment model should drive further efficiencies and margin
improvements.
Finally, our mobile strategy will continue to span across geographical regions, but will focus on building comprehensive, secure
and relevant mobile-based solutions that will be easy to implement and agnostic as to carriers, issuers, or hardware manufacturers.
In an effort to optimize the commercialization of our mobile solutions, we will also be setting up a dedicated business unit in
Europe and will increasingly take a more direct consumer approach.
Appreciation
To our stakeholders, we recognize the external pressures on our share price over the past few years that have primarily been due
to the perceived uncertainty surrounding the long-term sustainability of our contract with SASSA. Rest assured that management
is fully committed to providing the South African government and the country's most vulnerable citizens the highest quality of
service, maximum security and the tools to transition them into enjoying access to more affordable and reliable services within
the formal financial sector. At the same time, we recognize that we must diversify our business to reduce our reliance on large
contracts and customers and we are taking active steps to do so.
We would like to extend our sincere thanks to our colleagues on the Board, our management team and all of our employees for
their dedication and tireless pursuit of excellence in serving our new and existing customers, our communities and for constantly
striving to push Net1 to a position of leadership within our industry.
Lastly, to our customers – thank you for your unwavering support. We endeavor to continuously provide you with innovative and
relevant products that will in turn ensure you are always at the forefront of technological solutions for your customers.
Sincerely,
Dr. Serge Belamant
Chairman and Chief Executive Officer
Financial results at a glance
Consolidated results (refer also Item 6 to our Annual Report on Form 10-K included in this Annual Report)
(in United States dollar thousands, except percentages, per share data and number of employees)
Revenue ........................................................
Operating income .........................................
Operating income margin .............................
Net income Net1 ...........................................
Earnings per share:
Basic ($) ..................................................
Diluted ($) ...............................................
Fundamental net income1 .............................
Fundamental earnings per share1:
Basic ($) ..................................................
Number of employees ...................................
Cash flows provided by operating activities .
Cash and cash equivalents .................................
Total assets ............................................................
Total equity ...........................................................
Operating segments information
(in United States dollar thousands)
2014
581,656
101,798
18%
70,111
1.51
1.50
100,539
Year Ended June 30
2012
390,264
61,150
16%
44,651
2013
452,147
23,162
5%
12,977
2011
343,420
37,428
11%
2,647
0.28
0.28
34,822
2.16
4,415
37,145
58,672
0.76
4,307
55,917
53,665
1,350,945 1,276,322
339,969
441,748
0.99
0.99
64,094
1.42
4,851
20,406
39,123
955,893
346,811
0.06
0.06
68,932
1.53
2,290
66,223
95,263
781,645
328,010
2010
280,364
69,811
25%
38,990
0.84
0.84
92,914
2.01
2,192
68,683
153,742
472,090
287,301
During June 2014, we simplified our operating and internal reporting structures from five reportable segments to three. Previously
reported information for 2013 and 2012 has been restated. Refer to Note 23 to our 2014 consolidated financial statements.
Information for 2011 and 2010 has not been restated and is therefore not presented in the table below.
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Year Ended June 30,
2013
2014
2012
261,577
152,725
207,595
621,897
(40,241)
581,656
242,739
135,954
108,001
486,694
(34,547)
452,147
194,630
120,625
90,792
406,047
(15,783)
390,264
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income ............
61,401
21,952
60,685
144,038
(42,240)
101,798
Refer to Item 7 of our Annual Report on Form 10-K included in this Annual Report for a detailed discussion of our results per
operating segment.
33,906
14,649
45,884
94,439
(33,289)
61,150
(21,316)
14,208
57,491
50,383
(27,221)
23,162
1 Fundamental net income and earnings per share are non-GAAP measures. Refer to —“Forward looking statements and use of
non-GAAP measures—Use of non-GAAP measures in this Annual Report” for further information regarding these non-GAAP
measures.
Corporate social responsibility report
Net1 opens the gates to information and learning for South Africans
South Africa’s beloved Nelson Mandela said, “Education is the most powerful weapon which you can use to change the world,”
while Microsoft’s Steve Ballmer said that “the number one benefit of technology is that it empowers people to do what they want
to do. It lets people be creative. It lets people be productive. It lets people learn things they didn’t think they could learn before,
and so in a sense, it is all about potential.”
The sentiments behind these two pearls of wisdom are the foundation of our Corporate Social Responsibility (“CSR”) policy:
Net1 focuses on making it possible for disadvantaged South African children and adults to further their education and improve
their employability by providing access to technology that will empower them to change their lives for the better.
This may be achieved through as direct an intervention as building computer laboratories at disadvantaged schools, or it may be
broader in application, such as making it possible for students to study at night by providing them with solar-powered lights.
We have a dedicated team that works closely with the Minster of Social Development, Ms. Bathabile Dlamini, and her
department, including SASSA, to identify sites, locations and communities that are in particularly dire need of the kind of
assistance that we are able to offer. Our team travels the country with the Minister at her request, engaging with local stakeholders
to determine their needs, and to collaborate with them to provide the most relevant and meaningful solutions to their challenges.
We spent ZAR4.0 million during fiscal 2014, in a tangible demonstration of our commitment to create a better life for South
Africa’s most vulnerable citizens as well as to share certain of our technologies with them. We have also ear-marked and
committed a further ZAR4.6 million for future similar initiatives.
Delivering on our commitment to provide access to technology and further education:
Computer laboratories
Net1 collaborated with giveITback to build and equip computer laboratories at three disadvantaged schools: students at Clairwood
Secondary School and the Isibonelo Secondary School in KwaZulu-Natal, and the Moremogolo Primary School in the North
West Province now have access to fully equipped computer laboratories, which include a server, printer, internet access,
networking, desks, electricity infrastructure, painting, signage and warranties.
Dr. Serge Belamant:
“Providing access to technology in rural schools changes the lives of the whole community. Children that benefit from an
improved education are expected to become the breadwinners in their families and they stand a far better chance of success if
they are adequately prepared to engage with technology in the workplace. These centers equip them to do more than just
complete their education – they equip them to uplift the whole community around them.”
We chose to collaborate with giveITback because the organisation provides a holistic solution that has been carefully planned and
designed to make a meaningful difference to students. With each 30-PC computer lab costing in the region of R400 000 and
installed in just five days, we are happy to make this investment in the future of children, because we know that they have taken
care of every requirement. giveITback investigated several schools before proposing Clairwood Secondary, Isibonelo Secondary
and Moremogolo Primary to Net1 as prospective sites for the computer laboratories.
For example, the Isibonelo Secondary school has just over 1,000 students, a qualified teacher, and an armed response company
that patrols the school’s grounds when it is not in use. The school has actively decreased its student intake to reduce class sizes, so
that teachers can focus on the quality of education that they offer, in order to increase the school’s pass rates. The school has also
won a national library award, and this building now houses the computer lab.
The Clairwood Secondary School is one of the few trade schools in the province that serves underprivileged children. This is a
large school equipped with a computer laboratory – but it was outdated and obsolete, and funding to update it could not be
obtained.
Most trades nowadays require the use of PCs which contain the mechanics of running a small business, so it made good sense to
provide this school with an updated laboratory for the students. They are now able to learn trades that fill both chronic skills gaps
in the marketplace, and that will create employment at a time when unemployment is as high as 25.5%.
There is no doubt that technology will be the primary enabler of the workplace of the future - whether it’s through access to
research facilities on the internet, through collaborative work process or design programs, or through the business applications
that make it simple for employers to pay their workers without using cash. We are continually investing in technology that makes
it easier to do business and easier for people to manage their money. We are privileged and honored to be able to open the way for
the students at these three schools to become participants in the technology economy of the future.
Delivering on our commitment to lighten the load:
Lighting up South Africa with the Sun-e-light
We have identified that one of the greatest obstacles on the path of learning for rural school children is the absence of electricity
required to provide light for night-time studying. This absence of one of the most basic services also prevents them from
accessing the wealth of information available online, as they have no electricity to provide power to computers, or indeed, to even
charge mobile phones that could give them access to mobile phone tutoring services.
Our N1MS team developed the Sun-e-light in response to this set of dilemmas. This first generation portable, compact solar-
powered lamp has a port to charge mobile phones and can also be used as a torch. The next generation Sun-e-light will include a
built-in SIM card which will enable it to be used as a Wi-Fi hotspot, enabling users to connect to the internet to, for example, do
research online, experience the digital world, provide learners access to academic material, and enable school graduates to access
job-searching portals.
The first generation Sun-e-light requires eight hours of sunlight to be fully charged and provides light for up to 16 hours.
Mr. Philip Belamant, N1MS Managing Director:
“The Sun-e-light is about so much more than just providing light – it’s about providing accessibility and connectivity. Sun-e-light
gives learners the illumination and the access to information that they need to complete their education. Net1 will be distributing
the solar lamp at schools and tertiary educational facilities across South Africa, to communities identified by the Department of
Social Development and other areas where learners do not have access to a consistent electricity supply.”
We want to make it as easy as possible for South Africans in need to obtain the Sun-e-light, and we have enabled features on our
USSD platforms that make it easy to request a lamp directly from a mobile phone.
We have already donated close to 1,200 Sun-e-lights in projects across the country, including to students of the Jon Kotlolo
School in Nellmapius, Pretoria (and members of the surrounding community), as part of the recent Mandela Day initiative. We
believe it is equally important for a responsible corporate citizen to provide not only financial assistance but also with
contribution of time by executives and employees. As such, our employees were intimately involved in the Mandela Day
initiative and each packed a Sun-e-light lamp in a care bucket with every day essentials, along with a personalized message of
hope and inspiration.
The lamps have also been donated to members of the Msinga community and the Melmoth community in KwaZulu-Natal.
Thousands of lamps are scheduled to be donated in the coming months.
Net1 created the Sun-e-light primarily as a way for providing both the simple necessity of light and the more advanced need for
connectivity with the intention of distributing it as donations to needy communities across the country. However, it will be
available for sale in the coming months, providing a lighting and connectivity solution for South Africans who are vulnerable to
load shedding or irregular electricity supplies.
Delivering on our intention to unite communities
Eating out with pensioners in the Western Cape
The Department of Social Development (“DSD”) and SASSA approached us to collaborate in providing a special lunch for 3,000
of the province’s pensioners, on February 12, 2014 at The Good Hope Centre.
Guests of honor at the event included Minister Ms. Bathabile Dlamini; Ms. Baleka Mbethe, Chairperson of the African National
Congress and now the Speaker of the National Assembly; Ms. Zoe Kota-Fredericks, now the Deputy Minister of Human
Settlements; Ms. Maurencia Gillon, member of the Western Cape legislature and member of the standing committee on
community development; Ms. Dorothy Gopie, parliamentarian in the Women’s Ministry and sign-language interpreter; Ms.
Mildred Lesio from the Department of Military Veterans; and various executives from SASSA and Age Concern.
The 3,000 guests were collected from various collection points across the province, and hosted for a meal, as well as
entertainment provided by them Methodist Church of South Africa, and the Western Cape Street Bands Association.
Each guest was presented with a goodie bag after the function, which included sweet treats and a blanket to keep them warm
during the imminent winter.
Early Childhood Development in the spotlight at Mookgophong
The DSD identified that the Mookgophong crèche in Naboomspruit in Limpopo was in dire need of upgrading, to give the
children of the local community the facilities that they need.
We supplied a selection of playground equipment, furniture and other necessities, giving the teachers at the school the facilities
that they need to provide the children in their care with the best possible start in life.
Making a home for a senior citizen
The DSD and SASSA learned of the plight of a senior citizen who was living in a shack in Kwaggafontein B, a settlement in
Mpumalanga.
The DSD and SASSA worked with members of the local community and businesses within the local Thembisile Municipality to
purchase the required construction materials, but still needed money to pay for the labor costs of building her home.
We agreed to donate the required shortfall, and soon, she was able to move into her own new brick-and-mortar home.
Report assurance
We have not obtained independent third party assurance of this corporate social responsibility report for the 2014 reporting
period.
Forward looking statements and use of non-GAAP measures
Forward looking statements
This Annual Report 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. 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. For more information about the factors that could cause our actual results to differ materially from current
expectations, you should refer to the section entitled “Risk Factors” in our 2014 Annual Report on Form 10-K and in our
Quarterly Reports on Form 10-Q that we file from time to time with the United States Securities and Exchange Commission.
Use of non-GAAP measures in this Annual Report
US securities laws require that when we publish any non-GAAP measures, we disclose the reason for using the non-GAAP
measure and provide reconciliation to the directly comparable GAAP measure. The presentation of fundamental net income and
fundamental earnings per share and headline earnings per share are non-GAAP measures.
Why we use non-GAAP measures
Management believes that the fundamental net income and earnings per share metric enhances its own evaluation, as well as an
investor’s understanding, of our financial performance.
How we calculate our non-GAAP measures
Fundamental net income and earnings per share is GAAP net income and earnings per share adjusted for (1) the amortization of
acquisition-related intangible assets (net of deferred taxes), (2) stock-based compensation charges and (3) unusual non-recurring
items (refer to captions included in the table below).
Reconciliation of GAAP net income to fundamental net income
The table below presents the reconciliation between GAAP net income to fundamental net income for our last five fiscal years:
GAAP .....................................................................................................
Intangible asset amortization, net of tax ............................................
Stock-based compensation charge .....................................................
Facility fees for KSNET debt ............................................................
US government investigations-related and US lawsuit expenses ......
BEE equity instruments charge ..........................................................
Net loss on deconsolidation of subsidiaries and business, net of tax .
Transaction-related costs ...................................................................
Change in tax law ..............................................................................
Valuation allowances .........................................................................
Capital taxes paid ...............................................................................
Loss on sale of 10% of Smart Life ....................................................
Intangible assets impairment, net of tax ............................................
Restructuring charges at Net1UTA ....................................................
Gain on FEC, net of tax .....................................................................
Fundamental ............................................................................
2014
70,111
12,490
2,914
657
2,579
11,268
443
77
-
-
-
-
-
-
-
100,539
Net income (USD’000)
2012
2013
44,651
12,977
2011
2,647
13,679
3,907
302
3,888
-
-
69
-
-
-
-
-
-
-
34,822
14,602
2,775
389
14,211
(3,994)
-
(18,315)
8,232
1,465
78
-
-
64,094
15,708
1,717
1,953
-
-
6,049
-
8,856
-
-
31,339
777
(114)
68,932
2010
38,990
10,261
5,670
-
-
615
-
-
-
-
37,378
-
-
92,914
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-31203
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction
of incorporation or organization)
98-0171860
(I.R.S. Employer
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
Common Stock,
par value $0.001 per share
Name of Each Exchange on Which Registered
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
Yes [X] No [ ]
the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
[ ] Large accelerated filer
[ X] Accelerated filer
[ ] Non-accelerated filer
[ ]
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of
December 31, 2013 (the last business day of the 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 $218,600,379. This calculation does not reflect a determination that persons are affiliates for any
other purposes.
As of August 25, 2014, 47,819,299 shares of the 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 2014 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2014
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
Signatures
Financial Statements
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F-1
1
FORWARD LOOKING STATEMENTS
PART I
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 in our 2015 fiscal year, which runs from
July 1, 2014 to June 30, 2015.
ITEM 1. BUSINESS
Overview
We are a leading provider of payment solutions and transaction processing services across multiple industries and in a
number of emerging economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based
alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction
channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a
bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and
other financial service providers. Our universal electronic payment system, or UEPS, and UEPS/EMV derivative discussed
below, uses biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by
major banking institutions that require immediate access through a communications network to a centralized computer. This
offline capability means that users of our system can conduct transactions at any time with other card holders in even the most
remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also
offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages. Our
latest version of the UEPS technology has been certified by the EuroPay, MasterCard and Visa global standard, or EMV, which
facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to
transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive
scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant customers. In
addition to effecting purchases, cash-backs and any form of payment, our system can be used for banking, healthcare
management, international money transfers, voting and identification.
We also provide secure transaction technology solutions and services, by offering transaction processing, financial and
clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing,
cryptography, mobile telephony and integrated circuit card (chip/smart card) technologies.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our
UEPS/EMV technology, to over nine million recipient cardholders across the entire country, process debit and credit card
payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as
bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide
mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and
associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion services such as
microloans, mobile transacting and prepaid utilities to our cardholder base.
Internationally, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea,
and we offer card processing, payment gateway and banking value-added services in that country. Our XeoHealth service
provides funders and providers of healthcare in United States with an on-line real-time management system for healthcare
transactions.
Our Net1 Mobile Solutions, or N1MS, business unit is responsible for the worldwide technical development and
commercialization of our array of web and mobile applications and payment technologies, such as Mobile Virtual Card, or
MVC, Chip and GSM licensing and Virtual Top Up, or VTU, and has deployed solutions in many countries, including South
Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines and Colombia.
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All references to “the Company,” “we,” “us,” or “our” are references to Net 1 UEPS Technologies, Inc. and its
consolidated subsidiaries, collectively, and all references to “Net1” are to Net 1 UEPS Technologies, Inc. only, except as
otherwise indicated or where the context indicates otherwise.
Market Opportunity
Services for the Under-banked: According to the World Bank, three quarters of the world's poor, living on less than $2 a
day, have no bank account. As a result, 2.5 billion adults around the world, or 50% of the 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 recipient cardholders, they generally have no secure
way of protecting their cash other than by converting it immediately into goods, carrying it with them or hiding it. In cases
where an individual has access to a bank account, the typical deposit, withdrawal and account fees meaningfully reduce the
money available to meet basic needs. For government agencies and employers, using cash to pay welfare benefits or wages
results in significant expense due to the logistics of obtaining that cash, moving it to distribution points and protecting it from
theft.
Our target under-banked customer base in most emerging economies, and particularly in South Africa, has limited access
to formal financial services and therefore relies heavily on the unregulated informal sector for such services. By leveraging our
smart card and mobile technologies, we are able to offer affordable, secure and reliable financial services such as loans and
insurance products to these consumers and alleviate some of the challenges they face in dealing with the informal sector.
With over 30 million cards issued in more than ten developing countries around the world, our track record and scale
uniquely positions us to continue further geographical penetration of our technology in additional emerging countries.
Online transaction processing services: The continued global growth of retail credit and debit card transactions is reflected
in the March 2014 Nilson Report, according to which worldwide annual general purpose card purchase dollar volume increased
19.3% to $20.6 trillion in 2013, while transaction volume increased by 12.2% to 200 billion transactions and cards issued
increased by 13.3% to 8.3 billion cards during the same period. General purpose cards include the major card network brands
such as MasterCard, Visa, UnionPay and American Express. In South Africa we operate the largest bank-independent
transaction processing service through EasyPay, where we have developed a suite of value-added services such as bill payment,
airtime top-up, gift card, money transfer and pre-paid utility purchases that we offer as a complete solution to merchants and
retailers. In South Korea, through KSNET, we are one of the top three VAN processors and we provide card processing,
banking value-added services and payment gateway functionality to more than 225,000 retailers. Our expertise in on-line
transaction processing and value-added services provides us with the opportunity to participate globally in this rapidly growing
market segment.
Mobile Payments: Despite lacking access to formal financial services, large proportions of the under-banked customer
segment own and utilize mobile phones. The World 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 in Sub-Saharan Africa, where traditional banking has been hampered by transportation and
other infrastructure problems.
Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access
to formal financial and other services. Today, most mobile payment solutions offered by various participants in the industry
largely provide access to information and basic services, such as allowing consumers to check account balances or transfer
funds between existing accounts with the financial institution, but they offer limited functionality and ability to use the mobile
device as an actual payments and banking instrument. Our UEPS and MVC solutions are enabled to run on the SIM cards in
mobile phones and provide our users with secure payment and banking functionality.
Healthcare: Given the lack of broad-based healthcare services in many emerging economies, governments are increasingly
focused on driving initiatives to provide affordable and accessible healthcare services to their populations. Similarly, countries
such as the United States are embarking on expansive overhauls of their existing healthcare systems.
Through our XeoHealth service we utilize our real-time rules engine and claims processing technology to offer
governments, funders and providers of healthcare a comprehensive solution that offers a completely automated healthcare rules
adjudication and payment system, reducing both cost and time.
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Our Core Proprietary Technologies
UEPS and UEPS/EMV
We developed our core UEPS technology to enable the affordable delivery of financial products and services to the
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;
•
• Automatic credit;
• Automatic debit;
•
•
“Morphing” of other common payment systems, such as EMV;
Interest calculations; and
“Milking” / batching of large transaction volumes in an off-line environment.
Our UEPS technology incorporates the software, smart cards, payment terminals, back-end infrastructure and transaction
security to provide a complete payment and transaction processing solution.
Within industry verticals, our UEPS technology is applied to electronic commerce transactions in the fields of social
security, wage distribution, banking, medical and patient management, money transfers, voting and identification systems.
Market sectors include government and non-government organizations, or NGOs, healthcare, telecoms, financial institutions,
retailers, petroleum and utilities.
Our latest version of the UEPS technology is interoperable with the global EMV standard, allowing the cards to be used
wherever EMV cards are accepted, while also providing all the additional functionality offered by UEPS. This UEPS/EMV
functionality is especially relevant in areas where there is an established payment system and provides flexibility to our
customers to be serviced at any POS, including point of sale devices and ATMs.
Mobile Virtual Card
We have developed an innovative mobile phone-based payment solution, namely MVC, which enables secure purchases
with no disruption to existing merchant infrastructures and significant incentives for all stakeholders.
The MVC solution utilizes existing and traditional payment methods but enhances them by replacing plastic card data with
a one-time-use virtual card data, hence eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual card data
replaces, digit-for-digit, the credit (or debit) card number, the expiration date and the card verification value with only the issuer
bank identification number (first 6-digit) remaining constant.
The MVC solution uses the mobile phone to generate virtual cards offline. The mobile phone is the most available, cost-
effective, secure and portable platform for generating virtual cards for remote payments (online purchasing, money transfers,
phone and catalogue orders).
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Following a simple registration process, the virtual card application is activated over-the-air, enabling the phone to
generate virtual card numbers completely off-line. MVCs are used like traditional plastic credit or debit cards, except that as
soon as the transaction is authorized, the generated card number expires immediately. While MVC has been focused primarily
on card-not-present transactions for internet payments in our initial deployments, we have the ability to customize the software
as industry acceptance increases to incorporate new trends such as presentation through near field communication, or NFC, or
Quick Response, or QR, Codes.
Consumers can easily generate a new card on their mobile phone to shop on the internet or to place a catalogue or
telephone order. MVCs are completely secure and can also be sent in a single click to family, friends, and service providers.
Once the authorization request reaches the issuing bank processor, our servers decrypt the virtual card data, authenticate the
consumer and pass the transaction request to the card issuer for authorization. MVC can be offered as a prepaid solution or
directly linked to a 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 or via direct deposit.
The benefits of MVC include, for:
• Card issuers—increased transactional revenues from existing accounts, driving more transactional revenues and
elimination of fraudulent card use.
• Mobile network operators—revenues from payments, reduced churn, opportunities for powerful co-branding schemes.
• Consumers—convenience, peace of mind, ease of use, rewards.
• Merchants—elimination of charge-backs and fraud at no extra cost.
Our Strategy
We intend to provide the leading transacting system for the billions of unbanked and under-banked people in the world to
engage in electronic transactions, as well as to provide our transaction processing, value-added services processing, new secure
mobile payment technologies and healthcare processing services globally. To achieve these goals, we are pursuing the following
strategies:
Build on our significant and established South African infrastructure—In South Africa, we are one of the leading
independent transaction processors, 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. We believe that our large cardholder base, specialized technology and payment
infrastructure, together with our strong government and business relationships, position us at the epicenter of commerce in the
country.
We believe that we are well-positioned to continue to gain market share and build upon the critical mass that we have
developed in South Africa and have identified the following opportunities to continue to drive growth in our South African
business:
• Government focus on expansion of social benefits—As a result of the South African government’s focus on the
provision of social grants as a core element of its social assistance and poverty alleviation policies, and our SASSA
contract to distribute such grants on a national basis, we believe that we are in a position to provide services to over
50% of the country’s adult population. Through our national distribution platform and relationships with a number of
leading companies across multiple industries, we believe we can provide many of the services consumed by our
cardholders who would otherwise have to rely on the informal sector.
•
Increasing adoption of existing services—Our technology supports a variety of other products and smart card to smart
card, or S2S, services that expand the use of our technology and provide us with new sources of transaction-based
revenues. During the last several years, we have introduced these new products and financial services in South Africa
for existing and newly-enrolled cardholders. We have installed our POS terminals in thousands of mostly rural
merchant locations throughout the country, which allows recipient cardholders to receive their grants at these locations
and transact business with the retailers using our smart card. We have enabled our cards to be compliant with
international EMV standards, which will allow our cardholder base to purchase goods and services at merchant POS
locations that currently accept MasterCard-branded cards and all South African ATMs. This additional functionality
allows us to significantly expand the number of terminals and ATMs that use our smart card, capturing fees from new
transactions and positioning our cards to be used by a larger share of the banked population.
5
•
Introduction of new services–We are also poised to benefit from the introduction and adoption of new services across
our various platforms, which we believe will generate significant incremental transaction fee revenue from current and
new users at a relatively low cost to us. Some of these services include:
o Value-added services through multiple EasyPay channels—EasyPay is the largest bank-independent financial
switch and merchant processor in South Africa for credit and debit card transactions. Our technology also
allows us to provide a variety of additional, value-added payment services, such as bill payment, prepaid mobile
top-up, prepaid utility services and gift cards, that we sell into our existing card holder base as well as to new
customers. We have developed additional platforms to access EasyPay’s offerings such as a self service kiosks,
or EasyPay Kiosk, and web and mobile phone applications to create a larger, seamless, value-added payments
eco-system.
o Third-party payments from payroll processing through FIHRST—Through our FIHRST service, we offer
employers an easy and flexible method of making payments to employees and payroll-related creditors. By
combining the FIHRST service and the EasyPay product suite, we can provide employees with the ability to pay
their bills or purchase prepaid airtime and utilities as a payroll deduction or by providing them with credit
facilities.
• Using our “first wave/second wave” approach to expand into new markets—We use what we refer to as a “first
wave/second wave” approach to market expansion. In the “first wave,” we seek to identify an application for which
there is a demonstrated and immediate need in a particular territory and then sell and implement our technology to
fulfill this initial need. As a result, we should achieve the deployment of the required technological infrastructure as
well as the registration of a critical mass of cardholders or customers. During this phase, we should generate revenues
from the sale of our software and hardware devices, as well as ongoing revenues from transaction fees, maintenance
services and the use of our biometric verification engine. Once the infrastructure has been deployed and we achieve a
critical mass of customers, we intend to focus on the “second wave,” which should allow us to use this infrastructure to
provide users, at a low incremental cost to us, with a wide array of financial products and services for which we can
charge fees based on the value of the transactions performed.
•
•
Leveraging our new payment technologies to gain access to developed 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. 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 resources to ensure that we remain at the forefront of this rapidly
evolving technological space. While some of our mobile solutions are more relevant in developed markets such as the
United States, we have also experienced significant demand for our mobile payment solutions from developing
economies, where mobile transacting is seen as the best solution to rapidly leapfrog the antiquated payment solutions
typically available in these countries at minimal cost.
Pursue strategic acquisition opportunities or partnerships to gain access to new markets or complementary product—
We will continue to pursue acquisition opportunities and partnerships that provide us with an entry point for our
existing products into a new market, or provides us with technologies or solutions complementary to our current
offerings.
Our Business Units
Our company is organized into the following business units.
Cash Paymaster Services (“CPS”)
Our CPS business unit is based in Johannesburg, South Africa, and deploys our UEPS/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
2014, 2013 and 2012 fiscal years, we derived approximately 27%, 42%, and 41% of our revenues respectively, from CPS’
social welfare grant distribution business.
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CPS provides a secure and affordable transacting channel between social welfare grant recipient cardholders, beneficiaries,
SASSA and formal businesses. CPS enrolls social welfare grant recipient cardholders and, as appropriate, the respective
beneficiaries by issuing the recipient cardholder with a UEPS/EMV smart card that digitally stores their biometric fingerprint
templates on the card, enabling them to access their social welfare grants securely at any time or place and providing them with
a fully-fledged bank account.
The smart card is issued to the recipient cardholder on site and utilizes optical fingerprint sensor technology to identify and
verify a recipient cardholder. The recipient cardholder simply inserts a smart card into the POS device and is prompted to
present his fingerprint. If the fingerprint matches the one stored on the smart card, the smart card is loaded with the value
created for that particular smart card. Additionally, during enrolment we capture the recipient cardholder’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 all of the UEPS functionality, which includes the ability to have the
smart card funded with pension or welfare payments, make retail purchases, enjoy the convenience of pre-paid facilities and
qualify for a range of affordable financial services, including insurance and short-term loans as well as standard EMV
transactional capabilities to operate wherever MasterCard is accepted. The smart card also offers the card holder the ability to
make debit order payments to a variety of third parties, including utility companies, schools and retail merchants, with which the
holder maintains an account. The card holder can also use the same smart card as a savings account.
Our UEPS/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.
KSNET
Our KSNET business unit is based in Seoul, South Korea, and is a significant payment solutions provider in South Korea,
has the broadest product offering in the country, a base of approximately 225,000 merchants and an extensive direct and indirect
sales network. KSNET’s core operations comprise of three project offerings, namely card VAN, payment gateway, or PG, and
banking VAN. KSNET is able to realize significant synergies across these core operations because it is the only payment
solutions provider that offers all three of these offerings in South Korea. Over 90% of 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.
PG offers us an attractive growth opportunity as e-commerce transactions represent an increasing share of payments,
driven by increased wire-line and wireless broadband penetration, an increasing number of merchants moving online,
and the enhanced security of online transactions driving consumer acceptance. We believe that KSNET can become the
leading provider in the PG industry by leveraging its existing merchant base and entering into new markets earlier than
competitors.
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• Banking 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 at this time is relatively small.
This business unit has been allocated to our International transaction processing reporting segment.
EasyPay
Our EasyPay business unit operates the largest bank-independent financial switch in South Africa and is based in
Cape Town, South Africa. EasyPay focuses on the provision of high-volume, secure and convenient payment, prepayment and
value-added services to the South African market. 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
companies;
• EasyPay bill payment—EasyPay offers consumers a point-of-sale bill payment service which is integrated into a large
number of national retailers, the internet, self service kiosks and mobile handsets. EasyPay processes monthly account
payment transactions for a number of bill issuers including major local authorities, telephone companies, utilities,
medical service providers, traffic departments, mail order companies, banks and insurance companies;
• EasyPay prepaid electricity—This service enables local utility companies such as Eskom Holdings Limited and a
growing number of local authorities on a national basis to sell prepaid electricity to their customers;
• Prepaid airtime—EasyPay vends airtime at retail POS terminals for all the South African mobile telephone network
operators;
• Electronic gift voucher—EasyPay supports the electronic generation, issuance and redemption of paper or card-based
gift vouchers;
• EasyPay licenses—EasyPay enables the issuance of new South African Broadcasting television licenses and the
capturing of existing license details within retail environments via a web-based user interface;
• Third party switching and processing support—EasyPay switches transactions from retail POS systems to the relevant
back-end systems;
• Hosting services—EasyPay’s infrastructure supports the hosting of payment or back-up servers and applications on
behalf of third parties, including utility companies;
• EasyPay Kiosk—We have developed a biometrically enabled self service kiosk that allows our customers to access all
the value-added services provided by EasyPay and to create and load their EasyPay virtual wallets with value; and
• EasyPay Web and Mobile—This service enables EasyPay customers to access all the value-added services provided by
EasyPay, such as bill payments and the purchase of prepaid airtime and utilities through a secure website that may be
accessed through personal computers or through mobile handsets.
EasyPay provides 24x7 monitoring and support services, reconciliation, automated clearing bureau settlement, reporting,
full disaster recovery and redundancy services.
EasyPay is also responsible for marketing our secure, integrated POS payment products and systems in South Africa.
This business unit has been allocated to our South African transaction processing reporting segment.
Net1 Mobile Solutions
Our N1MS business unit is managed from Johannesburg, South Africa with business development support branches in the
United States and India. This business unit is responsible for the technical development and commercialization of our array of
web and mobile applications and payment technologies.
8
N1MS offers an array of products and services that cater for the needs of the global market and comprises of the following
key business lines:
•
•
• Third Party Payments—Through FIHRST we are the largest provider of third party and payroll associated payments in
South Africa, servicing over 1,800 employee groups that represent approximately 600,000 employees. Our market
leading position is due to our ability to move informed money (the movement of money and its corresponding data to
third party organizations). This allows us to provide one of the most comprehensive suites of financial services,
ranging from garnishee orders through to payment modules and collections. We also offer the PayPlus service,
providing employees with access to prepaid airtime, electricity and other value added services, or VAS.
Prepaid Vending —The Prepaid business line handles multichannel distribution of electronic products and services
aimed at a variety of markets. Across Africa and abroad, our VTU solutions open up a separate revenue stream for
Mobile Network Operators, or MNOs, and other clients. The stability and scalability of our VTU offerings enables our
customers to facilitate more than 100 million monthly transactions.
MVC & Verification— Our internationally patented MVC technology is a market leading innovation which addresses
the needs of the modern mobile payment market. It is the easiest, most secure and most convenient way to pay for
goods and services online directly from a mobile phone. Our MVC technology provides a completely secure, off-line
payment solution for card-not-present transactions, such as payments made for internet purchases. The MVC
technology runs as an application on any mobile phone and utilizes our patented cryptographic card generator to secure
any payment transaction. The advent of new technologies such as NFC or QR Codes also enables the utilization of our
MVC technology for card present payments.
MNOs 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, through to SMS Mega Promotions, tailor-made for each MNO with a focus to maximize subscriber
activity, brand perception and profitability.
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 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 in our product and service portfolio. We develop both client-facing and
background services, with coverage on every relevant platform including Mobile (Android, iOS, BlackBerry, Windows
Phone 8 and J2ME) and Web (with full cross-browser compatibility).
•
•
• 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 TDES, EMV and PCI. We are a member
of the STS association, actively participating in developing new and improved standards that address the needs of the
modern cryptographic market.
This business unit has been allocated to our South African processing, International transaction processing, and Financial
inclusion and applied technologies reporting segments.
Financial Services
We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are
able to provide our UEPS/EMV cardholders with competitive microfinance, life insurance, transactional and money transfer
products based on our understanding of their risk profiles, demographics and lifestyle requirements. Our financial services
offerings are designed on the principles of simplicity and cost-efficiency as they bring financial inclusion to our millions of
cardholders who were previously unable to access any formal financial services. Our largest financial services offering is the
provision of short-term microloans to our South African UEPS/EMV cardholders, where we provide the loans using our surplus
cash reserves and earn revenue from the service fees charged on these loans.
Following the suspension of our life insurance license during fiscal 2013 by the South African Financial Services
Board, or FSB, that prevented us from writing any further life insurance policies, we have agreed a plan with the FSB to uplift
the suspension. The eventual upliftment of the suspension is subject to FSB approval of our implementation of this plan. We
intend to offer our customer base the insurance products applicable to this market segment when the suspension is uplifted,
focusing on group life and funeral insurance policies.
9
Our Financial Services activities have been allocated to our Financial inclusion and applied technologies reporting
segment.
XeoHealth
Our XeoHealth business unit operates from Frederick, Maryland, and offers our XeoRules real time adjudication, or RTS,
solutions for the end-to-end electronic processing of medical claims information in the United States. XeoHealth has won a
number of projects in the United States either as the primary contractor for the provision of our RTS solution to customers, or as
a sub-contractor to parties contracted to provide an adjudication solution.
XeoHealth has been allocated to our International transaction processing reporting segment.
Corporate
The Corporate unit provides global support services to our business units, joint ventures and investments for the following
activities:
• Group executive—responsible for the overall company management, defining our global strategy, investor relations
and corporate finance activities.
• Finance and administration—provides company-wide support in the areas of accounting, treasury, human resources,
administration, legal, secretarial, taxation, compliance and internal audit.
• Group information technology—defines our overall IT strategy and the overall systems architecture and is responsible
•
for the identification and management of the group’s research and development activities.
Joint ventures and investments unit—provides governance support to our joint ventures and assists with the evaluation
of new investment opportunities.
Competition
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing
payment systems and the providers of financial services, there are a number of other products that use smart card technology in
connection with a funds transfer system. While it is impossible for us to estimate the total number of competitors in the global
payments marketplace, we believe that the most competitive product in this marketplace is EMV, a system that is promoted by
most of the major card companies such as Visa, MasterCard, JCB and American Express. The competitive advantage of our
UEPS offering is that our technology can operate real-time, but in an off-line environment, using biometric identification
instead of the standard PIN methodology employed by our competitors. We have enhanced our competitive advantage through
the development of our latest version of the UEPS technology that has been certified by EMV, which facilitates our traditionally
proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled
point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through
the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant recipient cardholders. We estimate that we
process less than 1% of all global payment transactions in the international marketplace.
In South Africa, and specifically in the payment of salaries and wages, our competitors include the local banks and other
transaction processors. The South African banks and the South African Post Office, or SAPO, also offer employees the option to
open low cost bank accounts that enable the employees to receive their salaries or wages through the formal banking payment
networks.
The payment of social welfare grants in South Africa is determined through a highly competitive tender process managed
by SASSA. The participants in SASSA’s tender processes have historically included the local banks, other payment processors,
SAPO and mobile operators. We compete primarily on the basis of the innovative nature and security of our technology as well
as the broadest distribution footprint.
We are able to load social welfare grants on behalf of the South African government directly onto a biometrically secured
UEPS/EMV smart card in rural areas where there is little or no infrastructure or in semi-urban areas through our merchant
acquiring system. Our UEPS/EMV-enabled smart cards are therefore used as a means of identification, security and as a
transacting instrument. Grants loaded onto our UEPS/EMV-enabled smart cards can be used both online and offline and
recipient cardholders pay no monthly account or transaction fees. The usefulness of a traditional bank card to its holder is
dependent on the availability of a branch network, ATM infrastructure and merchants accepting the card. Access to bank
branches, ATMs and merchants accepting traditional bank cards are limited or non-existent in the rural areas of South Africa.
We believe the security, functionality and simplicity of our UEPS/EMV smart card provides us with a unique ability to service
these rural areas of South Africa, as well as all urban areas through the existing POS and ATM infrastructure. Our technology
eliminates the risk associated with receiving social welfare grants in cash as well as the costs associated with transaction fees
charged by banks when recipient cardholders exceed the minimum number of free transactions per month.
10
We believe that SASSA considers the technology utilized, pricing of the payment service rendered and other factors such
as BEE rating as the most important factors when considering potential service providers. We compete with other service
providers on these aspects through SASSA’s tender processes, when applicable, or through contract extension negotiations. Our
current SASSA contract expires in 2017; however, as described in Item 3—Legal Proceedings, SASSA has been directed to
conduct a new tender process which may result in the award of a new tender prior to the expiration of our contract.
We have identified 13 major card VAN companies in South Korea, of which KSNET is one of the three largest. The other
two large VAN companies are NICE Information & Telecommunication Inc. and Korea Information & Communications
Company, Limited. Entities operating in the VAN industry in South Korea compete on pricing and customer service.
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 2.5 billion transactions during the twelve months ended June 2013 valued at trillions of ZAR.
In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities
in the mobile payments industry. While the industry is still in its infancy, a number of entities are establishing their presence in
this space. Specifically identified entities include traditional payment networks such as Visa, MasterCard and American
Express; commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google and
PayPal; mobile operators such as AT&T, Verizon, Vodafone and Bharti Airtel; as well as companies specifically focused on
mobile payments such as M-Pesa, Monetise and Square.
Research and Development
During fiscal 2014, 2013 and 2012, we incurred research and development expenditures of $2.2 million, $1.3 million and
$3.9 million, respectively. These expenditures consist primarily of the salaries of our software engineers and developers. Our
research and development activities relate primarily to the continual revision and improvement of our core UEPS and
UEPS/EMV software and its functionality and the design and development of our MVC concept and mobile payment
applications. For example, we continually advance our security protocols and algorithms as well as develop new UEPS features
that we believe will enhance the attractiveness of our product and service offerings. Our research and development efforts also
focus on taking advantage of improvements in the hardware platforms that are not proprietary to us but which form part of our
system.
Intellectual Property
Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a
combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our
intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a
number of trademarks in various countries.
Financial Information about Geographical Areas and Operating Segments
Note 23 to our consolidated financial statements included in this annual report contains detailed financial information
about our operating segments for fiscal 2014, 2013 and 2012. Revenues based on the geographic location from which the sale
originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table
below:
2014
$’000
428,931
146,667
6,058
581,656
Revenue
2013
$’000
317,916
129,338
4,893
452,147
2012
$’000
272,063
114,096
4,105
390,264
2014
$’000
105,627
229,830
6,593
342,050
Long-lived assets
2013
$’000
117,858
213,589
7,676
339,123
2012
$’000
140,308
224,272
6,911
371,491
South Africa ...................
South Korea ...................
Rest of world .................
Total ...........................
Employees
As of June 30, 2014, we had 4,415 employees. On a segmental basis, 193 employees were part of our management,
2,631 were employed in South African transaction processing, 228 were employed in International transaction processing, 1,363
were employed in Financial inclusion and applied technologies and corporate/eliminations activities.
11
On a functional basis, four of our employees were part of executive management, 121 were employed in sales and
marketing, 212 were employed in finance and administration, 323 were employed in information technology and 3,755 were
employed in operations.
As of June 30, 2014, approximately 77 of the 2,631 employees we have in South Africa who were performing transaction-
based activities were members of the South African Commercial Catering and Allied Workers Union and approximately 164 of
the 212 employees we have in South Korea who perform international transaction-based activities were members of the KSNET
Union. We believe we have a good relationship with our employees and these unions.
Corporate history
Net1 was incorporated in Florida in May 1997. In June 2004, Net1 acquired Net1 Applied Technology Holdings Limited,
or Aplitec, a public company listed on the Johannesburg Stock Exchange, or JSE. In 2005, Net1 completed an initial public
offering and listed on the Nasdaq Stock Market. In October 2008, Net1 listed on the JSE in a secondary listing, which enabled
the former Aplitec shareholders (as well as South African residents generally) to hold Net1 common stock directly.
Available information
We maintain an Internet website at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports are available free of charge through the “SEC filings” portion of
our website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The
information contained on, or accessible through, on our website is not incorporated into this Annual Report on Form 10-K.
Executive Officers and Significant Employees of the Registrant
Executive officers
The table below presents our executive officers, their ages and their titles:
Name
Dr. Serge C.P. Belamant
Mr. Herman G. Kotzé
Mr. Phil-Hyun Oh
Mr. Nitin Soma
Age
60
44
55
47
Title
Chief Executive Officer, Chairman and Director
Chief Financial Officer, Treasurer, Secretary and Director
Chief Executive Officer and President, KSNET, Inc.
Senior Vice President Information Technology
Dr. Belamant is one of the founders of our company and has been our Chief Executive Officer since October 2000 and the
Chairman of our board since February 2003. He was also Chief Executive Officer of Aplitec. Dr. Belamant spent ten years
working as a computer scientist for Control Data Corporation where he won a number of international awards. Later, he was
responsible for the design, development, implementation and operation of the Saswitch ATM network in South Africa that still
rates as one of the largest ATM switching systems in the world. Dr. Belamant has patented a number of inventions, ranging
from biometrics to gaming-related inventions, including our original funds transfer system patent. Dr. Belamant has more than
30 years of experience in the fields of operations research, security, biometrics, artificial intelligence and online and offline
transaction processing systems. Dr. Belamant holds a PhD in Information Technology and Management.
Mr. Kotzé has been our Chief Financial Officer, Secretary and Treasurer since June 2004. From January 2000 until
June 2004, he served on the board of Aplitec as Group Financial Director. Mr. Kotzé joined Aplitec in November 1998 as a
strategic financial analyst. Prior to joining Aplitec, Mr. Kotzé was a business analyst at the Industrial Development Corporation
of South Africa. Mr. Kotzé qualified as a member of the South African Institute of Chartered Accountants at KPMG.
Mr. Oh has served as Chief Executive Officer and President of KSNET since 2007. He is the Chairman of the VAN
Association in South Korea. Prior to that, he was the Managing Partner at Dasan Accounting Firm and was the Head of the
Investment Banking Division at Daewoo Securities. Mr. Oh is responsible for the day to day operations of KSNET and as its
Chief Executive Officer and President is instrumental in setting and implementing its strategy and objectives.
Mr. Soma has served as our Senior Vice President of Information Technology since June 2004. Mr. Soma joined Aplitec in
1997. He specializes in transaction switching and interbank settlements and designed the Stratus back-end system for Aplitec.
Mr. Soma has over 15 years of experience in the development and design of smart card payment systems.
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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
The South African Constitutional Court has ordered SASSA to run a new tender process for the
payment of social grants. As a result, we cannot predict whether our SASSA contract will remain in
effect for the remainder of its five-year term. We derive a substantial portion of our revenues from this
contract and from the provision of financial and other services to our cardholder base. If we were to
lose our SASSA contract, our business would suffer significantly.
On April 17, 2014, the South African Constitutional Court issued its ruling on an appropriate remedy following its
declaration on November 29, 2013 that the tender process followed by SASSA in awarding a contract to us was constitutionally
invalid. In its ruling, the Constitutional Court upheld the declaration of invalidity of our SASSA contract, but suspended such
declaration until the awarding of a new tender by SASSA in accordance with the ruling or if no tender is awarded, for the
remainder of the existing five-year contract period, as further described below.
The Constitutional Court ordered SASSA to initiate a new tender process within 30 days after the ruling. The new tender
must be for a period of five years and a new and independent Bid Evaluation and Bid Adjudication Committee must be
appointed to evaluate and adjudicate the new tender process. The Constitutional Court further ruled that if SASSA does not
award a new tender, the declaration of invalidity of our current SASSA contract will be further suspended until completion of
the five-year year period for which the contract was originally awarded.
On June 5, 2014, SASSA filed a progress report with the Constitutional Court in which it stated that it “has started taking
the steps necessary to initiate a new tender process.” We cannot predict what the timing or outcome of the new tender process
will be, or if a new tender award will be made at all after the process is complete. We intend to participate in the new tender,
which will consume a substantial portion of our management’s time and attention. If SASSA awards the new tender to another
bidder, we would lose the benefit of the remaining portion of our contract.
In addition, our SASSA contract has enabled us to offer a variety of innovative financial and other services, such as UEPS-
based loans and procurement of prepaid airtime, to our social welfare recipient cardholders. Although we believe that our
offerings frequently represent the lowest-cost alternative for our customers for these types of services, if were to lose our
SASSA contract, it might be less convenient for our cardholder customers to purchase these services from us and thus, we may
have difficulty growing or even maintaining this aspect of our South African business, which would negatively affect our future
operating performance.
The DOJ and the SEC are investigating whether we have violated the Foreign Corrupt Practices
Act, or FCPA, and other federal criminal laws, which has adversely impacted our business and
reputation.
On November 30, 2012, we received a letter from the U.S. Department of Justice, Criminal Division, informing us that the
DOJ and the Federal Bureau of Investigation have begun an investigation into whether we and our subsidiaries, including our
officers, directors, employees, and agents and other persons and entities possibly affiliated with us violated provisions of the
FCPA and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the Government of
South Africa in connection with securing our SASSA contract and also engaged in violations of the federal securities laws in
connection with statements made by us in our SEC filings regarding this contract. On the same date, we received a letter from
the Division of Enforcement of the SEC advising us that it is also conducting an investigation concerning our company. The
SEC letter states that the investigation is a non-public, fact-finding inquiry and that the SEC investigation does not mean that the
SEC has concluded that we or anyone else has broken the law or that the SEC has a negative opinion of any person, entity or
security. We are continuing to cooperate with the DOJ and the SEC regarding these investigations.
13
We have been, and will continue to be, exposed to a variety of negative consequences as a result of these investigations.
There could be one or more enforcement actions in respect of the matters that are the subject of one or both of the
investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist
orders or other relief, criminal convictions and/or penalties. We cannot predict accurately at this time the outcome or impact of
the investigations.
In addition, we have incurred and will continue to incur significant legal and other costs in responding to requests for
information seeking documents, testimony and other information in connection with the investigations and cannot predict at this
time the ultimate amount of all such costs. These matters have required the involvement of certain members of our senior
management that has materially and adversely affected their ability to devote their time to other matters relating to our business.
The investigations have negatively impacted our ability to maintain our existing business relationships and to obtain new
business, as our business reputation has already suffered significant damage due to the perceptions created by an investigation
of this nature. We believe that this damage to our reputation has, and will continue, to have a significant impact on our ability to
execute certain aspects of our business strategy effectively. For example, in fiscal 2013 the FSB suspended Smart Life’s license
and prohibited it from writing any new long-term insurance policies in South Africa. We believe that the suspension was
triggered by the adverse publicity we have received as a result of the DOJ and SEC investigations. While Smart Life’s
operations are not currently material, providing a variety of financial products, such as insurance, to our cardholder base is an
important part of our future business strategy. In addition, in order to continue to fund the costs of the investigations, we have
had to upstream a portion of our ZAR cash reserves to the United States, which has resulted in unfavorable currency conversion
rates and the incurrence of dividend withholding taxes that we would not otherwise have had to pay.
We have disclosed competitively sensitive information as a result of the AllPay litigation, which
could adversely affect our competitive position in the future.
In connection with the litigation challenging the award of the SASSA tender to us, we included our entire 2011 SASSA
tender submission in the court record, which court record is in the public domain. Our tender submission contains competitively
sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information
which could adversely affect our competitive position in any future similar tender submissions to the extent that such
information continues to remain competitively sensitive.
In order to meet our obligations under our SASSA contract, we are required to deposit government
funds with financial institutions in South Africa before commencing the payment cycle and are exposed
to counterparty risk.
In order to meet our obligations under our SASSA contract, we are required to deposit government funds, which will
ultimately be used to pay social welfare grants, with financial institutions in South Africa before commencing the payment
cycle. If these financial institutions are unable to meet their commitments to us, in a timely manner or at all, we would be unable
to discharge our obligations under our SASSA contract and could be subject to financial losses, penalties, loss of reputation and
potentially, the cancellation of our contract. As we are unable to influence these financial institutions' operations, including their
internal information technology structures, capital structures, risk management, business continuity and disaster recovery
programs, or their regulatory compliance systems, we are exposed to counterparty risk.
We may undertake acquisitions that could increase our costs or liabilities or be disruptive to our
business.
Acquisitions are a significant part of our long-term growth strategy as we seek to grow our business internationally and to
deploy our technologies in new markets both inside and outside South Africa. However, we may not be able to locate suitable
acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not
be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the
acquired business into our existing business. These transactions may require debt financing or additional equity financing,
resulting in additional leverage or dilution of ownership.
Acquisitions of businesses or other material operations and the integration of these acquisitions will require significant
attention from our senior management which may divert their attention from our day to day business. The difficulties of
integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees
or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting
our acquisition candidates.
14
In addition, we may need to record write-downs from future impairments of goodwill or other intangible assets, which
could reduce our future reported earnings. Finally, acquisition candidates may have liabilities or adverse operating issues that
we fail to discover through due diligence prior to the acquisition.
We have a significant amount of indebtedness that requires us to comply with restrictive and
financial covenants. If we are unable to comply with these covenants, we could default on this debt,
which would have a material adverse effect on our business and financial condition.
As of June 30, 2014, we had approximately $77.2 million of outstanding indebtedness, which we incurred to finance our
acquisition of KSNET in October 2010. These loans are secured by a pledge by Net1 Korea of its entire equity interest in
KSNET and a pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest in Net1
Korea. The terms of the loan facility require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial
ratios (including a leverage ratio and a debt service coverage ratio) and restrict Net1 Korea’s ability to make certain
distributions with respect to its capital stock, prepay other debt, encumber its assets, incur additional indebtedness, or engage in
certain business combinations. Although these covenants only apply to our South Korean subsidiaries, these security
arrangements and covenants may reduce our operating flexibility or our ability to engage in other transactions that may be
beneficial to us. If we are unable to comply with these covenants, we could be in default and the indebtedness could be
accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender
and as a result, our business and financial condition would suffer.
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked
market segment, which could limit growth in our transaction-based activities segment.
Certain South African banks have also developed their own low-cost banking products targeted at the unbanked and under-
banked market segment. According to the 2013 FinScope survey, which is an annual survey conducted by the FinMark Trust, a
non-profit independent trust, there has been a significant increase in the banked population at the bottom of the pyramid as LSM
3-4 increased from 45% in 2012 to 57% in 2013. As the competition to bank the unbanked in South Africa intensifies, we may
not be successful in marketing our low-cost banking product to our target population. Moreover, as our product offerings
increase, gain market acceptance and pose a competitive threat in South Africa, especially our UEPS/EMV product with
biometric verification and our financial services offerings, the banks and SAPO may seek governmental or other regulatory
intervention if they view us as disrupting their transactional or other businesses.
Our microlending loan book exposes us to credit risk and our allowance for doubtful finance loans
receivable may not be sufficient to absorb future write-offs.
We expanded our microlending loan book by approximately 600% during fiscal 2014. The majority of these finance loans
made are for a period of six months or less and we are in the process of determining and understanding the impairment risk of
the book. We have created an allowance for doubtful finance loans receivable related to this book. However, this is a new
allowance and management considered factors including the period of the UEPS-loan outstanding, creditworthiness of the
customers and the past payment history and trends of its established UEPS-based lending book. We consider this policy to be
appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer
payment patterns. However, additional allowances may be required should the ability of our customers to make payments when
due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance
loan receivables, including on-going evaluation of the creditworthiness of each customer.
We may face competition from other companies that offer smart card technology, other innovative
payment technologies and payment processing, which could result in loss of our existing business and
adversely impact our ability to successfully market additional products and services.
Our primary competitors in the payment processing market include other independent processors, as well as financial
institutions, independent sales organizations, and, potentially card networks. Many of our competitors are companies who are
larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer
better pricing terms or incentives to customers, which could result in a loss of our potential or current customers or could force
us to lower our prices as well. Either of these actions could have a significant effect on our revenues and earnings.
15
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing
payment systems and the providers of financial services and low cost bank accounts, there are a number of other products that
use smart card technology in connection with a funds transfer system. During the past several years, smart card technology has
become increasingly prevalent. We believe that the most competitive product in this marketplace is EMV, a system that is
promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. Also, governments and
financial institutions are, to an increasing extent, implementing general-purpose reloadable prepaid cards as a low-cost
alternative to provide financial services to the unbanked population. Moreover, while we see the acceptance over time of using a
mobile phone to facilitate financial services as an opportunity, there is a risk that other companies will be able to introduce such
services to the marketplace successfully and that customers may prefer those services to ours, based on technology, price or
other factors.
A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could
harm our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A recessionary
economic environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce
the level of transactions we process and the take-up of financial services we offer, which would, in turn, negatively impact our
financial results. If financial institutions and retailers experience decreased demand for their products and services our hardware,
software and related technology sales will reduce, resulting in lower revenue.
The loss of the services of Dr. Belamant or any of our other executive officers would adversely
affect our business.
Our future financial and operational performance depends, in large part, on the continued contributions of our senior
management, in particular, Dr. Serge Belamant, our Chief Executive Officer and Chairman and Herman Kotzé, our Chief
Financial Officer. Many of our key responsibilities are performed by these two individuals, and the loss of the services of either
of them could disrupt our development efforts or business relationships and our ability to continue to innovate and to meet
customers’ needs, which could have a material adverse effect on our business and financial performance. We do not have
employment agreements with these executive officers and they may terminate their employment at any time.
In addition, the success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh
and the other senior members of the KSNET management team. We do not maintain any “key person” life insurance policies.
We face a highly competitive employment market and may not be successful in attracting and
retaining a sufficient number of skilled employees, particularly in the technical and sales areas and
senior management.
Our future success depends on our ability to continue to develop new products and to market these products to our target
users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain
sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would
adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep
abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require
is high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our
technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors
in South Africa have led, and continue to lead, numerous qualified individuals to leave the country, thus depleting the
availability of qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain
highly qualified managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate
capabilities and experience and effectively integrate these people into our business, it could negatively affect our product
development and marketing activities.
System failures, including breaches in the security of our system, could harm our business.
We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end
system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers.
Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our
systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands.
These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new
applications and services. Finally, because our customers may use our products for critical transactions, any system failures
could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their
losses. Even if unsuccessful, this type of claim could be time consuming and costly for us to address.
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Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they
remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant,
and our disaster recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security
features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud
in electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to
breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform.
Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our
solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would
cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any security breaches
affecting our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system
could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to
compensate us for losses that may result from interruptions in our service as a result of system failures.
The period between our initial contact with a potential customer and the sale of our UEPS products
or services to that customer tends to be long and may be subject to delays which may have an impact on
our revenues.
The period between our initial contact with a potential customer and the purchase of our UEPS products and services is
often long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures. A lengthy sales cycle may have an impact on the timing of our revenues, which
may cause our quarterly operating results to fall below investor expectations. A 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.
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We also rely on trademarks to establish a market identity for some of our products. To maintain the value of our
trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or
dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark
applications, and might have to defend our registered trademark and pending trademark applications from challenge by third
parties.
Defending our intellectual property rights or defending ourselves in infringement suits that may be
brought against us is expensive and time-consuming and may not be successful.
Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result
in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could
diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may
not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent
protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark
protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights.
Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs
and devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any
infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay
royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer
costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.
Our strategy of partnering with companies outside South Africa may not be successful.
In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering
arrangements with companies outside South Africa, such as the ones we have co-established in Namibia and India. The success
of these endeavors is, however, subject to a number of factors over which we have little or no control, such as finding suitable
partners with the appropriate financial, business and technical backing and continued governmental support for planned
implementations. In some countries, finding suitable partners and obtaining the appropriate support from the government
involved may take a number of years before we can commence implementation. Some of these partnering arrangements may
take the form of joint ventures in which we receive a minority interest. Minority ownership carries with it numerous risks,
including dependence on partners to provide knowledge of local market conditions and to facilitate the acquisition of any
necessary licenses and permits, as well as the inability to control the joint venture vehicle and to direct its policies and
strategies. Such a lack of control could result in the loss of all or part of our investment in such entities. In addition, our foreign
partners may have different business methods and customs which may be unfamiliar to us and with which we disagree. Our
joint venture partners may not be able to implement our business model in new areas as efficiently and quickly as we have been
able to do in South Africa. Furthermore, limitations imposed on our South African subsidiaries by South African exchange
control regulations, as well as limitations imposed on us by the Investment Company Act of 1940, may limit our ability to
establish partnerships or entities in which we do not obtain a controlling interest.
We may have difficulty managing our growth.
We continue to experience growth, both in the scope of our operations and size of our organization. This growth is placing
significant demands on our management. Continued growth would increase the challenges involved in implementing
appropriate operational and financial systems, expanding our technical and sales and marketing infrastructure and capabilities,
providing adequate training and supervision to maintain high quality standards, and preserving our culture and values.
International growth, in particular, means that we must become familiar and comply with complex laws and regulations in other
countries, especially laws relating to taxation.
Additionally, continued growth will place significant additional demands on our management and our financial and
operational resources, and will require that we continue to develop and improve our operational, financial and other internal
controls. If we cannot scale and manage our business appropriately, we will not experience our projected growth and our
financial results may suffer.
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We pre-fund the payment of social welfare grants through our merchant acquiring system in South
Africa and pre-fund the settlement of certain customers in South Korea and a significant level of
payment defaults by these merchants or customers would adversely affect us.
We pre-fund social welfare grants through the merchants who participate in our merchant acquiring system in the South
African provinces where we operate as well as prefund the settlement of funds to certain customers in South Korea. These pre-
funding obligations expose us to the risk of default by these merchants and customers. Although we have not experienced any
material defaults by merchants or customers in the return of pre-funded amounts to us, we cannot guarantee that material
defaults will not occur in the future. A material level of merchant or customer defaults could have a material adverse effect on
us, our financial position and results of operations.
We may incur material losses in connection with our distribution of cash to recipient cardholders of
social welfare grants.
Many social welfare recipient cardholders use our services to access cash using their smart cards. We use armored vehicles
to deliver large amounts of cash to rural areas across South Africa to enable these welfare recipient cardholders to receive this
cash. In some cases, we also store the cash that will be delivered by the armored vehicles in depots overnight or over the
weekend to facilitate delivery to these rural areas. We cannot insure against certain risks of loss or theft of cash from our
delivery vehicles and we will therefore bear the full cost of certain uninsured losses or theft in connection with the delivery
process, and such losses could materially and adversely affect our financial condition, cash flows and results of operations. We
have not incurred any material losses resulting from cash distribution in recent years, but there is no assurance that we will not
incur material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price
fluctuations, which could harm our business.
We obtain our smart cards, POS devices and the other hardware we use in our business from a limited number of suppliers,
and do not manufacture this equipment ourselves. We generally do not have long-term agreements with our manufacturers or
component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of parts or products
when we need them, or if they increase their prices, we may not be able to find alternative sources in a timely manner and could
be faced with a critical shortage. This could harm our ability to implement new systems and cause our revenues to decline. Even
if we are able to secure alternative sources in a timely manner, our costs could increase. A supply interruption or an increase in
demand beyond current suppliers’ capabilities could harm our ability to distribute our equipment and thus, to acquire a new
source of customers who use our UEPS technology. Any interruption in the supply of the hardware necessary to operate our
technology, or our inability to obtain substitute equipment at acceptable prices in a timely manner, could impair our ability to
meet the demand of our customers, which would have an adverse effect on our business.
Shipments of our electronic payment systems may be delayed by factors outside of our control,
which can harm our reputation and our relationships with our customers.
The shipment of payment systems requires us or our manufacturers, distributors or other agents to obtain customs or other
government certifications and approvals and, on occasion, to submit to physical inspection of our systems in transit. Failure to
satisfy these requirements, and the very process of trying to satisfy them, can lead to lengthy delays in the delivery of our
solutions to our direct or indirect customers. Delays and unreliable delivery by us may harm our reputation and our relationships
with our customers.
Our Smart Life business exposes us to risks typically experienced by life assurance companies.
Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of
these risks include the extent to which we are able to continue to reinsure our risks at acceptable costs, reinsurer counterparty
risk, maintaining regulatory capital adequacy, solvency and liquidity requirements, our ability to price our insurance products
appropriately, the risk that actual claims experience may exceed our estimates and the competitiveness of the South African
insurance market. If we are unable to maintain our desired level of reinsurance at prices that we consider acceptable, we would
have to either accept an increase in our exposure risk or reduce our insurance writings. If our reinsurers are unable to meet their
commitments to us in a timely manner, or at all, we may be unable to discharge our obligations under our insurance contracts.
As such, we are exposed to counterparty, including credit, risk of these reinsurers. Our product pricing includes long-term
assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business.
Using the wrong assumptions to price our insurance products could materially and adversely affect our financial position, results
of operations and cash flows.
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Further, even though we currently reinsure the majority of our insurance contract liabilities, if our actual claims experience
is higher than our estimates, our financial position, results of operations and cash flows could be adversely affected. Finally, the
South African insurance industry is highly competitive. Many of our competitors are well-established, represented nationally
and market similar products and we may not be able to effectively penetrate the South African insurance market.
Risks Relating to Operating in South Africa and Other Foreign Markets
If we do not achieve applicable black economic empowerment, or BEE, objectives in our South
African businesses, we risk losing our government and private contracts. In addition, it is possible that
we may be required to increase black shareholding of our company in a manner that could dilute your
ownership.
The South African government, through the Broad-Based Black Economic Empowerment Act, 2003, established a
legislative framework for the promotion of BEE. The law recognizes two distinct mechanisms for the achievement of BEE
objectives—compliance with sector-specific codes of good practice and compliance with industry-specific transformation
charters. In June 2012 the South African government promulgated an Information and Communications Technology, or ICT,
sector-specific code, to which we are subject. Achievement of BEE objectives is measured by the ICT sector “scorecard” which
establishes a weighting to various components of BEE. We have taken a number of actions as a company to increase
empowerment of black South Africans. However, it is possible that these actions may not be sufficient to enable us to achieve
applicable BEE objectives. In that event, in order to avoid risking the loss of our government and private contracts, we may
have to seek to comply through other means, including by selling or placing additional shares of Net1 or of our South African
subsidiaries to black South Africans. Such sales of shares could have a dilutive impact of your ownership interest, which could
cause the market price of our stock to decline.
We expect that our BEE rating will be important to our ability to win a new contract from SASSA and we continually seek
ways to improve our BEE rating, especially the equity component of our rating. In April 2014, we implemented a BEE
transaction pursuant to which we issued 4.4 million shares of our common stock to our BEE partners for ZAR 60.00 per share,
which represented a 25% discount to the market price of our shares at the time that we negotiated the transaction. We entered
into this transaction to improve the equity component of our BEE rating. We provided funding to the BEE partners in order for
them to buy these shares from us. In June 2014, and in accordance with the terms of agreements, we repurchased approximately
2.4 million of these shares of our common stock in order for the BEE partners to repay the loans we provided to them. As a
result of these transactions, as of June 30, 2014, the BEE partners owned approximately 4% of our shares of common stock.
Under the BEE agreements, we have the option to exchange the remaining shares owned by the BEE partners for shares in CPS.
It is possible that we may find it necessary to issue additional shares to improve our BEE rating. If we enter into further
BEE transactions that involve the issuance of equity, we cannot predict what the dilutive effect of such a transaction would be
on your ownership or how it would affect the market price of our stock.
Fluctuations in the value of the South African rand have had, and will continue to have, a
significant impact on our reported results of operations, which may make it difficult to evaluate our
business performance between reporting periods and may also adversely affect our stock price.
The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results
are reported in US dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the ZAR
against the US dollar, and to a lesser extent, the South Korean won, would negatively impact our reported revenue and net
income, while a strengthening of the ZAR would have the opposite effect. Depreciation in the ZAR may negatively impact the
prices at which our stock trades. The US dollar/ZAR exchange rate has historically been volatile and we expect this volatility to
continue. During fiscal 2014, the ZAR was significantly weaker against the US dollar than during most of the preceding several
years, which adversely affected our 2014 revenue and net income. We provide detailed information about historical exchange
rates in Item 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.
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We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations, other than economic hedging relating to our inventory purchases which are
settled in US dollars or euros. We have used forward contracts in order to hedge our economic exposure to the ZAR/US dollar
and ZAR/euro exchange rate fluctuations from these foreign currency transactions. We cannot guarantee that we will enter into
hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency fluctuations.
South 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.
The economy of South Africa is exposed to high inflation and interest rates which could increase
our operating costs and thereby reduce our profitability.
The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation
and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies.
High rates of inflation could increase our South African-based costs and decrease our operating margins. Although higher
interest rates would increase the amount of income we earn on our cash balances, they would also adversely affect our ability to
obtain cost-effective debt financing in South Africa.
South African exchange control regulations could hinder our ability to make foreign investments
and obtain foreign-denominated financing.
South 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 US corporation and is not itself subject to South African exchange control regulations, these
regulations do restrict the ability of our South African subsidiaries to raise and deploy capital outside the Common Monetary
Area, to borrow money in currencies other than the South African rand and to hold foreign currency. Exchange control
restrictions may also affect the ability of these subsidiaries to pay dividends to Net1 unless the affected subsidiary can show that
any payment of such dividend will not place it in an over-borrowed position. As of June 30, 2014, approximately 69% of our
cash and cash equivalents were held by our South African subsidiaries. Exchange control regulations could make it difficult for
our South African subsidiaries to: (i) export capital from South Africa; (ii) hold foreign currency or incur indebtedness
denominated in foreign currencies without the approval of SARB; (iii) acquire an interest in a foreign venture without the
approval of SARB and first having complied with the investment criteria of SARB; or (iv) repatriate to South Africa profits of
foreign operations. These regulations could also limit our ability to utilize profits of one foreign business to finance operations
of a different foreign business.
Under current exchange control regulations, SARB approval would be required for any acquisition of our company which
would involve payment to our South African shareholders of any consideration other than South African rand. This restriction
could limit our management in its ability to consider strategic options and thus, our shareholders may not be able to realize the
premium over the current trading price of our shares.
Most of South 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.
Trade unions have had a significant impact on the collective bargaining process as well as on social and political reform in
South Africa in general. Although only approximately 2% percent of our South African workforce is unionized and we have not
experienced any labor disruptions in recent years, such labor disruptions may occur in the future. In addition, developments in
South African labor laws may increase our costs or alter our relationship with our employees and trade unions, which may have
an adverse effect on us, our financial condition and our operations.
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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:
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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 and communications challenges;
potential adverse changes in laws and regulatory practices, including import and export license requirements
and restrictions, tariffs, legal structures and tax laws;
difficulties in staffing and managing operations and ensuring the safety of our employees;
restrictions on the right to convert or repatriate currency or export assets;
greater risk of uncollectible accounts and longer collection cycles;
indigenization and empowerment programs; and
exposure to liability under US securities and foreign trade laws, including the FCPA, and regulations
established by the US Department of Treasury’s Office of Foreign Assets Control, or OFAC.
Many of these countries and regions are in various stages of developing institutions and political, legal and regulatory
systems that are characteristic of democracies. However, institutions in these countries and regions may not yet be as firmly
established as they are in democracies in the developed world. Many of these countries and regions are also in the process of
transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies
that can affect our investments in these countries and regions. Moreover, the procedural safeguards of the new legal and
regulatory regimes in these countries and regions are still being developed and, therefore, existing laws and regulations may be
applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and
regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries
and regions face uncertainty as to the security of their investments. Any unexpected changes in the political or economic
conditions in these or neighboring countries or others in the region may have a material adverse effect on the international
investments that we have made or may make in the future, which may in turn have a material adverse effect on our business,
operating results, cash flows and financial condition.
Risks Relating to Government Regulation
We are required to comply with certain US laws and regulations, including the FCPA as well as
economic and trade sanctions, which could adversely impact our future growth.
We must comply with the FCPA, which prohibits US companies or their agents and employees from providing anything of
value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help
obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. In addition, OFAC
administers and enforces economic and trade sanctions against targeted foreign countries, entities and individuals based on
US foreign policy and national security goals.
Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners
comply with the FCPA could subject us to substantial penalties. In addition, the requirement that we comply with the FCPA
could put us at a competitive disadvantage with companies that are not required to comply with the FCPA or could otherwise
harm our business. For example, in many emerging markets, there may be significant levels of official corruption, and thus,
bribery of public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such
as paying bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly
even result in unlawful, selective or arbitrary action being taken against us by foreign officials. Furthermore, the trade sanctions
administered and enforced by OFAC target countries which are typically less developed countries.
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Since less developed countries present some of the best opportunities for us to expand our business internationally,
restrictions against entering into transactions with those foreign countries, as well as with certain entities and individuals in
those countries, can adversely affect our ability to grow our business.
Changes in current South African government regulations relating to social welfare grants could
adversely affect our revenues and cash flows.
We derive a substantial portion of our current business from the distribution of social welfare grants in South Africa.
Because social welfare eligibility and grant amounts are regulated by the South African government, any changes to or
reinterpretations of the government regulations relating to social welfare may result in the non-renewal or reduction of grants for
certain individuals, or a determination that currently eligible social welfare grant recipient cardholders are no longer eligible. If
any of these changes were to occur, the number of grants we distribute could decrease which could result in a reduction of our
revenue and cash flows.
We do not have a South African banking license and therefore we provide our social welfare grant
distribution and wage payment solution through an arrangement with a third-party bank, which limits
our control over this business and the economic benefit we derive from it. If this arrangement were to
terminate, we would not be able to operate our social welfare grant distribution and wage payment
business without alternate means of access to a banking license.
The South African retail banking market is highly regulated. Under current law and regulations, our South African social
welfare grant distribution and wage payment business activities in the unbanked market requires us to be registered as a bank in
South Africa or to have access to an existing banking license. We are not currently so registered, but we have entered into an
agreement with Grindrod Bank Limited, or Grindrod, that enables us to implement our social welfare grant distribution and
wage payment solution in compliance with the relevant laws and regulations. If the agreement were to be terminated, we would
not be able to operate these services unless we were able to obtain access to a banking license through alternate means. We are
also dependent on Grindrod to defend us against attacks from the other South African banks who may regard the rapid market
acceptance of our UEPS/EMV product with biometric verification as disruptive to their funds transfer or other businesses and
may seek governmental or other regulatory intervention.
In addition, the South African Financial Advisory and Intermediary Services Act, 2002, requires persons who give advice
regarding the purchase of financial products or who act as intermediaries between financial product suppliers and consumers in
South Africa to register as financial service providers. We are in the process of applying for a license under this Act in order to
sell financial products. We currently comply with the Act by operating as a juristic representative of a duly licensed third party.
If our status as juristic representative were to be cancelled and if we fail to obtain our own license, we may be stopped from
continuing this part of our business in South Africa.
Our payment processing businesses are subject to substantial governmental regulation and may be
adversely affected by liability under, or any future inability to comply with, existing or future
regulations or requirements.
Our payment processing activities are subject to extensive regulation. Compliance with the requirements under these
various regulatory regimes may cause us to incur significant additional costs and failure to comply with such requirements could
result in the shutdown of the non-complying facility, the imposition of liens, fines and/or civil or criminal liability.
We may be subject to regulations regarding privacy, data use and/or security which could adversely
affect our business.
We are subject to regulations in a number of the countries in which we operate relating to the collection, use, retention,
security and transfer of personally identifiable information about the people who use our products and services, in particular,
personal financial and health information. New laws in this area have been passed by several jurisdictions, and other
jurisdictions are considering imposing additional restrictions. The interpretation and application of user data protection laws are
in a state of flux. These laws may be interpreted and applied inconsistently from country to country and our current data
protection policies and practices may not be consistent with those interpretations and applications. Complying with these
varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse
to our business. Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or
consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or
others, subject us to significant penalties and negative publicity and adversely affect us. In addition, as noted above, we are
subject to the possibility of security breaches, which themselves may result in a violation of these laws.
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Risks Relating to our Common Stock
Our stock price has been and may continue to be volatile.
Our stock price has experienced recent significant volatility. During the 2014 fiscal year, our stock price ranged from a low
of $7.01 to a high of $13.00. We expect that the trading price of our common stock may continue to be volatile as a result of a
number of factors, including, but not limited to the following:
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government or regulatory investigations, including developments in the current US government investigations;
fluctuations in currency exchange rates, particularly the US dollar/ZAR exchange rate;
announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity
securities or dilution of our existing business in South Africa;
quarterly variations in our operating results, especially if our operating results fall below the expectations of
securities analysts and investors;
announcements of acquisitions, disposals or impairments of intangible assets;
the timing of or delays in the commencement, implementation or completion of major projects;
large purchases or sales of our common stock;
general conditions in the markets in which we operate; and
economic and financial conditions.
A majority of our common stock is beneficially owned by a small number of shareholders.
The interests of these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership of our outstanding common stock because approximately 53% of our outstanding
common stock is owned by three shareholders. Based on their most recent SEC filings disclosing ownership of our shares,
International Value Advisers, LLC, or IVA, Allan Gray Proprietary Limited, and investment entities affiliated with General
Atlantic LLC, beneficially owned approximately 27%, 18% and 8% of our outstanding common stock, respectively. General
Atlantic also has the right to representation on our board of directors although it is not currently exercising that right.
The interests of IVA, Allan Gray and General Atlantic may be different from or conflict with the interests of our other
shareholders. As a result of the ownership by IVA, Allan Gray and General Atlantic, they will be able, if they act together, to
influence our management and affairs and all matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a
change of control of our company, thus depriving shareholders of a premium for their shares, or facilitating a change of control
that other shareholders may oppose.
We may seek to raise additional financing by issuing new securities with terms or rights superior to
those of our shares of common stock, which could adversely affect the market price of our shares of
common stock.
We may require additional financing to fund future operations, including expansion in current and new markets,
programming development and acquisition, capital costs and the costs of any necessary implementation of technological
innovations or alternative technologies, or to fund acquisitions. Because of the exposure to market risks associated with
economies in emerging markets, we may not be able to obtain financing on favorable terms or at all.
If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be
reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common
stock, which could adversely affect the market price and voting power of shares of common stock. If we raise additional funds
by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of
shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant
interest expense for us.
We may have difficulty raising necessary capital to fund operations or acquisitions as a result of
market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility,
and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related
to the operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of
common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no
control. If our business development plans are successful, we may require additional financing to continue to develop and
exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent
upon our ability to obtain financing through debt and equity or other means.
24
Issuances of significant amounts of stock in the future could potentially dilute your equity
ownership and adversely affect the price of our common stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order
to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could
sell additional shares to raise capital to fund our operations or to acquire other businesses, issue shares in a BEE transaction,
issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize the issuance of
additional shares of common stock without notice to, or further action by, our shareholders, unless shareholder approval is
required by law or the rules of the NASDAQ Stock Market. The issuance of additional shares could dilute the equity ownership
of our current shareholders. In addition, additional shares that we issue would likely be freely tradable which could adversely
affect the trading price of our common stock.
Failure to maintain effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material
adverse effect on our business and stock price.
Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification
and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report,
among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially
affect, or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely
basis.
The requirement to evaluate and report on our internal controls also applies to companies that we acquire. Some of these
companies may not be required to comply with Sarbanes prior to the time we acquire them. The integration of these acquired
companies into our internal control over financial reporting could require significant time and resources from our management
and other personnel and may increase our compliance costs. If we fail to successfully integrate the operations of these acquired
companies into our internal control over financial reporting, our internal control over financial reporting may not be effective.
While we continue to dedicate resources and management time to ensuring that we have effective controls over financial
reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the
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.
A foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which will be enforced by
South African courts provided that:
•
•
•
the court or arbitral body which pronounced the judgment had international jurisdiction and competence to entertain
the case according to the principles recognized by South African law with reference to the jurisdiction of foreign
courts;
the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it);
the judgment has not lapsed;
25
•
•
•
•
the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in
South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the
defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and
that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal;
the judgment was not obtained by improper or fraudulent means;
the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive
damages; and
the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of
1978 (as amended), of the Republic of South Africa.
It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the
person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have
suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its
management. Although the award of punitive damages is generally unknown to the South African legal system, that does not
mean that such awards are necessarily contrary to public policy. Whether a judgment was contrary to public policy depends on
the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South
African courts cannot enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign
court. Further, if a foreign judgment is enforced by a South African court, it will be payable in South African currency. Also,
under South Africa’s exchange control laws, the approval of SARB is required before a defendant resident in South Africa may
pay money to a non-resident plaintiff in satisfaction of a foreign judgment enforced by a court in South Africa.
It is doubtful whether an original action based on United States federal securities laws may be brought before South
African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of
proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents
executed outside South Africa must be authenticated for the purpose of use in South African courts.
In reaching the foregoing conclusions, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our corporate headquarters facility which consists of approximately 93,000 square feet in Johannesburg, South
Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park
and 134 depot facilities. We also lease additional office space in Johannesburg, Cape Town and Durban, South Africa; Seoul,
South Korea; and Frederick, Maryland. These leases expire at various dates through 2018.
We own land and buildings in Ahnsung, Kyung-gi, South Korea, which facility is used for the storage of business
documents. We believe we have adequate facilities for our current business operations.
26
ITEM 3. LEGAL PROCEEDINGS
SASSA tender litigation
On April 17, 2014, the South African Constitutional Court, the highest court in South Africa, issued its ruling on an
appropriate remedy following its declaration on November 29, 2013, that the tender process followed by SASSA in awarding a
contract to us in January 2012 was constitutionally invalid. The Constitutional Court upheld the declaration of invalidity of our
SASSA contract, but suspended such declaration until the awarding of a new tender by SASSA in accordance with the ruling or
if no tender is awarded, for the remainder of the existing five-year contract period, as further described below.
The Constitutional Court ordered SASSA to initiate a new tender process within 30 days after the ruling. The request for
proposals for the new tender must contain adequate safeguards to ensure that no loss of lawful existing social grants occurs, the
payment of lawful existing grants is not interrupted, and personal data obtained in the payment process remains private and may
not be used in any manner for any purpose other than payment of grants or for any purpose sanctioned by the Minister of Social
Development. The new tender must be for a period of five years and a new and independent Bid Evaluation and Bid
Adjudication Committee must be appointed to evaluate and adjudicate the new tender process. Their evaluation and
adjudication must be made public by filing, with the Registrar of the Constitutional Court, a status report on the first Monday of
every quarter of the year until completion of the process.
The Constitutional Court further ruled that if SASSA does not award a new tender, the declaration of invalidity of our
current SASSA contract will be further suspended until completion of the five-year year period for which the contract was
originally awarded. In this event, SASSA must, within 14 days of its decision not to award the tender, lodge a report to the
Registrar of the Constitutional Court setting out all the relevant information on whether and when it will be ready to assume the
duty to pay grants itself. Furthermore, CPS, our wholly owned subsidiary that won the 2012 tender, must in this event file with
the Constitutional Court an audited statement of expenses incurred, income received and net profit earned by it during the five
year completed contract period, which statement must also be verified by an independent auditor appointed by SASSA and filed
with the Constitutional Court. Finally, AllPay was ordered to pay SASSA’s and our costs in relation to the application to lead
further evidence brought in the main merits application and all parties were ordered to pay their own costs related to the
provision of further evidence to the Constitutional Court in order for it to determine the ruling described above.
The Constitutional Court ruling effectively ends this litigation, which was commenced by AllPay on February 8, 2012 in
the High Court of South Africa against us and SASSA, challenging SASSA's award of the tender to us.
Suit against AllPay
On December 11, 2012, we commenced a lawsuit in the South Gauteng High Court in South Africa against AllPay. In our
lawsuit, we have alleged that AllPay, wrongfully and unlawfully and with the intention of injuring our reputation, infringing our
goodwill and reducing our share price, competed unlawfully with us, by
•
•
•
directly or indirectly making false reports and providing false information to members of the South African media
which AllPay orchestrated thereby creating the basis for false media reports which alleged or implied that the SASSA
tender process was tainted by corruption through bribes by or on behalf of our subsidiary, CPS;
introducing the media reports and allegations of corruption by or on behalf of us in connection with the SASSA tender
process into the court proceedings in South Africa instituted by AllPay which sought to set aside the award of the
tender to us;
causing an unfounded report to be made to the Johannesburg Stock Exchange, or JSE, regarding disclosure that we
made in relation to the SASSA contract;
• making a report to the DOJ, bringing to the attention of the DOJ the corruption allegations and the South African
•
media reports and repeating the allegations made in the report to the JSE; and
falsely seeking to create the impression in media reports and radio interviews that it had been found in the South
African court proceedings described above that the tender process was tainted by corruption.
In the lawsuit, we are seeking damages in the aggregate amount of ZAR 478 million (approximately US$45.2 million
based on the ZAR/US dollar exchange rate on June 30, 2014) plus interest and costs. The damages claimed may increase as we
quantify the continued impact of 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.
Our application to prompt the Hawks to conduct an investigation into corruption allegations that appeared in the South
African media
On February 14, 2013, we filed an application pursuant to Section 34 of the South African Prevention of Corrupt Activities
Act in South Africa with the South African Police Service. Section 34 deals with the reporting of suspected fraud, theft,
extortion and forgery.
27
Matters reported under Section 34 are usually referred for investigation to the South African Directorate for Priority Crime
Investigation, known as the Hawks. We filed the Section 34 application to prompt the Hawks to conduct an investigation into
who may have made corruption allegations that appeared in the South African media after we were awarded the SASSA tender
in January 2012. The Hawks have confirmed to us that our Section 34 application has been accepted for investigation. We have
provided certain electronic information to the Hawks at their request and we will cooperate with the Hawks in their
investigation.
United States securities litigation
On December 24, 2013, Net1, our chief executive officer and our chief financial officer were named as defendants in a
purported class action lawsuit filed in the United States District Court for the Southern District of New York alleging violations
of the federal securities laws. The lawsuit alleges that we made materially false and misleading statements regarding our
business and compliance policies in our SEC filings and other public disclosures. The lawsuit was brought on behalf of a
purported shareholder of Net1 and all other similarly situated shareholders who purchased our securities between
August 27, 2009 and November 27, 2013. The lawsuit seeks unspecified damages. On July 23, 2014, the Court appointed a lead
plaintiff and lead counsel. No motion for class certification has been filed. We believe this lawsuit has no merit and intend to
defend it vigorously.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to
which we are a party or of which any of our property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol
“UEPS” and on the JSE in South Africa under the symbol “NT1.” The Nasdaq is our principal market for the trading of our
common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by
Nasdaq.
Period
Quarter ended September 30, 2012 ...........
Quarter ended December 31, 2012 ............
Quarter ended March 31, 2013 ...................
Quarter ended June 30, 2013 ......................
Quarter ended September 30, 2013 ...........
Quarter ended December 31, 2013 ............
Quarter ended March 31, 2014 ...................
Quarter ended June 30, 2014 ......................
High
$10.51
$9.39
$7.95
$8.00
$13.00
$12.74
$10.90
$12.09
Low
$7.84
$3.01
$5.01
$6.60
$7.01
$7.33
$7.58
$7.03
Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City, New
Jersey, 07310. According to the records of our transfer agent, as of August 20, 2014, there were 10 shareholders of record of our
common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose
shares are held of record by banks, brokers, and other financial institutions. Our transfer agent in South Africa is Link Market
Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.
Dividends
We have not paid any dividends on our shares of common stock during our last two fiscal years and presently intend to
retain future earnings to finance the expansion of the business. We do not anticipate paying any cash dividends in the
foreseeable future. The future dividend policy will depend on our earnings, capital requirements, expansion plans, financial
condition and other relevant factors.
Issuer purchases of equity securities
In June 2014, we repurchased 2,428,122 shares of our common stock from our BEE partners pursuant to the Relationship
Agreements with them, at a price of ZAR 109.98 per share. Our BEE transactions, including the repurchase, are described in
detail in footnote 14 to our consolidated financial statements.
In August 2013, our Board of Directors authorized the repurchase of up to $100 million of our common stock from time to
time. The authorization has no expiration date. We have not repurchased any shares under this authorization. The repurchase of
shares described in the previous paragraph were effected pursuant to a separate authorization by our Board of Directors.
29
Share performance graph
The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on
our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested
on June 30, 2009, in each of our common stock, the S&P 500 companies, and the companies in the NASDAQ Industrial Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(AMONG NET 1, THE S&P 500 INDEX AND THE NASDAQ INDUSTRIAL INDEX)
NASDAQ Industrial Index
S&P 500 Index
Net1
300
250
200
s
r
a
l
l
o
D
150
100
50
-
2009
2010
2011
2012
Fiscal year ended June 30,
2013
2014
30
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, 2014 and 2013, and for the three years
ended June 30, 2014 have been derived from our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2012, 2011 and 2010 and for the
years ended June 30, 2011 and 2010, have been derived from our consolidated financial statements, which are not included
herein. The selected historical financial data as of each date and for each period presented have been prepared in accordance
with US GAAP. These historical results are not necessarily indicative of results to be expected in any future period.
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue ...........................................................................................
Cost of goods sold, IT processing, servicing and support ...
Selling, general and administrative ...........................................
Equity instruments granted pursuant to BEE
transactions (3) ...............................................................................
Depreciation and amortization ...................................................
Impairment losses ..........................................................................
Operating income ..........................................................................
Interest income ...............................................................................
Interest expense ..............................................................................
Income before income taxes .......................................................
Income tax expense .......................................................................
Net income attributable to Net1 .................................................
Income from continuing operations per share:
2014(1)
$581,656
260,232
168,072
11,268
40,286
-
101,798
14,817
7,473
109,142
39,379
70,111
Year Ended June 30
2012(1)
$390,264
141,000
137,404
2013(1)
$452,147
196,834
191,552
2011(2)
$343,420
109,858
119,692
-
40,599
-
23,162
12,083
7,966
27,279
14,656
12,977
14,211
36,499
-
61,150
8,576
9,345
60,381
15,936
44,651
-
34,671
41,771
37,428
7,654
8,672
36,410
33,525
2,647
2010
$280,364
72,973
80,854
-
19,348
37,378
69,811
10,116
1,047
78,880
40,822
38,990
Basic .............................................................................................
Diluted ..........................................................................................
$0.84
$0.84
(1) Includes revenue and implementation costs related to our SASSA contract from April 2012. In addition, 2014 includes
recovery of $26.6 million of implementation costs from SASSA.
(2) Includes KSNET from November 2010.
(3) Includes a non-cash charge of approximately $11.3 million in 2014 related to common stock issued in our BEE transactions.
In addition, 2012 includes a non-cash charge of approximately $14.2 million in connection with the issuance of a now-expired
option to purchase shares of our common stock in a previous BEE transaction.
$1.51
$1.50
$0.06
$0.06
$0.99
$0.99
$0.28
$0.28
Additional Operating Data:
(in thousands, except percentages)
Cash flows provided by operating activities ..................
Cash flows used in investing activities ............................
Cash flows provided by (used in) financing activities .
2014(1)
2013(1)
$55,917
$447,816
$(13,378) $409,716
$37,145
$21,640
Year ended June 30,
2012(1)
$20,406
$292,539
$231,907
2011(1)
$66,223
$323,685
$183,269
2010(1)
$68,683
$90,186
$(48,478)
Operating income margin ...................................................
(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.
11%
16%
25%
18%
5%
31
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents ..................................................
Total current assets before settlement assets ..................
Goodwill .................................................................................
Intangible assets ....................................................................
Total assets .............................................................................
Total current liabilities before settlement obligations .
Total long-term debt ............................................................
Total equity ............................................................................
2014
$58,672
282,908
186,576
68,514
1,350,945
81,823
62,388
$441,748
2013
$53,665
184,723
175,806
77,257
1,276,322
76,859
66,632
$339,969
As of June 30,
2012
$39,123
175,236
182,737
93,930
955,893
73,377
79,760
2011
$95,263
213,421
209,570
119,856
781,645
102,406
111,776
$346,811 $328,010
2010
$153,742
226,429
76,346
68,347
472,090
57,927
4,343
$287,301
- Remainder of this page left blank -
32
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, uses biometrically secure smart cards that
operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate
access through a communications network to a centralized computer. This offline capability means that users of our system can
conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is
often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability
by removing any elements that are costly and are prone to outages. Our latest version of the UEPS technology has now been
certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and
allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The new UEPS/EMV technology has been
deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social
welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for
banking, healthcare management, international money transfers, voting and identification.
We also provide secure transaction technology solutions and services, by offering transaction processing, financial and
clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing,
cryptography, mobile telephony and integrated circuit card (chip/smart card) technologies.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our
UEPS/EMV technology, to over nine million recipient cardholders across the entire country, process debit and credit card
payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as
bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide
mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and
associated payroll payments in South Africa through our FIHRST service. Our XeoHealth service provides funders and
providers of healthcare in United States with an on-line real-time management system for healthcare transactions.
Internationally, through KSNET, we are one of the top three VAN processors in South Korea, and we offer card
processing, payment gateway and banking value-added services in that country.
Our N1MS business unit is responsible for the worldwide technical development and commercialization of our array of
web and mobile applications and payment technologies, such as MVC, Chip and GSM licensing and VTU and has deployed
solutions in many countries, including South Africa, Namibia, Nigeria, Cameroon, the Philippines and Colombia.
Sources of Revenue
We generate our revenues by charging transaction fees to government agencies, merchants, financial service providers,
utility providers, bill issuers, employers and healthcare providers; by providing loans and insurance products and by selling
hardware, licensing software and providing related technology services.
We have structured our business and our business development efforts around four related but separate approaches to
deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related
technology to a customer. The revenue and costs associated with this approach are reflected in our Financial inclusion and
applied technologies segment.
33
We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a
supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the
system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of
the South African government on a fixed fee basis, but charge a fee on an ad valorem basis for goods and services purchased
using our smart card. The revenue and costs associated with this approach are reflected in our South African transaction
processing and Financial inclusion and applied technologies segments.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to
supply those services and products directly where the business case is compelling. For instance, we provide short-term UEPS-
based loans to our smart card holders. This is an example of the third approach that we have taken. Here we can act as the
principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the
provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our Financial
inclusion and applied technologies segment.
In South Africa, we also generate fees from debit and credit card transaction processing, the provision of value-added
services such as bill payments, mobile top-up and pre-paid utility sales, transaction processing for both funders and providers of
healthcare and from providing a payroll transaction management service. The revenue and costs associated with these services
are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.
Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 225,000
merchants and to card issuers in South Korea through our value-added-network. In the US, we earn transaction fees from our
customers utilizing our XeoRules on-line real-time management system for healthcare transactions. We also generate fees from
our customers who utilize our VCPay technology to generate a unique, one-time use prepaid virtual card number to securely
purchase goods and services or perform bill payments in any card-not-present environment. The revenue and costs at KSNET,
XeoHealth and VCPay as well as those from our expired Iraqi contracts to February 2013, are reflected in our International
transaction processing segment.
Finally, we have entered into business partnerships or joint ventures to introduce our UEPS and VTU solutions to markets
such as Namibia. In these situations, we take an equity position in the business while also acting as a supplier of technology. In
evaluating these types of opportunities, we seek to maintain a highly disciplined approach, carefully selecting partners,
participating closely in the development of the business plan and remaining actively engaged in the management of the new
business. In most instances, the joint venture or partnership has a license to use the UEPS in the specific territory, including the
back-end system. We account for our equity investments using the equity method. When we equity-account these investments,
we are required under US GAAP to eliminate our share of the net income generated from sales of hardware and software to the
investee. We recognize this net income from these equity-accounted investments during the period in which the hardware and
software is utilized in the 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.
Developments during Fiscal 2014
Constitutional Court pronounces remedy for SASSA tender award
On April 17, 2014, the South African Constitutional Court, or Constitutional Court, ruled on the appropriate remedy
following its declaration on November 29, 2013, that the tender process followed by the South African Social Security Agency,
or SASSA, in awarding a contract to Net1's wholly-owned subsidiary, Cash Paymaster Services, or CPS, was constitutionally
invalid. The declaration of invalidity of the contract between SASSA and CPS was upheld, but suspended until a new tender is
awarded, or for the remainder of the existing contract period if no tender is awarded. SASSA is required to initiate a new tender
process within 30 days of the Constitutional Court's ruling and any award must be for a period of five years.
See Part I, Item 3—“Legal Proceedings,” for additional details.
December 2013 BEE transactions and buy back of shares from BEE partners
During fiscal 2014, we signed two BEE Relationship Agreements pursuant to which we issued, in April 2014, an aggregate
of 4,400,000 shares of our common stock to our BEE partners for ZAR 60.00 per share. Our share price exceeded ZAR 120.00
on June 4, 2014 and all outstanding amounts under the Relationship Agreements became due and payable. The BEE partners
were unable to pay all outstanding amounts due on June 5, 2014, and accordingly a trigger event occurred. In June 2014, we
repurchased a total of 2,428,122 shares of our common stock, at the determined volume weighted average price of ZAR109.98,
from the BEE partners. Accordingly, the BEE partners owned 1,971,878 shares of our common stock as of June 30, 2014. Refer
to notes 14 and 17 to our consolidated financial statements for a full description of and accounting for the BEE transactions.
34
Recovery of additional implementation costs from SASSA
In the fourth quarter of fiscal 2014, we received ZAR 277 million (or $26.6 million) from SASSA related to the recovery
of additional implementation costs incurred during the beneficiary re-registration process in fiscal 2012 and 2013. At the time,
SASSA requested us to biometrically register all social grant beneficiaries (including all child beneficiaries), in addition to the
grant recipients who were issued with the SASSA-branded UEPS/EMV smart cards. As a result, we performed approximately
11 million additional registrations that did not form part of its monthly service fee. After an independent verification process,
SASSA agreed to pay the ZAR 277 million as full settlement of the additional costs incurred.
Growth in mobile value-added services
Our N1MS business unit introduced a new suite of mobile value-added services, commencing with a prepaid airtime
product during the first quarter of fiscal 2014 and experienced strong adoption throughout fiscal 2014. This product allows our
customers in South Africa to electronically purchase prepaid airtime without having to visit a physical prepaid airtime vendor.
N1MS also introduced a similar service under the brand “Pasavute” in partnership with Telecom Networks Malawi in the
second half of fiscal 2014.
Traditional prepaid airtime procurement is usually time consuming for the customer and results in them having to pay
additional costs. Our product allows our customers, many of whom do not have their own means of transport or ready access to
transport, to purchase prepaid airtime without having to travel. We also believe that our product is substantially cheaper than
traditional prepaid airtime channels, which often require customers to pay a substantial premium to obtain airtime.
At June 30, 2014, we had approximately 3.0 million registered users, effecting more than one million transactions per day
during peak periods. N1MS has also launched additional mobile value-added services, including prepaid electricity, and
adoption rates of these products could be similar to its prepaid airtime offering. We believe that these new products are also
cheaper than existing offerings and will make a meaningful difference in the lives of users of these new products.
Financial services
During fiscal 2014, we commenced the national rollout of our financial services offering in the six provinces in which we
did not offer our product during fiscal 2013. The rollout has required us to employ and train additional staff and incur set up
costs, and rent additional premises in order to establish a physical presence in these six provinces. We experienced significant
growth in our lending book during fiscal 2014 compared with 2013.
Disposal of non-core businesses
During fiscal 2014, we concluded a number of corporate transactions as we continue to restructure and re-focus our
business on key long-term growth opportunities. We sold MediKredit, our medical claims processing business in South Africa,
and NUETS’ business, which consisted primarily of customer contracts in Africa except for Namibia and Botswana. We have
also substantially liquidated our Net1 UTA business. Refer to notes 18 to our consolidated financial statements for a full
description of these transactions.
Change to internal reporting structure and restatement of previously reported information
During June 2014, we simplified our operating and internal reporting structures from five reportable segments to three.
Previously reported information has been restated. Refer to Note 23 to our consolidated financial statements and see —
“Presentation of quarterly revenue and operating income by segment for fiscal 2012 to 2014” below for more information.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with US GAAP, which requires management to
make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the
determination of estimates requires 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.
35
The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In
determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized
valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques,
including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have
occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the
reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities
that form part of the reporting unit.
The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In
determining the fair value of reporting units, we consider the earnings before interest, taxation, depreciation and amortization, or
EBITDA, and the EBITDA multiples applicable to peer and industry comparables of the reporting units. We base our estimates
on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments
and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during
fiscal 2014 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units
were not at risk of potential impairment.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using
the purchase method of accounting. We completed acquisitions during fiscal 2013 and 2012, where we identified and
recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income
approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding
expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates,
exchange rates, cash tax charges and useful lives.
The valuations were based on information available at the time of the acquisition and the expectations and assumptions
that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from
forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets
may be necessary.
Deferred Taxation
We estimate our tax liability through the calculations done for the determination of our current tax liability, together with
assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities which are disclosed on our balance sheet. Management then has to assess
the likelihood that deferred tax assets are more likely than not to be realized in future periods. In the event it is determined that
the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred
tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was
made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an
adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination
is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with
estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal
2014, we recorded a decrease of $29.0 million, and in fiscal 2013, and 2012, we recorded an increase of $6.6 million and
$1.6 million, respectively, to our valuation allowance.
Stock-based Compensation and Equity Instrument issued pursuant to BEE transactions
Stock-based compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based
compensation charges under current accounting standards. These standards require all share-based compensation to employees
to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods
and also requires an estimation of forfeitures when calculating compensation expense.
We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and
directors and recognize compensation cost on a straight line basis. Option-pricing models require estimates of a number of key
valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our
management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of
stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was
$3.7 million, $3.9 million and $2.8 million for fiscal 2014, 2013 and 2012, respectively.
36
Equity instruments
We recorded non-cash charges of $11.3 million and $14.2 million associated with the issuance of equity instruments as
part of the BEE transactions during fiscal 2014 and fiscal 2012, respectively, as these awards were fully vested during those
periods. The option granted in fiscal 2012 expired unexercised in fiscal 2013, however, the expense recorded during fiscal 2012
was not reversed during fiscal 2013 because the option had vested in full on the grant date in 2012.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts receivable related to our Financial inclusion and applied technologies and
international transaction-based activities segments as a result of sales or rental of hardware, support and maintenance services
provided; or sale of licenses to customers; or the provision of transaction processing services to our customers.
Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on
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.
Additional allowances may be required should the ability of our customers to make payments when due deteriorate in the future.
A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including
on-going evaluation of the creditworthiness of each customer.
Research and Development
Accounting standards require product development costs to be charged to expenses as incurred until technological
feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been
determined viable for its intended use. The time between the attainment of technological feasibility and completion of software
development has been short. Accordingly, we did not capitalize any development costs during the years ended June 30, 2014,
2013 or 2012, particularly because the main part of our development is the enhancement and upgrading of existing products.
Costs to develop software for our internal use is expensed as incurred, except to the extent that these costs are incurred
during the application development stage. All other costs including those incurred in the project development and post-
implementation stages are expensed as incurred.
A significant amount of judgment is required to separate research costs, new development costs and ongoing development
costs based as the transition between these stages. A multitude of factors need to be considered by management, including an
assessment of the state of readiness of the software and the existence of markets for the software. The possibility of capitalizing
development costs in the future may have a material impact on the group’s profitability in the period when the costs are
capitalized, and in subsequent periods when the capitalized costs are amortized.
Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements,
including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
37
Recent accounting pronouncements not yet adopted as of June 30, 2014
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet
adopted as of June 30, 2014, including the expected dates of adoption and effects on financial condition, results of operations
and cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows:
Table 1
ZAR : $ average exchange rate ............
Highest ZAR : $ rate during period ......
Lowest ZAR : $ rate during period ......
Rate at end of period ............................
Year ended June 30,
2013
8.8462
10.3587
8.0444
9.8925
2014
10.3798
11.2579
9.6259
10.5887
2012
7.7920
8.6987
6.6096
8.2881
KRW : $ average exchange rate ...........
Highest KRW : $ rate during period ....
Lowest KRW : $ rate during period .....
Rate at end of period ............................
1,068
1,147
1,014
1,014
1,112
1,162
1,019
1,144
1,130
1,202
1,029
1,159
ZAR: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
:
$
S
U
R
A
Z
12.00
11.50
11.00
10.50
10.00
9.50
9.00
8.50
8.00
7.50
7.00
6.50
6.00
J
u
n
-
3
0
J
u
l
-
3
1
A
u
g
-
3
1
S
e
p
-
3
0
O
c
t
-
3
1
N
o
v
-
3
0
D
e
c
-
3
1
J
a
n
-
3
1
F
e
b
-
2
9
M
a
r
-
3
1
A
p
r
-
3
0
M
a
y
-
3
1
J
u
n
-
3
0
F2014 ZAR
F2013 ZAR
F2012 ZAR
38
:
$
S
U
W
R
K
1,300
1,250
1,200
1,150
1,100
1,050
1,000
J
u
n
-
3
0
KRW: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
J
u
l
-
3
1
A
u
g
-
3
1
S
e
p
-
3
0
O
c
t
-
3
1
N
o
v
-
3
0
D
e
c
-
3
1
J
a
n
-
3
1
F
e
b
-
2
8
M
a
r
-
3
1
A
p
r
-
3
0
M
a
y
-
3
1
J
u
n
-
3
0
F2014 KRW
F2013 KRW
F2012 KRW
Translation Exchange Rates
We are required to translate our results of operations from ZAR to US dollars on a monthly basis. Thus, the average rates
used to translate this data for the years ended June 30, 2014, 2013 and 2012, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are the rates shown in the following table:
Table 2
Income and expense items: $1 = ZAR ..........
Income and expense items: $1 = KRW .........
Year ended
June 30,
2013
8.7105
1,072
2014
10.3966
1,049
2012
7.7186
1,104
Balance sheet items: $1 = ZAR .....................
Balance sheet items: $1 = KRW ...................
10.5887
1,014
9.8925
1,144
8.2881
1,159
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited
consolidated financial statements which are prepared in accordance with US GAAP. We analyze our results of operations both
in US dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional
currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions
are initially incurred and measured. Due to the significant impact of currency fluctuations between the US dollar and ZAR on
our reported results and because we use the US dollar as our reporting currency, we believe that the supplemental presentation
of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.
Our operating segment revenue presented in “—Results of operations by operating segment” represents total revenue per
operating segment before intercompany eliminations. A reconciliation between total operating segment revenue and revenue
presented in our consolidated financial statements is included in Note 23 to those statements.
Fiscal 2013 results include SmartSwitch Botswana from December 1, 2012 and N1MS from September 1, 2012. Fiscal
2012 results include Smart Life from July 1, 2011 and Eason from October 1, 2011. Refer also to Note 3 to the consolidated
financial statements.
39
The discussion below gives effect to the reallocation of certain activities among our various operating segments as
discussed above.
Fiscal 2014 Compared to Fiscal 2013
The following factors had an influence on our results of operations during fiscal 2014 as compared with the same period in
the prior year:
• Unfavorable impact from the strengthening of the US dollar against the ZAR: The US dollar appreciated by 19%
•
against the ZAR during fiscal 2014 which negatively impacted our reported results;
$26.6 million recovery of expenses and 2013 implementation costs: Our SASSA contract implementation is complete.
During fiscal 2014 we received approximately $26.6 million, or approximately $19.1 million, net of tax, from SASSA
related to the recovery of additional implementation costs incurred during the beneficiary re-registration process in
fiscal 2012 and 2013. Fiscal 2013 results include implementation-related expenditure, including smart card costs, of
approximately $66.5 million;
• Fair value charge resulting from issue of equity instruments pursuant to BEE transactions: The fair value non-cash
charge of $11.3 million related to our BEE transactions adversely impacted our reported results during fiscal 2014;
•
Increased contribution by KSNET: Our results were positively impacted by growth in our South Korean operations;
• Higher revenue resulting from an increase in low-margin prepaid airtime sales: Our revenue has increased as a
result of the growth of our prepaid airtime offering during fiscal 2014, which has lower margins compared with our
other South African businesses;
• National rollout of our financial services offering: We continued the national rollout of our financial services offering
during fiscal 2014, which resulted in higher revenue from UEPS-based lending. Profitability in the Financial inclusion
and applied technologies segment however was lower due to rollout costs, including hiring and training of additional
staff and infrastructure deployment as well as the creation of an allowance for doubtful finance loans receivable;
• Ad hoc hardware sales in fiscal 2014: We sold more terminals and cards during fiscal 2014 as a result of ad hoc orders
received from our customers;
• Lower DOJ and SEC investigation-related expenses: We incurred DOJ and SEC investigation-related expenses of
$3.9 million during fiscal 2014 compared to $5.9 million during 2013; and
• Fiscal 2013 bad debt provision: In fiscal 2013 we provided $2.3 million related to the expired NUETS Iraqi customer
contracts.
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
The following tables show the changes in the items comprising our statements of operations, both in US dollars and in
ZAR:
Table 3
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Equity instruments issued pursuant to BEE transactions ..............................
Depreciation and amortization ......................................................................
Operating income ..........................................................................................
Interest income ..............................................................................................
Interest expense .............................................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before income from equity-accounted investments ...................
Income from equity-accounted investments ..................................................
Net income ....................................................................................................
Add net loss attributable to non-controlling interest .....................................
Net income attributable to Net1 ....................................................................
40
In United States Dollars
(US GAAP)
Year ended June 30,
2014
$ ’000
581,656
260,232
168,072
11,268
40,286
101,798
14,817
7,473
109,142
39,379
69,763
298
70,061
(50)
70,111
2013
$ ’000
452,147
196,834
191,552
-
40,599
23,162
12,083
7,966
27,279
14,656
12,623
351
12,974
(3)
12,977
%
change
29%
32%
(12%)
nm
(1%)
340%
23%
(6%)
300%
169%
453%
(15%)
440%
nm
440%
Table 4
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Equity instruments issued pursuant to BEE transactions ..............................
Depreciation and amortization ......................................................................
Operating income ..........................................................................................
Interest income ..............................................................................................
Interest expense .............................................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before income from equity-accounted investments ...................
Income from equity-accounted investments ..................................................
Net income ....................................................................................................
Add net loss attributable to non-controlling interest .....................................
Net income attributable to Net1 ....................................................................
In South African Rand
(US GAAP)
Year ended June 30,
2014
ZAR
’000
6,047,244
2,705,528
1,745,784
118,740
418,838
1,058,354
154,046
77,694
1,134,706
409,408
725,298
3,098
728,396
(520)
728,916
2013
ZAR
’000
3,938,426
1,714,523
1,668,514
-
353,637
201,752
105,249
69,388
237,613
127,661
109,952
3,057
113,009
(26)
113,035
%
change
54%
58%
5%
nm
18%
425%
46%
12%
378%
221%
560%
1%
545%
nm
545%
The increase in revenue was primarily due to the recovery of implementation costs related to our SASSA contract, a higher
contribution from KSNET, more low-margin transaction fees generated from beneficiaries using the South African National
Payment System, higher prepaid airtime sales driven by the rollout of our prepaid airtime product, an increase in the number of
UEPS-based loans and more ad hoc terminal and card sales.
The increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses incurred
from increased usage of the South African National Payment System by beneficiaries and higher prepaid airtime, terminal and
card sales. These increases were offset by the substantial elimination of expenses related to our SASSA contract
implementation, which we completed in the fourth quarter of fiscal 2013.
In USD, our selling, general and administration expense decreased due to the substantial elimination of SASSA contract
implementation costs and lower legal fees in connection with the US government investigations in the current year, which was
offset by increases in goods and services purchased from third parties.
Our operating income margin for fiscal 2014 and 2013 was 18% and 5%, respectively. We discuss the components of
operating income margin under “—Results of operations by operating segment.” The increase is primarily attributable to the
recovery of implementation costs related to our SASSA contract and the substantial elimination of implementation costs in
fiscal 2014, and was partially offset by the non-cash charge related to the equity instruments issued pursuant to our BEE
transactions.
The grant date fair value of the equity instruments issued pursuant to our December 2013 BEE transactions was
$11.3 million (ZAR 118.7 million) and was expensed in full in fiscal 2014.
In ZAR, depreciation and amortization were higher primarily as a result of an increase in depreciation related to assets used
to service our obligations under our SASSA contract, which was partially offset by no MediKredit and FIHRST intangible asset
amortization as the these intangible assets were fully amortized at the end of June 2013.
Interest on surplus cash increased to $14.8 million (ZAR 154.0 million) from $12.1 million (ZAR 105.2 million), due
primarily to higher average daily ZAR cash balances.
In US dollars, interest expense decreased to $7.5 million (ZAR 77.7 million) from $8.0 million (ZAR 69.4 million), due to
a lower average long-term debt balance on our South Korean debt as well as lower interest rate resulting from our refinancing
concluded in October 2013.
Fiscal 2014 tax expense was $39.4 million (ZAR 409.4 million) compared to $14.7 million (ZAR 127.7 million) in fiscal
2013. Our effective tax rate for fiscal 2014, was 36.1% and was higher than the South African statutory rate as a result of non-
deductible expenses (including the expense related to the equity instruments issued pursuant to our BEE transactions, interest
expense related to our long-term South Korean borrowings and stock-based compensation charges).
41
Our effective tax rate for the fiscal 2013, was 53.7% and was higher than the South African statutory rate primarily as a
result of non-deductible expenses (including interest expense related to our long-term South Korean borrowings and stock-based
compensation charges) and South African dividend withholding taxes.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 5
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income .................
Table 6
Operating Segment
2014
$ ’000
261,577
152,725
207,595
621,897
(40,241)
581,656
61,401
21,952
60,685
144,038
(42,240)
101,798
2014
ZAR
’000
Revenue:
South African transaction processing ....................... 2,719,511
International transaction processing ......................... 1,587,821
Financial inclusion and applied technologies ........... 2,158,282
Subtotal: Operating segments ............................ 6,465,614
418,370
Intersegment eliminations ............................
Consolidated revenue ................................. 6,047,244
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
638,362
228,226
630,918
Subtotal: Operating segments ............................ 1,497,506
(439,152)
Corporate/Eliminations ......................................
Consolidated operating income ................. 1,058,354
South African transaction processing
In United States Dollars (US GAAP)
Year ended June 30,
2013
$ ’000
% of
total
% of
total
45%
26%
36%
107%
(7%)
100%
60%
22%
60%
142%
(42%)
100%
242,739
135,954
108,001
486,694
(34,547)
452,147
(21,316)
14,208
57,491
50,383
(27,221)
23,162
54%
30%
24%
108%
(8%)
100%
(92%)
61%
248%
217%
(117%)
100%
In South African Rand (US GAAP)
Year ended June 30,
2013
ZAR
’000
% of
total
% of
total
45%
26%
36%
107%
(7%)
100%
60%
22%
60%
142%
(42%)
100%
2,114,378
1,184,227
940,743
4,239,348
300,922
3,938,426
(185,673)
123,759
500,775
438,861
(237,109)
201,752
54%
30%
24%
108%
(8%)
100%
(92%)
61%
248%
217%
(117%)
100%
%
change
8%
12%
92%
28%
16%
29%
nm
55%
6%
186%
55%
340%
%
change
29%
34%
129%
53%
39%
54%
nm
84%
26%
241%
85%
425%
In ZAR, the increase in segment revenues was primarily due the recovery of implementation costs related to our SASSA
contract and more low-margin transaction fees generated from beneficiaries using the South African National Payment System.
In addition, revenue from the distribution of social welfare grants grew modestly during the year and was in-line with the
increase in unique welfare cardholder recipients, net of removal of invalid and fraudulent beneficiaries.
Our operating income (loss) margin for fiscal 2014 and 2013 was 23% and (9)%, respectively, and has increased primarily
due to the recovery of implementation costs related to our SASSA contract and the substantial elimination of SASSA
implementation costs in fiscal 2014.
42
International transaction-based activities
Revenue increased primarily due to higher transaction volume at KSNET during fiscal 2014 but was partially offset by the
expiration and non-renewal of NUETS’ contract with its Iraqi customer in the third quarter of fiscal 2013. Operating income
during fiscal 2014 was higher due to increase in revenue contribution from KSNET, but partially offset by the loss of the
NUETS Iraqi contract as well as ongoing losses related to our XeoHealth launch in the United States.
Operating income margin for the segment is lower than for most of our South African transaction processing businesses.
Operating income margin for the year to date fiscal 2014 and 2013 was 14% and 10%, respectively.
Financial inclusion and applied technologies
Financial inclusion and applied technologies revenue and operating income increased primarily due to higher prepaid
airtime sales driven by the rollout of our prepaid airtime product, an increase in the number of UEPS-based loans as we rolled
out our product nationally, an increase in intersegment revenues and more ad hoc terminal and smart card sales. The increase in
operating income was partially offset by UEPS-based lending national roll-out expenses and the establishment of the allowance
for doubtful finance loans. Smart Life did not contribute to operating income in fiscal 2014 due to the FSB suspension of our
license.
Operating income margin for the Financial inclusion and applied technologies segment decreased to 29% from 53%,
primarily as a result of more low-margin prepaid airtime and hardware sales.
Corporate/ Eliminations
The increase in our corporate expenses resulted primarily from the non-cash charge related to the equity instruments issued
pursuant to our BEE transactions, increases in general corporate audit fees, executive emoluments and other corporate head
office-related expenses purchased from third parties, partially offset by lower US government investigation expenses.
Our corporate expenses also include acquisition-related intangible asset amortization; expenditure related to compliance
with Sarbanes; non-employee directors’ fees; employee and executive bonuses; stock-based compensation; audit fees; directors
and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental,
security and maintenance; and elimination entries.
Fiscal 2013 Compared to Fiscal 2012
The following factors had an influence on our results of operations during fiscal 2013 as compared with the same period in
the prior year:
• Unfavorable impact from the strengthening of the US dollar: The US dollar appreciated by 14% against the ZAR
during fiscal 2013 which negatively impacted our reported results;
• SASSA implementation costs: We completed the bulk enrollment of recipient cardholders and beneficiaries under our
SASSA contract during fiscal 2013 and incurred implementation and staff costs of $66.5 million, including the cost of
UEPS/EMV smart cards issued, compared with $10.9 million in fiscal 2012;
• DOJ and SEC investigation-related expenses: We incurred DOJ and SEC investigation-related expenses of
$5.9 million in fiscal 2013;
• Allowance for doubtful accounts receivable relating to expired Iraqi contracts: We have provided $2.3 million
related to expired NUETS Iraqi customer contracts;
• Fair value charge resulting from issue of equity instrument pursuant to BEE transaction: The fair value charge of
$14.2 million related to our BEE transaction negatively impacted our reported results during fiscal 2012;
• Fiscal 2012 impacted by change in South African tax law: As a result of the change in South African tax law that
replaced STC with a dividends withholding tax, fiscal 2012 tax expense included a net taxation benefit of
$10.1 million, as we recorded a $18.3 million deferred tax benefit which was offset by an $8.2 million foreign tax
credit valuation allowance; and
• Profit on liquidation of SmartSwitch Nigeria: In fiscal 2012, we recorded a non-cash profit of $4.0 million on the
liquidation of SmartSwitch Nigeria.
43
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
The following tables show the changes in the items comprising our statements of operations, both in US dollars and in
ZAR:
Table 7
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Equity instrument issued pursuant to BEE transaction .................................
Depreciation and amortization ......................................................................
Operating income ..........................................................................................
Interest income ..............................................................................................
Interest expense .............................................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before income from equity-accounted investments ...................
Income from equity-accounted investments ..................................................
Net income ....................................................................................................
(Add) Less net (loss) income attributable to non-controlling interest ...........
Net income attributable to Net1 ....................................................................
Table 8
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Equity instrument issued pursuant to BEE transaction .................................
Depreciation and amortization ......................................................................
Operating income ..........................................................................................
Interest income ..............................................................................................
Interest expense .............................................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before income from equity-accounted investments ...................
Income from equity-accounted investments ..................................................
Net income ....................................................................................................
(Add) Less net (loss) income attributable to non-controlling interest ...........
Net income attributable to Net1 ....................................................................
In United States Dollars
(US GAAP)
Year ended June 30,
2013
$ ’000
452,147
196,834
191,552
-
40,599
23,162
12,083
7,966
27,279
14,656
12,623
351
12,974
(3)
12,977
2012
$ ’000
390,264
141,000
137,404
14,211
36,499
61,150
8,576
9,345
60,381
15,936
44,445
220
44,665
14
44,651
%
change
16%
40%
39%
nm
11%
(62%)
41%
(15%)
(55%)
(8%)
(72%)
60%
(71%)
nm
(71%)
In South African Rand
(US GAAP)
Year ended June 30,
2013
ZAR
’000
3,938,426
1,714,523
1,668,514
-
353,637
201,752
105,249
69,388
237,613
127,661
109,952
3,057
113,009
(26)
113,035
2012
ZAR
’000
3,012,292
1,088,322
1,058,190
112,066
281,722
471,992
66,195
72,130
466,057
123,004
343,053
1,698
344,751
108
344,643
%
change
31%
58%
58%
nm
26%
(57%)
59%
(4%)
(49%)
4%
(68%)
80%
(67%)
nm
(67%)
The increase in revenue was primarily due to incremental revenue resulting from our new SASSA contract and a higher
contribution from KSNET.
The increase in cost of goods sold, IT processing, servicing and support was primarily due to higher expenses related to the
implementation of our new SASSA contract which includes the UEPS/EMV smart cards issued during fiscal 2013.
Our selling, general and administration expense increased primarily due to the SASSA contract implementation costs
described above, legal fees of approximately $5.9 million (ZAR 51.7 million) in connection with the government investigations
and the allowance for doubtful accounts receivable for expired NUETS contracts. Our selling, general and administration
expense for fiscal 2012 included SASSA contract implementation costs of $10.9 million (ZAR 83.9 million) and cash bonuses
of $5.4 million (ZAR 41.8 million) related to our SASSA tender award and a non-cash profit related to the liquidation of
SmartSwitch Nigeria of $4.0 million.
44
The grant date fair value of the equity instrument issued pursuant to our January 2012 BEE transaction was $14.2 million
(ZAR 112.1 million) and was expensed in full in fiscal 2012. The option expired unexercised in fiscal 2013.
Our operating income margin for fiscal 2013 and 2012 was 5% and 16%, respectively. We discuss the components of the
operating income margin under “—Results of operations by operating segment.” The decrease is primarily attributable to higher
implementation costs related to the SASSA contract, DOJ and SEC investigation costs and the NUETS allowance for doubtful
accounts receivable in fiscal 2013.
Depreciation and amortization increased primarily as a result of an increase in depreciation related to assets used to service
our obligations under our SASSA contract.
Interest on surplus cash increased to $12.1 million (ZAR 105.2 million) from $8.6 million (ZAR 66.2 million). The
increase resulted primarily from higher average daily ZAR cash balances offset by lower deposit rates resulting from the
decrease in the South African prime interest rate from an average of approximately 9.0% to 8.5% per annum.
Interest expense decreased to $8.0 million (ZAR 69.4 million) from $9.3 million (ZAR 72.1 million) due to a lower
average long-term debt balance.
Total fiscal 2013 tax expense was $14.7 million (ZAR 127.7 million) compared to $16.0 million (ZAR 123.0 million) in
fiscal 2013. Our fiscal 2012 tax expense includes $18.3 million related to a change in South African tax law and the creation of
a valuation allowance of $8.2 million related to foreign tax credits. Our effective tax rate for fiscal 2013, was 53.7% and was
higher than the South African statutory rate primarily as a result of non-deductible expenses (including interest expense related
to our long-term South Korean borrowings and stock-based compensation charges) and South African dividend withholding
taxes. Our effective tax rate for fiscal 2012, was 26.4% and was lower than the South African statutory rate as a result of a
change in South African tax law which resulted in a net deferred taxation benefit and a non-taxable profit on liquidation of
SmartSwitch Nigeria, which was partially offset by an equity instrument issued pursuant to our BEE transaction and non-
deductible expenses (including interest expense related to our long-term South Korean borrowings and stock-based
compensation charges) and the creation of a valuation allowance.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
In United States Dollars (US GAAP)
Year ended June 30,
2012
$ ’000
% of
total
% of
total
54%
30%
24%
108%
(8%)
100%
(92%)
61%
248%
217%
(117%)
100%
194,630
120,625
90,792
406,047
(15,783)
390,264
33,906
14,649
45,884
94,439
(33,289)
61,150
50%
27%
20%
97%
3%
100%
55%
24%
75%
154%
(54%)
100%
%
change
25%
13%
19%
20%
119%
16%
nm
(3%)
25%
(47%)
(18%)
(62%)
Table 9
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating income (loss):
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income ............
2013
$ ’000
242,739
135,954
108,001
486,694
(34,547)
452,147
(21,316)
14,208
57,491
50,383
(27,221)
23,162
45
Table 10
Operating Segment
Revenue:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Intersegment eliminations ............................
Consolidated revenue .................................
Operating (loss) income:
South African transaction processing .......................
International transaction processing .........................
Financial inclusion and applied technologies ...........
Subtotal: Operating segments ............................
Corporate/Eliminations ......................................
Consolidated operating income .................
South African transaction processing
2013
ZAR
’000
2,114,378
1,184,227
940,743
4,239,348
(300,922)
3,938,426
(185,673)
123,759
500,775
438,861
(237,109)
201,752
In South African Rand (US GAAP)
Year ended June 30,
2012
ZAR
’000
% of
total
% of
total
54%
30%
24%
108%
(8%)
100%
1,502,271
931,056
700,787
3,134,114
(121,822)
3,012,292
(92%)
61%
248%
217%
(117%)
100%
261,706
113,070
354,160
728,936
(256,944)
471,992
50%
31%
23%
104%
(4%)
100%
55%
24%
75%
154%
(54%)
100%
%
change
41%
27%
34%
35%
147%
31%
nm
9%
41%
(40%)
(8%)
(57%)
In ZAR, the increases in segment revenue were primarily due to higher revenues earned for a full year under our new
SASSA contract and low-margin transaction fees generated from beneficiaries using the South African National Payment
System.
Our operating (loss) income margin for fiscal 2013 and 2012 was (9%) and 17%, respectively, and has declined primarily
due to the higher SASSA implementation costs.
International transaction-based activities
KSNET continues to contribute the majority of our revenues and operating income in this operating segment. Revenue
increased primarily due to KSNET’s revenue growth during fiscal 2013 and was offset by the expiration and non-renewal of
NUETS’ contract with its Iraqi customer. Operating income was negatively impacted by this expiration and non-renewal and the
related allowance for doubtful accounts receivable, ongoing start-up expenditures related to our XeoHealth launch in the United
States, ongoing losses at Net1 Virtual Card and Net1 UTA as well as ongoing competition in the South Korean marketplace, but
was partially offset by increased revenue contributions from KSNET.
Operating margin for the segment is lower than most of our South African transaction processing businesses. Operating
income margin for fiscal 2013 and 2012 was 10% and 12%, respectively.
Financial inclusion and applied technologies
Our revenue from this operating segment increased because of higher intersegment fees and ad hoc hardware sales to
external customers and an increase in the number of smart card-based accounts as a result of the new SASSA contract, offset
lower UEPS-based lending revenue as a result of a decrease in the number of loans granted. Our revenue per smart card account
decreased in fiscal 2013, as a result of a change in our pricing for these accounts after taking into consideration the lower price
and higher volumes under the new SASSA contract. The new pricing was effective from April 1, 2012, and reduced the average
monthly revenue per smart card from ZAR5.50 to ZAR4.00 and the operating income margin from 45.45% to 28.50%.
Segment operating income increased due to the higher intersegment fees and ad hoc hardware sales to external customers,
offset by a lower smart-card account operating margin, on-going start-up expenditure incurred to establish our Smart Life
insurance business and lower UEPS-based lending activity. Smart Life did not contribute to operating income in fiscal 2013 or
2012.
Operating income margin for the Financial inclusion and applied technologies segment increased to 53% from 51%,
primarily as a result of higher intersegment fees, offset by increased start-up expenditures related to Smart Life and other
financial services offerings.
46
Corporate/ Eliminations
Our fiscal 2013 corporate expenses include increased legal and other fees we incurred in connection with the US
government investigations and higher stock-based compensation charges. Our fiscal 2012 corporate expenses include a charge
related to our equity instrument issued pursuant to our BEE transaction and a $4.0 million profit related to the liquidation of
SmartSwitch Nigeria.
Our corporate expenses also include acquisition-related intangible asset amortization; expenditure related to compliance
with Sarbanes; non-executive directors’ fees; employee and executive bonuses; stock-based compensation; legal and audit fees;
directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities,
rental, security and maintenance; and elimination entries.
Presentation of quarterly revenue and operating income by segment for fiscal 2012 to 2014
The tables below present quarterly revenue and operating income generated by our three reportable segments for the fiscal
2014, 2013 and 2012, and reconciliations to consolidated revenue and operating income (loss), as well as the US dollar/ ZAR
exchange rates applicable per fiscal quarter and year:
Income and expense items: $1 = ZAR ...............
10.0001
10.1592
10.8743
10.4218
Table 11
Operating Segment
Revenue:
South African transaction processing .................
International transaction processing ...................
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Intersegment eliminations ............................
Consolidated revenue ...........................
Operating (loss) income:
South African transaction processing .................
International transaction processing ...................
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Corporate/Eliminations ................................
Consolidated operating income ...........
Quarter
1
$ ’000
57,161
37,541
36,796
131,498
(8,004)
123,494
6,461
5,524
12,835
24,820
(8,420)
16,400
Table 12
Operating Segment
Revenue:
South African transaction processing .................
International transaction processing ...................
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Intersegment eliminations ............................
Consolidated revenue ...........................
Operating (loss) income:
South African transaction processing .................
International transaction-based activities ...........
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Corporate/Eliminations ................................
Consolidated operating income (loss) .
Income and expense items: $1 = ZAR ...............
Quarter
1
$ ’000
62,420
32,397
26,615
121,432
(9,750)
111,682
(3,299)
3,329
14,913
14,943
(5,618)
9,325
8.2606
47
In United States Dollars (US GAAP)
Fiscal 2014
Quarter
Quarter
Quarter
2
$ ’000
58,754
37,738
50,480
146,972
(9,689)
137,283
7,128
5,139
13,265
25,532
(6,730)
18,802
Quarter
2
$ ’000
61,708
33,664
25,563
120,935
(9,493)
111,442
(6,233)
3,583
14,286
11,636
(6,664)
4,972
8.7405
3
$ ’000
4
$ ’000
57,397
35,245
56,226
148,868
(10,742)
138,126
9,137
4,642
16,459
30,238
(6,289)
23,949
88,265
42,201
64,093
194,559
(11,806)
182,753
38,675
6,647
18,126
63,448
(20,801)
42,647
3
$ ’000
60,415
33,700
26,214
120,329
(9,188)
111,141
(11,587)
2,033
14,038
4,484
(9,210)
(4,726)
8.4662
4
$ ’000
58,196
36,193
29,609
123,998
(6,116)
117,882
(197)
5,263
14,254
19,320
(5,729)
13,591
9.1863
In United States Dollars (US GAAP)
Fiscal 2013
Quarter
Quarter
Full
Year
$ ’000
261,577
152,725
207,595
621,897
(40,241)
581,656
61,401
21,952
60,685
144,038
(42,240)
101,798
10.3966
Full
Year
$ ’000
242,739
135,954
108,001
486,694
(34,547)
452,147
(21,316)
14,208
57,491
50,383
(27,221)
23,162
8.7105
Table 13
Operating Segment
Revenue:
South African transaction processing .................
International transaction processing ...................
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Intersegment eliminations ............................
Consolidated revenue ...........................
Operating (loss) income:
South African transaction processing .................
International transaction processing ...................
Financial inclusion and applied technologies .....
Subtotal: Operating segments ......................
Corporate/Eliminations ................................
Consolidated operating income (loss) .
Quarter
1
$ ’000
45,632
31,053
24,454
101,139
(1,213)
99,926
17,001
4,346
11,968
33,315
(2,469)
30,846
Income and expense items: $1 = ZAR ...............
7.0939
Liquidity and Capital Resources
In United States Dollars (US GAAP)
Fiscal 2012
Quarter
Quarter
Quarter
2
$ ’000
43,985
29,446
19,771
93,202
(1,144)
92,058
13,549
3,519
9,479
26,547
(6,319)
20,228
8.1752
3
$ ’000
43,753
28,635
19,591
91,979
(1,315)
90,664
5,590
3,295
9,078
17,963
(5,485)
12,478
7.8521
4
$ ’000
61,260
31,491
26,976
119,727
(12,111)
107,616
(2,234)
3,489
15,359
16,614
(19,016)
(2,402)
8.0329
Full
Year
$ ’000
194,630
120,625
90,792
406,047
(15,783)
390,264
33,906
14,649
45,884
94,439
(33,289)
61,150
7.7186
At June 30, 2014, our cash balances were $58.7 million, which comprised mainly ZAR-denominated balances of
ZAR 411.9 million ($38.9 million), KRW-denominated balances of KRW 14.9 billion ($14.7 million) and US dollar-
denominated balances of $3.7 million and other currency deposits, primarily euro, of $1.4 million. The increase in our cash
balances from June 30, 2013, was primarily due to higher cash generated from our core business and the recovery of
implementation costs from SASSA, which increase was partially offset by higher corporate tax payments, the expansion of our
UEPS-based lending business, acquisition of terminals to maintain and expand our South Korean business activities, the
repayment of a portion of our South Korean debt and acquisition of substantially all of the remaining shares of KSNET that we
did not already own.
We currently believe that our cash and credit facilities are sufficient to fund our future operations for at least the next four
quarters.
We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at
South African banking institutions, and surplus cash held by our non-South African companies in the US and European money
markets. We have invested surplus cash in South Korea in short-term investment accounts at South Korean banking institutions.
In addition, we are required to invest the interest payable under our South Korean debt facilities due in the next six months in an
interest reserve account in South Korea.
Historically, we have financed most of our operations, research and development, working capital, capital expenditures
and acquisitions through our internally generated cash. When considering whether to borrow under our financing facilities, we
consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient
structures to moderate financing costs.
During December 2013, we increased our short-term South African credit facility with Nedbank Limited to
ZAR 400 million ($37.8 million). The short-term facility comprises of an overdraft facility of up to ZAR 250 million and
indirect and derivative facilities of up to ZAR 150 million, which includes letters of guarantee, letters of credit and forward
exchange contracts. As of June 30, 2014, we have used none of the overdraft and ZAR 139.0 million ($13.1 million) of the
indirect and derivative facilities to obtain foreign exchange contracts and to support guarantees issued by Nedbank to various
third parties on our behalf. Refer to Note 12 to the consolidated financial statements for more information about the terms of this
facility.
48
As of June 30, 2014, we had outstanding long-term debt of KRW 78.3 billion (approximately $77.2 million translated at
exchange rates applicable as of June 30, 2014) under credit facilities with a group of South Korean banks. The loans bear
interest at the South Korean CD rate in effect from time to time (2.65% as of June 30, 2014) plus a margin of 3.10% for one of
the term loan facilities and the revolver and a margin of 2.90% for the other term loan facility. Scheduled repayments of the
term loans and loan under the revolving credit facility are as follows: October 2014 (KRW 15 billion), April 2016, 2017 and
2018 (KRW 10 billion each) and October 2018 (KRW 30 billion plus all outstanding loans under our revolving credit facility).
Refer to Note 13 to the consolidated financial statements for more information about the terms of this facility.
We have a unique cash flow cycle due to the funding mechanism under our SASSA contact and our pre-funding of certain
merchants. We generally receive the grant funds 48 hours prior to the provision of the service in a trust account and any interest
we earn on these amounts is for the benefit of SASSA. We are required to initiate payments before the start of the pay cycle
month in order to have cash, merchant and interbank funds available when the payment cycle commences and this process
requires that we have access to the grant funds to be paid. These funds are recorded as settlement assets and liabilities.
Historically, we opened the pay cycle at certain participating merchants a few days before the payment of grants at pay sites,
however, currently we do not commence the payment cycle at participating merchants before the start of the pay cycle month.
We use our funds to pre-fund certain merchants for grants paid through our merchant acquiring system on our behalf a day
or two before the pay cycle opens. We typically reimburse merchants that are not pre-funded within 48 hours after they
distribute the grants to the social welfare recipient cardholders.
In addition, as a transaction processor, and in certain instances as a claims adjudicator, we receive cash from:
• customers on whose behalf we processes off-payroll payments that we will disburse to customer employees, payroll-
related payees and other payees designated by the customer; and
• credit card companies (as well as other types of payment services) which have business relationships with merchants
selling goods and services via the internet in South Korea that are our customers and on whose behalf we process the
transactions between various parties and settle the funds from the credit card companies to our merchant customers.
These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of
our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing
activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.
Cash flows from operating activities
Cash flows from operating activities for fiscal 2014 decreased to $37.1 million (ZAR 386.2 million) from $55.9 million
(ZAR 513.7 million) for fiscal 2013. Excluding the impact of interest paid under our South Korean debt facility and taxes
presented in the table below, the decrease in cash from operating activities resulted from the expansion of our UEPS-based
lending book, offset by cash inflows from improved trading activity, the recovery of implementation costs from SASSA and the
substantial elimination of implementation costs related to our SASSA contract in fiscal 2014. During fiscal 2014, we paid
interest of $5.2 million under our South Korean debt facility.
Cash flows from operating activities for fiscal 2013 increased to $55.9 million (ZAR 513.7 million) from $20.4 million
(ZAR 157.5 million) for fiscal 2012. Excluding the impact of interest paid under our South Korean debt facility and taxes
presented in the table below, the increase in cash provided by operating activities resulted from a more favorable trading
environment, notwithstanding the significant implementation costs paid in fiscal 2013, an increase in accounts payable and a
decrease in prefunding to merchants participating in our merchant acquiring system. These increases to operating cash flows
were offset by a moderate increase in accounts receivable and inventory and lower other payables and taxes which all decrease
operating cash flow. During fiscal 2013, we paid interest of $7.1 million under our South Korean debt facility.
During fiscal 2014, we made a first provisional tax payment of $13.3 million (ZAR 137.8 million) and a second
provisional tax payment of $25.0 million (ZAR 266.6 million) related to our 2014 tax year in South Africa. We also paid taxes
totaling $3.9 million in other tax jurisdictions, primarily South Korea.
During fiscal 2013, we made a first provisional tax payment of $6.8 million (ZAR 58.7 million), a second provisional tax
payment of $7.2 million (ZAR 72.5 million) related to our 2013 tax year in South Africa and paid dividend withholding taxes of
$1.6 million (ZAR 14.9 million) related to cross-border intercompany dividends paid. We made an additional second
provisional tax payments of $3.1 million (ZAR 25.5 million) related to our 2012 tax year in South Africa. We also paid taxes
totaling $3.3 million in other tax jurisdictions, primarily South Korea.
49
Taxes paid during fiscal 2014, 2013 and 2012 were as follows:
Table 14
First provisional payments ......................
Second provisional payments ..................
Taxation paid related to prior years .........
Taxation refunds received .......................
Dividend withholding taxation ................
Secondary taxation on companies ...........
Total South African taxes paid..........
Foreign taxes paid, primarily South
Korea.................................................
Total tax paid ..........................
2014
$
‘000
13,292
25,004
228
(36)
-
-
38,488
3,929
42,417
2013
$
‘000
6,757
7,228
3,072
(65)
1,610
-
18,602
3,298
21,900
Year ended June 30,
2012
$
‘000
2014
ZAR
‘000
15,014
8,485
3,326
(287)
-
1,811
28,349
137,773
266,573
2,360
(400)
-
-
406,306
2,355
30,704
41,506
447,812
2013
ZAR
‘000
58,693
72,451
25,517
(480)
14,916
-
171,097
29,468
200,565
2012
ZAR
‘000
123,271
71,458
24,803
(2,121)
-
14,615
232,026
18,288
250,314
Cash flows from investing activities
Cash used in investing activities for fiscal 2014 includes capital expenditure of $23.9 million (ZAR 248.5 million),
primarily for the acquisition of payment processing terminals in South Korea.
Cash used in investing activities for fiscal 2013 includes capital expenditure of $22.7 million (ZAR 198.1 million),
primarily for payment vehicles and related equipment for our SASSA contract and acquisition of payment processing terminals
in South Korea.
Cash used in investing activities for fiscal 2012 includes capital expenditure of $39.2 million (ZAR 302.2 million),
primarily for payment vehicles for our SASSA contract, acquisition of payment processing terminals in South Korea and POS
devices to service our merchant acquiring system in South Africa.
During fiscal 2013 we paid, net of cash acquired, $1.9 million (ZAR 16.8 million) for N1MS and $0.2 million for
SmartSwitch Botswana. During fiscal 2012, we received a net settlement of $4.9 million from the former shareholders of
KSNET. We also paid $4.5 million (ZAR 34.8 million) for the Eason prepaid electricity and airtime business during fiscal 2012.
Cash flows from financing activities
During the fiscal 2014, we refinanced our South Korean debt and used $70.6 million of these new borrowings and
$16.4 million of our surplus cash to repay the $87.0 million due under our old facility. In addition, we paid the facility fees
related to our new South Korean borrowings of approximately $0.9 million. During fiscal 2014, we utilized approximately
$2.1 million of these new borrowings to pay quarterly interest due in South Korea.
During fiscal 2014, we paid approximately $2.0 million for substantially all of the shares of KSNET we did not already
own. We utilized our South African short-term facility during fiscal 2014 and have repaid the full amount outstanding as of
June 30, 2014.
During fiscal 2013, we made a scheduled $14.5 million long-term debt repayment.
During fiscal 2012, we made long-term debt repayments of $19.2 million and acquired 180,656 shares of our common
stock for $1.1 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
50
Capital Expenditures
Capital expenditures for the years ended June 30, 2014, 2013 and 2012 were as follows:
Table 15
Operating Segment
2014
$
’000
2013
$
’000
Year ended June 30,
2012
$
’000
2014
ZAR
’000
2013
ZAR
’000
2012
ZAR
’000
South African transaction processing ..................
3,425
International transaction processing ..................... 19,393
1,088
Financial inclusion and applied technologies .......
Consolidated total........................................ 23,906
9,400
12,490
857
22,747
23,332
14,994
841
39,167
35,608
201,621
11,312
248,541
81,879
108,794
7,465
198,138
180,090
115,733
6,491
302,314
Our capital expenditures for fiscal 2014, 2013 and 2012, 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, 2014, of $0.2 million related mainly to computer equipment required to
maintain and expand operations. We expect to fund these expenditures through internally-generated funds. In addition to these
capital expenditures, we expect that capital spending for fiscal 2015 will also relate to expanding our operations in South Korea
and South Africa.
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2014:
Table 16
Payments due by Period, as of June 30, 2014 (in $ ’000s)
Total
Long-term debt obligations (A) ............
Operating lease obligations ..................
Purchase obligations .............................
Capital commitments ...........................
Other long-term obligations (B) ...........
Total ...............................................
(A) – Includes $77.2 million of long-term debt discussed under “—Liquidity and capital resources” and includes interest
88,049
7,587
5,541
190
23,477
124,844
-
-
-
-
23,477
23,477
Less
than 1
year
18,605
3,490
5,541
190
-
27,826
1-3
years
26,024
3,734
-
-
-
29,758
3-5
years
43,420
363
-
-
-
43,783
More
than 5
years
payable at the rate applicable as of June 30, 2014.
(B) – Includes policy holder liabilities of $22.2 million related to our insurance business.
51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to reduce our exposure to currencies other than the South African rand, or ZAR, through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, we use financial instruments to
economically hedge our exposure to exchange rate and interest rate fluctuations arising from our operations. We are also
exposed to equity price and liquidity risks as well as credit risks.
Currency Exchange Risk
We are subject to currency exchange risk because we purchase inventories that we are required to settle in other
currencies, primarily the euro and US dollar. We have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US dollar and the euro, on the other hand. As of
June 30, 2014, and 2013, our outstanding foreign exchange contracts were as follows:
As of June 30, 2014
Notional amount
EUR 182,272.50
EUR 182,272.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 181,570.50
EUR 181,570.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 174,424.50
EUR 174,424.50
Strike price
ZAR 15.2077
ZAR 15.3488
ZAR 15.4228
ZAR 15.2819
ZAR 15.3623
ZAR 15.5041
ZAR 15.5739
ZAR 15.4316
ZAR 15.6552
ZAR 15.5136
ZAR 15.5970
ZAR 15.7391
ZAR 15.8119
ZAR 15.6729
As of June 30, 2013
Fair market
value price Maturity
July 21, 2014
July 21, 2014
ZAR 14.5803
ZAR 14.5803
ZAR 14.6542 August 20, 2014
ZAR 14.6542 August 20, 2014
ZAR 14.7367 September 22, 2014
ZAR 14.7367 September 22, 2014
ZAR 14.8119 October 20, 2014
ZAR 14.8119 October 20, 2014
ZAR 14.8982 November 20, 2014
ZAR 14.8982 November 20, 2014
ZAR 14.9874 December 22, 2014
ZAR 14.9874 December 22, 2014
ZAR 15.0671
ZAR 15.0671
January 20, 2015
January 20, 2015
Notional amount
EUR 4,000,000
Strike price
ZAR 9.06
value price Maturity
ZAR 10.1397 September 30, 2013
Fair market
Translation Risk
Translation risk relates to the risk that our results of operations will vary significantly as the US dollar is our reporting
currency, but we earn most of our revenues and incur most of our expenses in ZAR. The US dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are outside our control, there can be no assurance that future
fluctuations will not adversely affect our results of operations and financial condition.
Interest Rate Risk
As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest
rates, which we manage primarily through our regular financing activities. In addition, outstanding indebtedness under our long-
term South Korean debt facilities bear interest at the South Korean CD rate plus 3.10% and 2.90%, respectively. As interest
rates, and specifically the South Korean CD rate, are outside our control, there can be no assurance that future increases in
interest rates, specifically the South Korean CD rate, will not adversely affect our results of operations and financial condition.
As of June 30, 2014, the South Korean CD rate was 2.65%.
52
The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as
of June 30, 2014, as a result of a change in the South Korean CD rate. The effects of a hypothetical 1% increase and a 1%
decrease in the South Korean CD rate as of June 30, 2014, is shown. The selected 1% hypothetical change does not reflect what
could be considered the best or worst case scenarios.
Table 17
Interest on debt facility
As of June 30, 2014
Annual
expected
interest
charge
($ ’000)
4,408
Hypothetical
change in
South
Korean CD
rate
1%
(1%)
Estimated
annual
expected
interest charge
after change in
South Korean
CD rate
($ ’000)
5,189
3,645
We generally maintain limited investment in cash equivalents and have occasionally invested in marketable securities. The
interest earned on our bank balances and short term cash investments is dependent on the prevailing interest rates in the
jurisdictions where our cash reserves are invested.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties. We maintain
credit risk policies with regard to our counterparties to minimize overall credit risk. These policies include an evaluation of a
potential 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 26% of the issued share capital of Finbond Group Limited which are exchange-traded equity securities. The fair
value of these securities as of June 30, 2014, represented approximately 1% of our total assets, including these securities. We
expect to hold these securities for an extended period of time and we are not concerned with short-term equity price volatility
with respect to these securities provided that the underlying business, economic and management characteristics of the company
remain sound.
The market price of these securities may fluctuate for a variety of reasons, consequently, the amount we may obtain in a
subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that we would incur as a result of the lack of liquidity on the exchange on which
these securities are listed. We may not be able to sell some or all of these securities at one time, or over an extended period of
time without influencing the exchange traded price, or at all.
53
The following table summarizes our exchange-traded equity securities with equity price risk as of June 30, 2014. The
effects of a hypothetical 10% increase and a 10% decrease in market prices as of June 30, 2014, is also shown. The selected
10% hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far
worse due both to the nature of equity markets and the aforementioned liquidity risk.
Table 18
Exchange-traded equity securities .
8,068
Fair
value
($ ’000)
As of June 30, 2014
Estimated fair
value after
hypothetical
change in price
($ ’000)
Hypothetical
Percentage
Increase
(Decrease) in
Shareholders’
Equity
8,875
7,261
0.21%
(0.21%)
Hypothetical
price change
10%
(10%)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the report of our independent registered public accounting firm,
appear on pages F-1 through F-55 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
54
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the chief executive officer and the chief financial
officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, the 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 US GAAP.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with US GAAP, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the 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 in 1992. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of June 30, 2014. Deloitte & Touche (South Africa), our independent
registered public accounting firm, has issued an audit report on our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended
June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the internal control over financial reporting of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report 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, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended June 30, 2014 of the Company and our report
dated August 28, 2014, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche (South Africa)
Registered Auditors
28 August 2014
National Executive: LL Bam Chief Executive AE Swiegers Chief Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax TP Pillay Consulting K Black Clients & Industries
JK Mazzocco Talent & Transformation MJ Jarvis Finance M Jordan Strategy S Gwala Managed Services
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
56
ITEM 9B. OTHER INFORMATION
None.
- Remainder of this page left blank -
57
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our executive officers is set out in Part I, Item 1 under the caption “Executive Officers and Significant
Employees of the Registrant.” The other information required by this Item is incorporated by reference to the sections of our
definitive proxy statement for our 2014 annual meeting of shareholders entitled “Board of Directors and Corporate Governance”
and “Additional Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2014 annual meeting of shareholders entitled “Executive Compensation,” “Board of Directors and Corporate 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
2014 annual meeting of shareholders entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2014 annual meeting of shareholders entitled “Certain Relationships and Related Transactions” and “Board of Directors and
Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2014 annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
58
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
PART IV
a) The following documents are filed as part of this report
1. Financial Statements
The following financial statements are included on pages F-1 through [F-55].
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2014 and 2013
Consolidated statements of operations for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of comprehensive income for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of changes in equity for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of cash flows for the years ended June 30, 2014, 2013 and 2012
Notes to the consolidated financial statements
2. Financial Statement Schedules
F-2
F-3
F-4
F-5
F-6
F-9
F-10
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is
otherwise included.
(b) Exhibits
Exhibit
No.
Description of Exhibit
Incorporated by Reference Herein
Included
Herewith Form Exhibit
Filing Date
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Articles of Incorporation
8-K
3.1
December 1, 2008
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc.
Form of common stock certificate
Distribution Agreement, dated July 1, 2002,
between Net 1 UEPS Technologies, Inc. and Net 1
Investment Holdings (Pty) Limited
Patent and Technology Agreement, dated June 19,
2000, by and between Net 1 Holdings S.a.r.1. and
Net 1 UEPS Technologies, Inc.
Technology License Agreement between Net 1
Investment Holdings (Proprietary) Limited and Visa
International Service Association
Product License Agreement between Net 1
Holdings S.a.r.1. and Net 1 Operations S.a.r.1.
Non Exclusive UEPS License Agreement between
Net 1 Investment Holdings (Proprietary) Limited
and SIA Netcards
Assignment of Copyright and License of Patents
and Trade Marks between MetroLink (Proprietary)
Limited and Net 1 Products (Proprietary) Limited
Agreement between Nedcor Bank Limited and Net
1 Products (Proprietary) Limited
Patent and Technology Agreement by and among
Net 1 Investment Holdings (Proprietary) Limited,
Net 1 Applied Technology Holding Limited and
Nedcor Bank Limited
59
8-K
S-1
3.2
4.1
November 5, 2009
June 20, 2005
S-4
10.1
February 3, 2004
S-4
10.2
February 3, 2004
S-1
10.12 May 26, 2005
S-4/A
10.8
April 21, 2004
S-4/A
10.10 April 21, 2004
S-1
10.18 May 26, 2005
S-1/A
10.16
July 19, 2005
S-1
10.19 May 26, 2005
10.9
10.10
10.11*
10.12*
10.13*
10.14*
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Patent and Technology Agreement by and among
Net 1 Holdings S.a.r.1., Net 1 Applied Technology
Holdings Limited and Nedcor Bank Limited
Agreement by and among Nedbank Limited, Net 1
UEPS Technologies, Inc., and Net 1 Applied
Technologies South Africa Limited
Amended and Restated Stock Incentive Plan of Net
1 UEPS Technologies, Inc.
Form of Restricted Stock Agreement
Form of Stock Option Agreement
Form of Restricted Stock Agreement (non-
employee directors)
Form of Option issued by the Company to Business
Venture Investments No 1567 (Proprietary) Limited
(RF)
Contract for the Payment of Social Grants dated
February 3, 2012 between CPS and SASSA
Service Level Agreement dated February 3, 2012
between CPS and SASSA
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
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.
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.
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.
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
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.
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.
60
S-1/A
10.19
July 19, 2005
S-1/A
10.20
July 19, 2005
14A
10-K
10-K
10-K
8-K
A
October 28, 2009
10.13
10.14
August 23, 2012
August 23, 2012
10.15
August 23, 2012
99.2
January 26, 2012
8-K
99.1
February 6, 2012
8-K
99.2
February 6, 2012
10-Q
10.25 May 9, 2013
8-K
10.24
October 31, 2013
8-K
10.25
December 10, 2013
8-K
10.26
December 10, 2013
8-K
10.27
December 19, 2013
10-Q
10.28
February 6, 2014
10-Q
10.29
February 6, 2014
8-K
10.30 March 18, 2014
8-K
10.31 March 18, 2014
8-K
10.1
July 2, 2014
8-K
10.2
July 2, 2014
10.25
10.26
10.27*
10.28*
12
14
21
23
31.1
31.2
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.
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.
Service Agreement between KSNET, Inc. and Phil-
Hyun Oh dated June 30, 2014
Service Agreement between Net1 Applied
Technologies Korea and Phil-Hyun Oh dated June
30, 2014
Statement of Ratio of Earnings to Fixed Charges
Amended and Restated Code of Ethics
Subsidiaries of Registrant
Consent of Independent Registered Public
Accounting Firm
Certification of Principal Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended
Certification of Principal Financial Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended
32
Certification pursuant to 18 USC Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Indicates a management contract or compensatory plan or arrangement.
X
X
X
X
X
X
X
X
X
X
X
X
X
61
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.
SIGNATURES
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director
Date: August 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Serge C.P. Belamant
Serge C.P. Belamant
/s/ Herman Gideon Kotzé
Herman Gideon Kotzé
/s/ Paul Edwards
Paul Edwards
/s/ Alasdair Jonathan Kemsley Pein
Alasdair Jonathan Kemsley Pein
/s/ Christopher Stefan Seabrooke
Christopher Stefan Seabrooke
Chief Executive Officer, Chairman of the Board and
Director (Principal Executive Officer)
August 28, 2014
Chief Financial Officer, Treasurer and Secretary and
Director (Principal Financial and Accounting Officer)
August 28, 2014
Director
Director
Director
August 28, 2014
August 28, 2014
August 28, 2014
62
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2014 and 2013
Consolidated statements of operations for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of comprehensive income for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of changes in equity for the years ended June 30, 2014, 2013 and 2012
Consolidated statements of cash flows for the years ended June 30, 2014, 2013 and 2012
Notes to the consolidated financial statements
F-2
F-3
F-4
F-5
F-6
F-9
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes
in equity, and cash flows for each of the three years in the period ended June 30, 2014. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Net 1 UEPS Technologies, Inc. and subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2014 in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of June 30, 2014, based on the criteria established in Internal Control
— Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated August 28, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche (South Africa)
Registered Auditors
28 August 2014
National Executive: LL Bam Chief Executive AE Swiegers Chief Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax TP Pillay Consulting K Black Clients & Industries
JK Mazzocco Talent & Transformation MJ Jarvis Finance M Jordan Strategy S Gwala Managed Services
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
as of June 30, 2014 and 2013
ASSETS
2014
2013
(In thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents
Pre-funded social welfare grants receivable (Note 4)
Accounts receivable, net (Note 5)
Finance loans receivable, net (Note 5)
Inventory (Note 6)
Deferred income taxes (Note 20)
Total current assets before settlement assets
Settlement assets
Total current assets
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
EQUITY-ACCOUNTED INVESTMENTS
GOODWILL (Note 9)
INTANGIBLE ASSETS, net (Note 9)
OTHER LONG-TERM ASSETS (Note 7 and Note 10)
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Other payables (Note 11)
Current portion of long-term borrowings (Note 13)
Income taxes payable
Total current liabilities before settlement obligations
Settlement obligations
Total current liabilities
DEFERRED INCOME TAXES (Note 20)
LONG-TERM BORROWINGS (Note 13)
OTHER LONG-TERM LIABILITIES (Note 10)
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 24)
EQUITY
COMMON STOCK (Note 14)
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - 2014: 47,819,299; 2013:
45,592,550
PREFERRED STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: 2014: -; 2013: -
ADDITIONAL PAID-IN CAPITAL
TREASURY SHARES, AT COST: 2014: 15,883,212; 2013: 13,455,090 (Note 14)
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 15)
RETAINED EARNINGS
TOTAL NET1 EQUITY
NON-CONTROLLING INTEREST
TOTAL EQUITY
$
$
58,672
4,809
148,067
53,124
10,785
7,451
282,908
725,987
1,008,895
47,797
878
186,576
68,514
38,285
1,350,945
40,570
17,101
42,257
14,789
7,676
81,823
725,987
807,810
15,522
62,388
23,477
909,197
53,665
2,934
102,614
8,350
12,222
4,938
184,723
752,476
937,199
48,301
1,183
175,806
77,257
36,576
1,276,322
26,567
33,808
14,209
2,275
76,859
752,476
829,335
18,727
66,632
21,659
936,353
63
59
-
202,401
(200,681)
(82,741)
522,729
441,771
(23)
441,748
-
160,670
(175,823)
(100,858)
452,618
336,666
3,303
339,969
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 1,350,945
$
1,276,322
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2014, 2013 and 2012
2014
2013
(In thousands, except per share data)
2012
REVENUE (Note 16)
Services rendered
Loan-based fees received
Sale of goods
EXPENSE
Cost of goods sold, IT processing, servicing and support
Selling, general and administration
Equity instruments issued pursuant to BEE transactions (Note 17)
Depreciation and amortization
OPERATING INCOME
INTEREST INCOME
INTEREST EXPENSE
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (Note 20)
NET INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
NET INCOME
$
$ 581,656
518,297
33,560
29,799
452,147
430,268
6,613
15,266
$ 390,264
362,679
8,433
19,152
260,232
168,072
11,268
40,286
101,798
14,817
7,473
109,142
39,379
69,763
298
70,061
196,834
141,000
191,552
137,404
-
40,599
23,162
12,083
7,966
27,279
14,656
14,211
36,499
61,150
8,576
9,345
60,381
15,936
12,623
44,445
351
220
12,974
44,665
(ADD) LESS: NET (LOSS) INCOME ATTRIBUTABLE TO NON-
CONTROLLING INTEREST
(50)
(3)
14
NET INCOME ATTRIBUTABLE TO NET1
$
70,111
$
12,977
$
44,651
Net income per share, in United States dollars: (Note 21)
Basic earnings attributable to Net1 shareholders
Diluted earnings attributable to Net1 shareholders
1.51
1.50
0.28
0.28
0.99
0.99
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended June 30, 2014, 2013 and 2012
2014
2013
(In thousands)
2012
NET INCOME
$
70,061
$
12,974
$
44,665
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized income on asset available for sale, net of tax
Release of foreign currency translation reserve related to sale/
liquidation of businesses (Note 19)
Movement in foreign currency translation reserve
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
COMPREHENSIVE INCOME (LOSS)
Add comprehensive loss attributable to non-controlling
interest
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO NET1
See accompanying notes to consolidated financial statements.
288
4,277
13,730
18,295
88,356
50
915
1,547
-
(26,051)
(25,136)
(12,162)
3
-
(43,617)
(42,070)
2,595
113
$
88,406
$
(12,159)
$
2,708
F-5
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2012 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total Net1
Equity
Non-
controlling
Interest
Total
Balance – July 1, 2011
58,427,239
$59
(13,274,434)
$(174,694)
45,152,805
$138,420
$394,990
$(33,779)
$324,996
$3,014
$328,010
Restricted stock granted (Note 18)
582,729
Stock-based compensation charge (Note 18)
Reversal of stock-based compensation charge (Note 18)
(5,976)
582,729
(5,976)
Equity instrument charge (Note 17)
Treasury shares acquired (Note 14)
Utilization of APIC pool related to vested restricted stock
Liquidation of SmartSwitch Nigeria (Note 19)
Sale of 10% of Smart Life (Note 3)
KSNET purchase accounting adjustment (Note 3)
Net income
Other comprehensive loss (Note 15)
(180,656)
(1,129)
(180,656)
2,909
(134)
14,211
(56)
-
2,909
(134)
14,211
(1,129)
(56)
44,651
44,651
-
2,909
(134)
14,211
(1,129)
(56)
280
188
(63)
44,665
280
188
(63)
14
(41,943)
(41,943)
(127)
(42,070)
Balance – June 30, 2012
59,003,992
$59
(13,455,090)
$(175,823)
45,548,902
$155,350
$439,641
$(75,722)
$343,505
$3,306
$346,811
F-6
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2013 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total
Net1
Equity
Non-
controlling
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)
Exercise of stock option (Note 18)
Stock-based compensation charge (Note 18)
21,569
30,000
-
Reversal of stock-based compensation charge (Note 18)
(55,333)
Utilization of APIC pool related to vested restricted stock
N1MSs acquisition (Note 3)
47,412
Net income
Other comprehensive loss (Note 15)
21,569
30,000
(55,333)
47,412
240
4,387
(480)
(11)
1,184
-
240
4,387
(480)
(11)
1,184
-
240
4,387
(480)
(11)
1,184
12,977
12,977
(3)
12,974
(25,136)
(25,136)
(25,136)
Balance – June 30, 2013
59,047,640
$59
(13,455,090)
$(175,823)
45,592,550
$160,670
$452,618
$(100,858)
$336,666
$3,303
$339,969
F-7
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in Equity for the year ended June 30, 2014 (dollar amounts in thousands)
Net 1 UEPS Technologies, Inc. Shareholders
Number
of
Shares
Amount
Number
of
Treasury
Shares
Treasury
Shares
Number of
shares, net of
treasury
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
other
comprehensive
(loss) income
Total
Net1
Equity
Non-
controlling
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
4
-
Issue of common stock (Note 14)
4,400,000
Repurchase of common stock (Note 14)
Restricted stock granted (Note 18)
Exercise of stock option (Note 18)
Equity instruments charge (Note 17)
Stock-based compensation charge (Note 18)
187,963
26,667
Reversal of stock-based compensation charge (Note 18)
(7,171)
Income tax benefit from vested stock awards
Acquisition of KSNET non-controlling interest (Note 14)
N1MSs acquisition (Note 3)
47,412
Net income
Other comprehensive income (Note 15)
(2,428,122)
(24,858)
(2,428,122)
4,400,000
25,050
187,963
26,667
(7,171)
47,412
198
11,268
3,724
(6)
5
1,492
25,054
(24,858)
-
198
11,268
3,724
(6)
5
25,054
(24,858)
-
198
11,268
3,724
(6)
5
(178)
1,314
(3,276)
(1,962)
-
-
70,111
70,111
(50)
70,061
18,295
18,295
-
18,295
Balance – June 30, 2014
63,702,511
$63
(15,883,212)
$(200,681)
47,819,299
$202,401
$522,729
$(82,741)
$441,771
$(23)
$441,748
See accompanying notes to consolidated financial statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2014, 2013 and 2012
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization
Earnings from equity-accounted investments
Fair value adjustment
Interest payable
Facility fee amortized
(Profit) Loss on disposal of property, plant and equipment
Net loss on sale of 10% of Smart Life
Loss (Profit) on deconsolidation of subsidiaries and business
(Note 19)
Realized loss on sale of Smart Life investments
Stock compensation charge, net of forfeitures (Note 18)
Fair value of BEE equity instruments granted (Note 17)
Increase in accounts and finance loans receivable, and pre-funded
grants receivable
Decrease (Increase) in inventory
Increase (Decrease) in accounts payable and other payables
Increase (Decrease) in taxes payable
Decrease in deferred taxes
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Proceeds from disposal of property, plant and equipment
Net cash outflow from sale of MediKredit (Note 19)
Proceeds from sale of business (Note 19)
Capital reduction/ repayment of loan by equity-accounted investment
Acquisitions, net of cash acquired (Note 3)
Settlement from former shareholders of KSNET (Note 3)
Acquisition of available-for-sale securities (Note 7)
Purchase of investments related to Smart Life
Proceeds from maturity of investments related to Smart Life
Other investing activities, net
Net change in settlement assets
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term borrowings (Note 13)
Long-term borrowings obtained (Note 13)
Proceeds from bank overdraft
Repayment of bank overdraft
Acquisition of interests in KSNET (Note 14)
Payment of facility fee (Note 13)
Proceeds from issue of common stock (Note 18)
Acquisition of treasury stock (Note 14)
Proceeds on sale of 10% of Smart Life (Note 3)
Net change in settlement obligations
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES
Effect of exchange rate changes on cash
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
See accompanying notes to consolidated financial statements.
$
F-9
2014
2013
(In thousands)
2012
$
70,061
$
12,974
$
44,665
40,286
(298)
(55)
2,100
738
(434)
-
55
-
3,718
11,268
(101,447)
780
12,671
5,523
(7,821)
37,145
(23,906)
2,990
(669)
186
539
-
-
-
-
-
570
(1,350)
(21,640)
(87,008)
73,677
24,580
(23,335)
(1,968)
(872)
198
-
-
1,350
(13,378)
2,880
5,007
53,665
58,672
40,599
(351)
631
4,313
302
110
-
-
-
3,907
-
(5,726)
(2,890)
8,113
(2,748)
(3,317)
55,917
(22,747)
510
-
-
3
(2,143)
-
-
-
-
545
(423,984)
(447,816)
(14,508)
-
-
-
-
-
240
-
-
423,984
409,716
(3,275)
14,542
39,123
53,665
$
$
36,499
(220)
(3,375)
8,823
389
(64)
81
(3,994)
25
2,775
14,211
(31,974)
(5,271)
(18,496)
(7,483)
(16,185)
20,406
(39,167)
764
-
-
122
(6,154)
4,945
(948)
(2,320)
2,321
(1)
(252,101)
(292,539)
(19,172)
-
-
-
-
-
-
(1,129)
107
252,101
231,907
(15,914)
(56,140)
95,263
39,123
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Net 1 UEPS Technologies, Inc. (“Net1” and collectively with its consolidated subsidiaries, the “Company”) was
incorporated in the State of Florida on May 8, 1997. The Company provides payment solutions and transaction processing
services across a wide range of industries and in various geographies. It has developed and markets a smart-card based alternative
payment system for the unbanked and underbanked populations of developing economies. Its universal electronic payment system
(“UEPS”) uses biometrically secure smart cards that operate in real-time but offline, which allows users to enter into transactions
at any time with other card holders in even the most remote areas. The Company also develops and provides secure transaction
technology solutions and services, and offers transaction processing, financial and on-line real-time healthcare management
solutions in the United States. The Company’s technology is widely used in South Africa today, where it distributes pension and
welfare payments to recipient cardholders in South Africa, provides financial services, processes debit and credit card payment
transactions on behalf of retailers through its EasyPay system, processes value-added services such as bill payments and prepaid
electricity for the major bill issuers and local councils in South Africa, processes third-party and associated payroll payments for
employees and provides mobile telephone top-up transactions for the major South African mobile carriers. Through KSNET, the
Company offers card processing, payment gateway (“PG”) and banking value-added network services (“VAN”) in South Korea.
Basis of presentation
The accompanying consolidated financial statements include subsidiaries over which Net1 exercises control and have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The financial statements of entities which are controlled by Net1, referred to as subsidiaries, are consolidated. Inter-company
accounts and transactions are eliminated upon consolidation.
The Company, if it is the primary beneficiary, consolidates entities which are considered to be variable interest entities
(“VIE”). The primary beneficiary is considered to be the entity that will absorb a majority of the entity's expected losses, receive a
majority of the entity's expected residual returns, or both. No entities were required to be consolidated in terms of these
requirements during the years ended June 30, 2014, 2013 and 2012.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Translation of foreign currencies
The primary functional currency of the Company is the South African Rand (“ZAR”) and its reporting currency is the
US dollar. The Company also has consolidated entities which have other currencies, primarily South Korean won (“KRW”), as
their functional currency. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues
and expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are
translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in selling, general and
administration expense on the 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, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for doubtful accounts receivable
Allowance for doubtful finance loans receivable
The Company regularly reviews the ageing of outstanding amounts due from borrowers and adjusts the allowance based on
management’s estimate of the recoverability of the finance loans receivable. The Company writes off finance loans receivable and
related service fees if a borrower is in arrears with repayments for more than three months or dies.
Allowance for doubtful accounts receivable
A specific provision is established where it is considered likely that all or a portion of the amount due from customers
renting point of sale (“POS”) equipment, receiving support and maintenance or transaction services or purchasing licenses from
the Company will not be recovered. Non-recoverability is assessed based on a review by management of the ageing of
outstanding amounts, the location of the customer and the payment history in relation to those specific amounts.
Inventory
Inventory is valued at the lower of cost and market value. Cost is determined on a first-in, first-out basis and includes
transport and handling costs.
Equity-accounted investments
The Company uses the equity method to account for investments in companies when it has significant influence but not
control over the operations of the equity-accounted company. Under the equity method, the Company initially records the
investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-
accounted company’s net income or loss. The Company does not recognize cumulative losses in excess of its investment or loans
in an equity-accounted investment except if it has an obligation to provide additional financial support. Dividends received from
an equity-accounted investment reduce the carrying value of the 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
Office equipment
Vehicles
Furniture and fittings
Plant and equipment
3 to 5 years
2 to 10 years
4 to 8 years
5 to 10 years
5 to 10 years
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognized in income.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values of the identifiable assets
acquired and liabilities assumed. The Company tests for impairment of goodwill on an annual basis and at any other time if events
or circumstances change that would more likely than not reduce the fair value of the reporting unit goodwill below its carrying
amount.
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the
business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel;
the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; and results of
testing for recoverability of a significant asset group within a reporting unit.
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recorded in the statement of operations. Measurement of the fair value of a reporting unit is based on one or more of the following
fair value measures: the amount at which the unit as a whole could be bought or sold in a current transaction between willing
parties; present value techniques of estimated future cash flows; or valuation techniques based on multiples of earnings or
revenue, or a similar performance measure.
Intangible assets
Intangible assets are shown at cost less accumulated amortization. Intangible assets are amortized over the following useful
lives:
Customer relationships
Software and unpatented technology
FTS patent
Exclusive licenses
Trademarks
Customer databases
1 to 15 years
3 to 5 years
10 years
7 years
3 to 20 years
3 years
Intangible assets are periodically evaluated for recoverability, and those evaluations take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Policy reserves and liabilities
Reserves for future policy benefits and claims payable
The Company determines its reserves for future policy benefits under its life insurance products using the financial
soundness valuation method and assumptions as of the issue date as to mortality, interest, persistency and expenses plus
provisions for adverse deviations.
Deposits on investment contracts
For the 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, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Reinsurance contracts held
The Company enters into reinsurance contracts with reinsurers under which the Company is compensated for the entire
amount or a portion of losses arising on one or more of the insurance contracts it issues.
The expected benefits to which the Company is entitled under its reinsurance contracts held are recognized as reinsurance
assets. These assets consist of short-term balances due from reinsurers (classified within accounts receivable, net) as well as long-
term receivables (classified within other long-term assets) that are dependent on the present value of expected claims and benefits
arising net of expected premiums payable under the related reinsurance contracts. Amounts recoverable from or due to reinsurers
are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each
reinsurance contract.
Reinsurance assets are assessed for impairment at each balance sheet date. If there is reliable objective evidence that
amounts due may not be recoverable, the Company reduces the carrying amount of the reinsurance asset to its recoverable amount
and recognizes that impairment loss in its condensed consolidated statement of operations.
Reinsurance premiums are recognized when due for payment under each reinsurance contract.
Sales taxes
Revenue and expenses are presented net of sales, use and value added taxes, as the case may be.
Revenue recognition
The Company recognizes revenue when:
•
there is persuasive evidence of an agreement or arrangement;
• delivery of products has occurred or services have been rendered;
•
• collectability is reasonably assured.
the seller’s price to the buyer is fixed or determinable; and
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 welfare benefit distribution service to the South Africa Social Security Agency. Fee income
received for these services is recognized in the statement of operations when distributions have been made to the recipient
cardholders.
Recipient cardholders are able to load their welfare grants at merchants enrolled in the Company’s participating merchant
system in certain provinces. There is no charge to the recipient cardholder to load the grant onto a smart card at the merchant
location, however, a fee is charged to the merchant for purchases made at the merchant using the smart card. A fee is also charged
to the merchant when the recipient cardholder makes a cash withdrawal. Fee income received for these services is recognized in
the statement of operations when the transaction occurs.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway
Card VAN services consist of services relating to authorization of credit card transactions including transmission of
transaction details (“authorization service”), and collection of receipts associated with the credit card transactions (“collection
service”). With its authorization service, the Company connects credit card companies with merchants online when a customer
uses his/her credit card via terminals installed at merchants’ sites and the 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, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway (continued)
Banking VAN is a division supporting a 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 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.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Software
Revenue from licensed software is recognized on a subscription basis over the period that the client is entitled to use the
license. Revenue from the sale of software is recognized if all revenue recognition criteria have been met. Post-contract
maintenance and technical support in respect of software is generally negotiated and sold as a separate service and is recognized
over the period such items are delivered.
Systems implementation projects
The Company undertakes smart card system implementation projects. The hardware and software installed in these projects
are in the form of customized systems, which ordinarily involve modification to meet the 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 expenditures is charged to net income in the period in which it is incurred. During the years
ended June 30, 2014, 2013 and 2012, the Company incurred research and development expenditures of $2.2 million, $1.3 million
and $3.9 million, respectively.
Computer software development
Product development costs in respect of software intended for sale to licensees are expensed as incurred until technological
feasibility is attained. Technological feasibility is attained when the 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, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes
payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events
recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of changes in tax
laws or enacted tax rates.
The Company measured its South African income taxes and deferred income taxes for the years ended June 30, 2014, 2013
and 2012, using the enacted statutory tax rate in South Africa of 28%. On December 20, 2011, there was a change in South
African tax law to impose a dividends withholding tax (a tax levied and withheld by a company on distributions to its
shareholders) to replace the Secondary Taxation on Companies (a tax levied directly on a company on dividend distributions)
(“STC”). The change was effective on April 1, 2012.
As of June 30, 2014, the Company intends to permanently reinvest its non-US undistributed earnings of $356.5 million in
those non-US jurisdictions. Accordingly, the Company has not recognized a deferred tax liability related to future distributions of
these undistributed earnings. It is not practicable for the Company to estimate the amount of unrecognized deferred tax liability
because of the complexities of the calculations involved. The Company will be required to record a tax charge if it is no longer
able to permanently reinvest its undistributed earnings. This may result in an increase in the Company’s effective tax rate in future
periods.
In establishing the appropriate deferred tax asset valuation allowances, the Company assesses the realizability of its deferred
tax assets, and based on all available evidence, both positive and negative, determines whether it is more likely than not that the
deferred tax assets or a portion thereof will be realized.
Reserves for uncertain tax positions are recognized in the financial statements for positions which are not considered more
likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. For positions that
meet the more likely than not standard, the measurement of the tax benefit recognized in the financial statements is based upon
the largest amount of tax benefit that, in 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 expense and penalties in selling,
general and administration in the consolidated statements of operations.
Stock-based compensation
Stock-based compensation represents the cost related to stock-based awards granted. The Company measures equity-based
stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an
expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. In respect of awards with only
service conditions that have a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over
the requisite service period for the entire award. The forfeiture rate is estimated using historical trends of the number of awards
forfeited prior to vesting. The expense is recorded in the statement of operations and classified based on the recipients’ respective
functions.
The Company records deferred tax assets for awards that result in deductions on the 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, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity instruments issued to third parties
Equity instruments issued to third parties represents the cost related to equity instruments granted. The Company measures
this cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a straight-line
basis (net of estimated forfeitures) over the requisite service period. The forfeiture rate is estimated based on the 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 recipient cardholders of social welfare grants, (2) cash received from customers on whose behalf the Company
processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees
designated by the customer and (3) as of June 30, 2013, cash received from healthcare plans which the Company disburses to
healthcare service providers once it adjudicates claims.
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social
welfare grants, (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees
designated by the customer and (3) as of June 30, 2013, amounts which are due to healthcare service providers after claims have
been adjudicated and reconciled, provided that the Company shall have previously received such funds from healthcare plan
customers.
The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets
and obligations.
Recent accounting pronouncements adopted
The following summary of recent accounting pronouncements reflects only the new authoritative accounting guidance
issued that is relevant and applicable to the Company.
In February 2013, the FASB issued guidance regarding Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income. This guidance requires entities to present (either on the face of the statement of operations or in the
notes) the effects on the line items of the statement of operations for amounts reclassified out of accumulated other
comprehensive income. The guidance is effective for the Company beginning July 1, 2013 and is applied prospectively. The
adoption of this guidance did not have a material impact on the Company’s financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2014
In March 2013, the FASB issued guidance regarding Parent’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 foreign entity in which the subsidiary or group of assets had
resided. The guidance is effective for the Company beginning July 1, 2014. Early adoption is permitted. The Company is
currently evaluating the impact of this guidance on its financial statements on adoption.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements not yet adopted as of June 30, 2014 (continued)
In May 2014, the FASB issued guidance regarding Revenue from Contracts with Customers. This guidance requires an
entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the
consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
guidance is effective for the Company beginning July 1, 2017. Early adoption is not permitted. The Company expects that this
guidance will have a material impact on its financial statements and is currently evaluating the impact of this guidance on its
financial statements on adoption.
3.
ACQUISITIONS
The cash paid, net of cash received related to the Company’s various acquisitions during the years ended June 30, 2014,
2013 and 2012 are summarized in the table below:
Net1 Mobile Solutions Proprietary Limited (“N1MS”) (formerly Pbel) ........
SmartSwitch Botswana (Proprietary) Limited (“SmartSwitch Botswana”) ....
The Smart Life Insurance Company Limited (“Smart Life”) .........................
Prepaid business ..............................................................................................
Total cash paid, net of cash received ............................................................
2014
$-
-
-
-
$-
2013
$1,913
230
-
-
$2,143
2012
$-
-
1,673
4,481
$6,154
2014 acquisitions
None.
2013 acquisitions
SmartSwitch Botswana (Proprietary) Limited
On December 7, 2012, the Company acquired 50% of the outstanding and issued ordinary shares in SmartSwitch Botswana,
a Botswana private company, for BWP 6.3 million (approximately $0.8 million) in cash. As a result of this transaction,
SmartSwitch Botswana is now a wholly-owned subsidiary and is consolidated in the Company’s financial statements.
SmartSwitch Botswana had previously been recorded as an equity-accounted investment. SmartSwitch Botswana has been
allocated to the Company’s International transaction processing operating segment.
N1MS (formerly Pbel)
On September 14, 2012, the Company acquired all of the outstanding and issued ordinary shares in N1MS, a South African
private company, for ZAR 33 million (approximately $3.8 million). ZAR 23 million of the purchase price was paid in cash and
the remaining ZAR 10 million was paid by issuing 142,236 shares of the 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 will be entitled to earn all 142,236 shares if the
cumulative pre-defined N1MS projected profit over the measurement period is achieved or if the Company decides to abandon its
Mobile Virtual Card initiative. During the years ended June 30, 2014 and 2013, N1MS achieved its pre-defined financial
performance milestones and the sellers earned 47,412 shares of the 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 the
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.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2013 acquisitions (continued)
N1MS (continued)
The Company believes that the acquisition of N1MS is important in the execution of its strategy to commercialize and
develop its world-wide virtual card patents and to supply secure, leading-edge technological solutions to the global payments
market with particular focus on mobile-based payment solutions. N1MS has been allocated to the Company’s South African
transaction processing operating segment.
The final purchase price allocation of SmartSwitch Botswana and N1MS acquisitions, translated at the foreign exchange
rates applicable on the date of acquisition, is provided in the table below:
Cash and cash equivalents .............................................................
Accounts receivable, net ................................................................
Inventory ........................................................................................
Other current assets ........................................................................
Property, plant and equipment, net ................................................
Intangible assets (Note 9)..............................................................
Goodwill (Note 9) ..........................................................................
Other payables ..............................................................................
Income taxes payable ....................................................................
Deferred tax liabilities ...................................................................
Fair value of assets and liabilities on acquisition .....................
Less: gain on re-measurement of previously held interest in
SmartSwitch Botswana ............................................................
Less: carrying value of SmartSwitch Botswana, an equity
accounted investment, at the acquisition date .........................
Total purchase price ............................................................
SmartSwitch
Botswana
N1MS
Total
$584
-
150
-
472
-
657
(218)
-
(17)
1,628
(328)
(486)
$814
$660
234
-
-
92
1,785
1,710
(65)
(93)
(494)
3,829
$1,244
234
150
-
564
1,785
2,367
(283)
(93)
(511)
5,457
-
(328)
-
$3,829
(486)
$4,643
Pro forma results of operations have not been presented because the effect of the SmartSwitch and N1MS acquisitions,
individually and in the aggregate, were not material to the Company. During the year ended June 30, 2013, the Company incurred
acquisition-related expenditure of $0.1 million related to these acquisitions. Since the closing of the SmartSwitch Botswana
acquisition, it has contributed revenue and net income of $0.7 million and $0.02 million, respectively, for the year ended
June 30, 2013. Since the closing of the N1MS acquisition, it has contributed revenue and incurred a net loss, after acquired
intangible asset amortization, net of taxation, of $1.1 million and $0.5 million, respectively, for the year ended June 30, 2013.
2012 acquisitions
Acquisition of prepaid airtime and electricity business
On October 3, 2011, the Company acquired the South African prepaid airtime and electricity businesses of Eason & Son,
Ltd (“Eason”), an Irish private limited company, for approximately $4.5 million in cash. The principal assets acquired comprise
prepaid airtime and electricity businesses customer list, accounts receivable books, inventory and a perpetual license to utilize
Eason’s internally developed transaction-based system software (“EBOS”).
F-20
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2012 acquisitions (continued)
Acquisition of prepaid airtime and electricity business (continued)
The business has been integrated with EasyPay and allocated to the Company’s South African transaction processing
operating segment.
Smart Life
On July 1, 2011, the Company acquired Smart Life (formerly known as Saambou Life Assurers Limited), a South African
long-term insurance company, for ZAR 13.0 million (approximately $1.8 million) in cash. Prior to its acquisition by the Company,
Smart Life had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not
written any new insurance business for a number of years and had reinsured all of its risk exposure under its life insurance
products. Smart Life has been allocated to the Company’s Financial inclusion and applied technologies operating segment. In
November 2011, the Company sold 10% of Smart Life to a strategic partner for $0.1 million and recognized a loss on sale of $0.08
million.
The acquisition of Smart Life provides the Company with an opportunity to offer relevant insurance products directly to its
existing customer and employee base in South Africa.
The final purchase price allocation of the prepaid business and Smart Life acquisitions, translated at the foreign exchange
rates applicable on the date of acquisition, are provided in the table below:
Accounts receivable, net ...................................................................
Inventory ...........................................................................................
Customer relationships .....................................................................
Software and unpatented technology ................................................
Deferred tax liability .........................................................................
Cash and cash equivalents ................................................................
Financial investments (allocated to other long-term assets) .............
Reinsurance assets (allocated to other long-term assets) ..................
Other payables ..................................................................................
Policy holder liabilities (allocated to other long-term liabilities) ......
Total purchase price .......................................................................
Prepaid
business
$1,083
305
895
2,449
(251)
-
-
-
-
-
$4,481
Smart Life
$152
-
-
-
-
169
3,059
28,492
(185)
(29,845)
$1,842
Total
$1,235
305
895
2,449
(251)
169
3,059
28,492
(185)
(29,845)
$6,323
During the year ended June 30, 2012, the Company did not incur transaction-related expenditures related to these
acquisitions.
KSNET Inc. (“KSNET”) - final settlement in December 2011
On October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately $240 million based on exchange
rates on October 29, 2010), and a post-closing working capital adjustment. In December 2011, the Company received
$4.9 million, in cash, in final settlement of any and all claims and contractual adjustments between the Company and the former
shareholders of KSNET. This amount was applied against the goodwill recognized on the acquisition of KSNET and has reduced
the goodwill balance. As required by the Company’s South Korean debt agreement, the Company used the settlement proceeds to
prepay a portion of its outstanding debt thereunder. The prepayment was made on January 30, 2012.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
4.
PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants
participating in the merchant acquiring system. The July 2014 payment service commenced on July 1, 2014, but the Company pre-
funded certain merchants participating in the merchant acquiring systems in the last two days of June 2014. The July 2013
payment service commenced on July 1, 2013, but the Company pre-funded certain merchants participating in the merchant
acquiring systems in the last two days of June 2013.
5.
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net
Accounts receivable, net
Accounts receivable, trade, net ................................................................................
Accounts receivable, trade, gross ..........................................................................
Allowance for doubtful accounts receivable, end of year .....................................
Beginning of year ............................................................................................
Deconsolidation ...............................................................................................
Reversed to statement of operations ................................................................
Charged to statement of operations .................................................................
Utilized ............................................................................................................
Foreign currency adjustment ...........................................................................
2014
$64,885
66,198
1,313
4,701
(32)
(1,455)
714
(2,451)
(164)
Cash payments to agents in South Korea that are amortized over the contract
period .......................................................................................................................
Other receivables .....................................................................................................
Total accounts receivable, net .........................................................................
46,591
36,591
$148,067
2013
$41,225
45,926
4,701
788
-
(93)
4,622
(5)
(611)
32,412
28,977
$102,614
Receivables from customers renting POS equipment from the Company are included in accounts receivable, trade, and are
stated net of an allowance for certain amounts that the Company’s management has identified may be unrecoverable. Accounts
receivable, trade, also includes amounts due from customers from the sale of hardware, software licenses and SIM cards and
provision of transaction processing services. During the year ended June 30, 2014, 2013 and 2012, respectively, the Company
recorded a bad debt expense of $0.6 million, $0.4 million and $0.2 million.
Finance loans receivable, net
Finance loans receivable, gross .............................................................................
Allowance for doubtful finance loans receivable, end of year ..............................
Beginning of year ............................................................................................
Charged to statement of operations .................................................................
Utilized ............................................................................................................
Foreign currency adjustment ...........................................................................
Total finance loans receivable, net ..........................................................
2014
$56,207
3,083
-
3,652
(513)
(56)
$53,124
2013
$8,350
-
-
-
-
-
$8,350
The Company updated its accounting policy for the allowance for doubtful finance loans receivable during the year ended
June 30, 2014, as a result of the increase in its UEPS-based lending book which is included in finance loans receivable in its
consolidated balance sheet. The Company does not believe that an allowance for doubtful finance loans receivable is required for
finance loans receivable as of June 30, 2013, because this was an established book and has been recovered. The Company did not
expense any unrecoverable finance loans receivable during the year ended June 30, 2014, because these loans were written off
directly against the allowance for doubtful finance loans receivable. The Company recorded an unrecoverable finance loans
receivable expense of $0.2 million during each of the years ended June 30, 2013 and 2012, respectively.
F-22
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
6.
INVENTORY
The Company’s inventory as of June 30, 2014 and 2013, is presented in the table below:
Finished goods ..............................................................................
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments
Initial recognition and measurement
2014
2013
$ 10,785
$10,785
$12,222
$12,222
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost,
which includes transaction costs.
Risk management
The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in
order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company
is also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other
currencies, primarily the euro and US dollar. The Company has used forward contracts in order to limit its exposure in these
transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the US dollar and the euro, on
the other hand.
Translation risk
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the US dollar is its
reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR exchange rate
has fluctuated significantly over the past three years. As exchange rates are outside the 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.
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-23
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
UEPS-based microlending credit risk
The Company is exposed to credit risk in its UEPS-based microlending activities, which provides unsecured short-term
loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer
and assigns a “creditworthiness score”, which takes into account a variety of factors such as other debts and total expenditures on
normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded
price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these
securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on
which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an
extended period of time without influencing the exchange traded price, or at all.
Financial instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-
performance risk including the 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:
• Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
• Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
• Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at
fair value.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
Investments in common stock
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to
determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for
identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and
liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would
be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect
management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3 investments.
Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited
(“Finbond”)
The Company's Level 3 asset represents an investment of 156,788,712 shares of common stock of Finbond, which are
exchange-traded equity securities. Finbond’s shares are traded on the Johannesburg Stock Exchange (“JSE”) and the Company
has designated such shares as available for sale investments. The Company has concluded that the market for Finbond shares is
not active and consequently has employed alternative valuation techniques in order to determine the fair value of such stock.
Finbond issues financial products and services under a mutual banking licence and also has a microlending offering. In
determining the fair value of Finbond, the Company has considered amongst other things Finbond’s historical financial
information (including its most recent public accounts), press releases issued by Finbond and its published net asset value. The
Company believes that the best indicator of fair value of Finbond is its published net asset value and has used this value to
determine the fair value.
The fair value of these securities as of June 30, 2014, represented approximately 1% of the Company’s total assets, including
these securities. The Company expects to hold these securities for an extended period of time and it is not concerned with short-
term equity price volatility with respect to these securities provided that the underlying business, economic and management
characteristics of the company remain sound.
In March 2012, Finbond completed a rights issue and the Company acquired an additional 72,156,187 shares for
approximately $1 million. The Company’s ownership interest in Finbond as of June 30, 2014, is approximately 26%. The
Company has no rights to participate in the financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbond’s board of directors whether through contractual agreement or otherwise. Consequently, the
Company has concluded that it does not have significant influence over Finbond and therefore equity accounting is not
appropriate.
Derivative transactions - Foreign exchange contracts
As part of the Company’s risk management strategy, the Company enters into derivative transactions to mitigate exposures
to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative
transactions. Substantially all of the Company’s derivative exposures are with counterparties that have long-term credit ratings of
BBB or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value
(level 2). The Company has no derivatives that require fair value measurement under level 1 or 3 of the fair value hierarchy.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
Derivative transactions - Foreign exchange contracts (continued)
The Company’s outstanding foreign exchange contracts are as follows:
As of June 30, 2014
Notional amount
EUR 182,272.50
EUR 182,272.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 181,570.50
EUR 181,570.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 180,022.50
EUR 174,424.50
EUR 174,424.50
Strike price
ZAR 15.2077
ZAR 15.3488
ZAR 15.4228
ZAR 15.2819
ZAR 15.3623
ZAR 15.5041
ZAR 15.5739
ZAR 15.4316
ZAR 15.6552
ZAR 15.5136
ZAR 15.5970
ZAR 15.7391
ZAR 15.8119
ZAR 15.6729
As of June 30, 2013
Fair market
value price Maturity
July 21, 2014
July 21, 2014
ZAR 14.5803
ZAR 14.5803
ZAR 14.6542 August 20, 2014
ZAR 14.6542 August 20, 2014
ZAR 14.7367 September 22, 2014
ZAR 14.7367 September 22, 2014
ZAR 14.8119 October 20, 2014
ZAR 14.8119 October 20, 2014
ZAR 14.8982 November 20, 2014
ZAR 14.8982 November 20, 2014
ZAR 14.9874 December 22, 2014
ZAR 14.9874 December 22, 2014
ZAR 15.0671
ZAR 15.0671
January 20, 2015
January 20, 2015
Notional amount
EUR 4,000,000
Strike price
ZAR 9.06
value price Maturity
ZAR 10.1397 September 30, 2013
Fair market
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of
June 30, 2014, according to the fair value hierarchy:
Assets
Related to insurance business (included in
other long-term assets): ..................................
Cash and cash equivalents ............................
Investment in Finbond (available for sale
assets included in other long-term assets) .......
Other ...............................................................
Total assets at fair value ...............................
Liabilities
Foreign exchange contracts .............................
Total liabilities at fair value .........................
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
$1,800
-
-
$1,800
$-
$-
F-26
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$-
-
47
$47
$164
$164
$-
$1,800
8,068
-
$8,068
$-
$-
8,068
47
$9,915
$164
$164
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of
June 30, 2013, according to the fair value hierarchy:
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
$1,833
-
-
$1,833
Assets
Related to insurance business (included in
other long-term assets): ..................................
Cash and cash equivalents ............................
Investment in Finbond (available for sale
assets included in other long-term assets) .......
Other ...............................................................
Total assets at fair value ...............................
Liabilities
Foreign exchange contracts .............................
Total liabilities at fair value .........................
$-
$-
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$-
-
147
$147
$436
$436
$-
$1,833
8,303
-
$8,303
8,303
147
$10,283
$-
$-
$436
$436
Changes in the Company’s investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were
insignificant during the years ended June 30, 2014 and 2013, respectively. There have been no transfers in or out of Level 3
during the years ended June 30, 2014 and 2013, respectively.
Trade, finance loans and other receivables
Trade, finance loans and other receivables originated by the Company are stated at cost less allowance for doubtful accounts
receivable. The fair value of trade, finance loans and other receivables approximate their carrying value due to their short-term
nature.
Trade and other payables
The fair values of trade and other payables approximates their carrying amounts, due to their short-term nature.
Assets and liabilities measured at fair value on a nonrecurring basis
The Company measures its assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily
impaired. The Company has no liabilities that are measured at fair value on a nonrecurring basis. The Company reviews the
carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the Company’s assets are determined using the best information
available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment
charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods presented herein.
F-27
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
8.
PROPERTY, PLANT AND EQUIPMENT, net
Summarized below is the cost, accumulated depreciation and carrying amount of property, plant and equipment as of
June 30, 2014 and 2013:
2014
2013
Cost:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
Accumulated depreciation:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
Carrying amount:
Land ............................................................................
Building and structures ...............................................
Computer equipment ...................................................
Furniture and office equipment ...................................
Motor vehicles.............................................................
Plant and equipment ....................................................
$967
530
110,393
6,686
20,575
68
139,219
-
128
73,908
4,799
12,519
68
91,422
967
402
36,485
1,887
8,056
-
$47,797
$858
471
101,536
7,864
22,127
253
133,109
-
92
69,573
5,627
9,263
253
84,808
858
379
31,963
2,237
12,864
-
$48,301
9.
GOODWILL AND INTANGIBLE ASSETS, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for the years ended June 30, 2014, 2013 and 2012:
Balance as of July 1, 2011 ................................................................
Reduction in goodwill: KSNET net settlement (Note 3) ................
Foreign currency adjustment (1) ......................................................
Balance as of June 30, 2012 ..............................................................
Acquisition of N1MS (Note 3) .......................................................
Acquisition of SmartSwitch Botswana (Note 3) ............................
Foreign currency adjustment (1) ......................................................
Balance as of June 30, 2013 ..............................................................
Loss on liquidation of Net1 Universal Electronic Technologies
(Austria) GmbH and associated entities (“Net1 UTA”) (Note
19) ..................................................................................................
Foreign currency adjustment (1) ......................................................
Balance as of June 30, 2014 ..............................................................
Gross
value
$258,084
(4,239)
(28,957)
224,888
1,710
657
(8,697)
218,558
(44,445)
12,463
$186,576
Accumulated
impairment
$(48,514)
-
6,363
(42,151)
-
-
(601)
(42,752)
Carrying
value
$209,570
(4,239)
(22,594)
182,737
1,710
657
(9,298)
175,806
44,445
(1,693)
$-
-
10,770
$186,576
(1) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand and the
South Korean won, and the US dollar on the carrying value.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Goodwill (continued)
Goodwill associated with the acquisition of N1MS and SmartSwitch Botswana represents the excess of cost over the fair
value of acquired net assets. The N1MS and SmartSwitch Botswana goodwill is not deductible for tax purposes. See Note 3 for
the allocation of the purchase price to the fair value of acquired net assets. N1MS has been allocated to the Company’s South
African transaction processing operating segment and SmartSwitch Botswana to the International transaction processing operating
segment.
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur
and circumstances change indicating potential impairment. The Company performs its annual impairment test as at June 30 of
each year. The results of our impairment tests during the year ended June 30, 2014 and 2013, indicated that the fair value of the
Company’s reporting units exceeded their carrying values and therefore the Company’s reporting units were not at risk of
potential impairment.
The Company changed its reportable segments during June 2014 (refer to Note 23). Goodwill has been allocated to the
Company’s reportable segments as follows:
South African transaction processing .......................................
International transaction processing ........................................
Financial inclusion and applied technologies...........................
Total ......................................................................................
Intangible assets, net
2014
$28,517
128,427
29,632
$186,576
2013
$30,525
113,972
31,309
$175,806
The Company assesses the carrying value of intangible assets for impairment whenever events occur or circumstances change
indicating that the carrying amount of the intangible asset may not be recoverable. No intangible assets have been impaired during
the years ended June 30, 2014, 2013 and 2012, respectively.
Summarized below is the carrying value and accumulated amortization of intangible assets as of June 30, 2014 and 2013:
Finite-lived intangible assets:
Customer relationships ............
Software and unpatented
technology ...............................
FTS patent ...............................
Exclusive licenses ...................
Trademarks .............................
Customer database ..................
33,604
3,619
4,506
6,890
-
Total finite-lived intangible assets . $147,295
As of June 30, 2014
As of June 30, 2013
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
$98,676
$(41,273)
$57,403
$90,469
$(29,818)
$60,651
(26,207)
(3,619)
(4,506)
(3,176)
-
$(78,781)
7,397
-
-
3,714
-
$68,514
34,951
3,873
4,506
6,611
614
$141,024
(22,151)
(3,873)
(4,506)
(2,805)
(614)
$(63,767)
12,800
-
-
3,806
-
$77,257
F-29
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net (continued)
Amortization expense charged for the years to June 30, 2014, 2013 and 2012 was $16.6 million, $18.2 million, and
$19.4 million, respectively.
Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on
June 30, 2014, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a
result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
2015 ........................................................
2016 ........................................................
2017 ........................................................
2018 ........................................................
2019 ........................................................
Thereafter ................................................
$15,831
11,838
9,421
9,421
9,074
$12,624
10. REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT
CONTRACTS
Reinsurance assets and policy holder liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and policy holder liabilities under insurance contracts during the
years ended June 30, 2014 and 2013:
Balances acquired on July 1, 2012 ..............................................
Claims and policyholders’ benefits under insurance contracts ...
Foreign currency adjustment (3) ...................................................
Balance as of June 30, 2013 .....................................................
Claims and policyholders’ benefits under insurance contracts ...
Foreign currency adjustment (3) ...................................................
Balance as of June 30, 2014 .....................................................
Reinsurance
assets (1)
$23,595
(211)
(3,827)
19,557
2,790
(1,285)
$21,062
Insurance
contracts (2)
$(23,701)
146
3,844
(19,711)
(3,063)
1,296
$(21,478)
(1) Included in other long-term assets;
(2) Included in other long-term liabilities;
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.
The Company has agreements with reinsurance companies in order to limit its losses from large insurance contracts,
however, if the reinsurer is unable to meet its obligations, the Company retains the liability.
The value of insurance contract liabilities is based on best estimates assumptions of future experience plus prescribed
margins, as required in the markets in which these products are offered, namely South Africa. The process of deriving the best
estimates assumptions plus prescribed margins includes assumptions related to future mortality and morbidity (an appropriate
base table of standard mortality is chosen depending on the type of contract and class of business), withdrawals (based on recent
withdrawal investigations and expected future trends), investment returns (based on government treasury rates adjusted by an
applicable margin), expense inflation (based on a 10-year real return on CPI-linked government bonds from the risk-free rate and
adding an allowance for salary inflation and book shrinkage of 1% per annum) and claim reporting delays (based on average
industry experience).
F-30
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
10. REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT
CONTRACTS (continued)
Assets and policy holder liabilities under investment contracts
Summarized below is the movement in assets and policy holder liabilities under investment contracts during the years ended
June 30, 2014 and 2013:
Balances acquired on July 1, 2012 ..............................................
Foreign currency adjustment (3) ...................................................
Balance as of June 30, 2013 .....................................................
Maturity claims under investment contracts ...............................
Foreign currency adjustment (3) ...................................................
Balance as of June 30, 2014 .....................................................
Assets (1)
$1,109
(156)
953
(202)
(63)
$688
Investment
contracts (2)
$(1,109)
156
(953)
202
63
$(688)
(1) Included in other long-term assets;
(2) Included in other long-term liabilities;
(3) The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.
The Company does not offer any investment products with guarantees related to capital or returns.
11. OTHER PAYABLES
Summarized below is the breakdown of other payables as of June 30, 2014 and 2013:
Participating merchants settlement obligation ..........................
Payroll-related payables ............................................................
Accruals ....................................................................................
Value-added tax payable ...........................................................
Other .........................................................................................
Provisions .................................................................................
2014
2013
$2,118
991
10,704
3,477
7,027
17,940
$42,257
$2,005
1,611
10,522
2,560
7,009
10,101
$33,808
12.
SHORT-TERM FACILITIES
South Africa
The Company’s short-term South African credit facility with Nedbank Limited comprises an overdraft facility of up to
ZAR 250 million and indirect and derivative facilities of up to ZAR 150 million, which include letters of guarantee, letters of
credit and forward exchange contracts. As of June 30, 2014, the interest rate on the overdraft facility was 7.85%. On
July 18, 2014, the interest rate on the overdraft facility was increased to 8.10% due to an increase in the South Africa repurchase
rate by 0.25%. The Company has ceded its investment in Cash Paymaster Services Proprietary Limited (“CPS”), a wholly owned
South African subsidiary, as security for its repayment obligations under the facility. A commitment fee of 0.35% per annum is
payable on the monthly unutilized amount of the overdraft portion of the short-term facility. The Company is required to comply
with customary non-financial covenants, including, without limitation, covenants that restrict its ability to dispose of or encumber
its assets, incur additional indebtedness or engage in certain business combinations. As of June 30, 2014, the Company had not
utilized any of its ZAR 250.0 million ($23.6 million, translated at exchange rates applicable as of June 30, 2014) overdraft
facility. The Company had utilized approximately ZAR 139.0 million ($13.1 million, translated at exchange rates applicable as of
June 30, 2014) of its facility to obtain foreign exchange contracts from the bank and to enable the bank to issue guarantees,
including stand-by letters of credit, in order for the Company to honor its obligations to third parties requiring such guarantees
(refer to Note 24). As of June 30, 2013, the Company had utilized none of these facilities.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
12.
SHORT-TERM FACILITIES (continued)
South Korea
The Company obtained a KRW 10 billion short-term overdraft facility from Hana Bank, a South Korean bank, in
January 2014. As of June 30, 2014, the interest rate on the overdraft facility was 4.98%. The Company has ceded the warehouse it
owns in South Korea as security for its repayment obligations under the facility. As of June 30, 2014, the Company had not
utilized any of its KRW 10.0 billion ($9.9 million, translated at exchange rates applicable as of June 30, 2014) overdraft facility.
The facility expires in January 2015.
13. LONG-TERM BORROWINGS
In October 2013, the Company refinanced its long-term South Korean credit facility and signed a new five-year senior
secured facilities agreement (the “Facilities Agreement”) with a consortium of South Korean banks. The Facilities Agreement
provides for three separate facilities to the Company’s wholly owned subsidiary, Net1 Applied Technologies Korea
(“Net1 Korea”): a Facility A loan of up to KRW 60.0 billion ($59.2 million), a Facility B loan of up to KRW 15 billion
($14.8 million) and a Facility C revolving credit facility of up to KRW 10.0 billion ($9.9 million) (all facilities denominated in
KRW and translated at exchange rates applicable as of June 30, 2014).
The Facility A and B loans were fully drawn on October 29, 2013, and used to repay KRW 75.0 billion ($70.6 million) of
the KRW 92.4 billion ($87.0 million) loan outstanding under the Company’s refinanced South Korean credit facility. The
remaining outstanding KRW 17.4 billion ($16.4 million) balance of that facility was paid from cash on hand on October 29, 2013.
In addition, the Company drew KRW 1.1 billion ($1.0 million) of the revolving credit facility on October 29, 2013, to pay fees
and expenses related to the Facilities Agreement and drew approximately KRW 2.2 billion ($2.1 million) during the last six
months of the year ended June 30, 2014, to pay interest due under the Facilities Agreement. The carrying value as of June 30,
2014, was $77.2 million. As of June 30, 2014, the carrying amount of the long-term borrowings approximated its fair value.
Interest on the loans and revolving credit facility is payable quarterly and is based on the South Korean CD rate in effect
from time to time plus a margin of 3.10% for the Facility A loan and Facility C revolving credit facility; and a margin of 2.90%
for the Facility B loan. The CD rate was 2.65% on June 30, 2014 and therefore the interest rate in effect as of June 30, 2014, for
the Facility A loan and Facility C revolving credit facility was 5.75% and for the Facility B loan was 5.55%, respectively. A
commitment fee of 0.3% is payable on any un-drawn and un-cancelled amount of the revolving credit facility.
The Company paid facilities fees of approximately KRW 0.9 billion ($0.9 million) on October 29, 2013, and amortized
approximately $0.3 million of these fees during the year ended June 30, 2014. The Company has expensed the remaining prepaid
facility fees related to the Company’s refinanced South Korean credit facility of approximately $0.4 million during the year ended
June 30, 2014. Total interest expense related to the new and refinanced facilities during the year ended June 30, 2014, 2013 and
2012, was $4.8 million, $7.1 million and $8.8 million, respectively.
The Facility A loan is repayable in three scheduled annual installments of KRW 10 billion in April 2016, 2017 and 2018,
with a final installment of KRW 30 billion due at the maturity date (October 29, 2018). The Facility B loan is repayable in full on
October 29, 2014. The Facility C revolving credit facility is repayable in full on the maturity date. Prepayment of the revolving
credit facility may be withdrawn at any time up to three months before the maturity date.
The loans under the Facilities Agreement are secured by a pledge by Net1 Korea of its entire equity interest in KSNET and a
pledge by the immediate parent of Net1 Korea (also one of the Company’s subsidiaries) of its entire equity interest in Net1 Korea.
The Facilities Agreement contains customary covenants that require Net1 Korea to maintain agreed leverage and debt service
coverage ratios and restricts Net1 Korea’s ability to make certain distributions with respect to its capital stock, prepay other debt,
encumber its assets, incur additional indebtedness, or engage in certain business combinations. The loans under the Facilities
Agreement are without recourse to, and the covenants and other agreements contained therein do not apply to, the Company or
any of the Company’s subsidiaries (other than Net1 Korea).
F-32
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. COMMON STOCK
Common stock
Holders of shares of Net1’s common stock are entitled to receive dividends and other distributions when declared by Net1’s
board of directors out of legally available funds. Payment of dividends and distributions is subject to certain restrictions under the
Florida Business Corporation Act, including the requirement that after making any distribution Net1 must be able to meet its
debts as they become due in the usual course of its business.
Upon voluntary or involuntary liquidation, dissolution or winding up of Net1, holders of common stock share ratably in the
assets remaining after payments to creditors and provision for the preference of any preferred stock according to its terms. There
are no pre-emptive or other subscription rights, conversion rights or redemption or scheduled installment payment provisions
relating to shares of common stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is entitled to one vote per share for the election of directors and for all other matters to be
voted on by shareholders. Holders of common stock may not cumulate their votes in the election of directors, and are entitled to
share equally and ratably in the dividends that may be declared by the board of directors, but only after payment of dividends
required to be paid on outstanding shares of preferred stock according to its terms. The shares of Net1 common stock are not
subject to redemption.
The Company’s number of shares, net of treasury, presented in the consolidated balance sheets and consolidated statement
of changes in equity includes participating non-vested equity shares (specifically contingently returnable shares) as described in
Note 18—Amended and Restated Stock Incentive Plan—Restricted Stock—General Terms of Awards. The following table
presents reconciliation between the number of shares, net of treasury, presented in the consolidated statement of changes in equity
and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the years ended
June 30, 2014, 2013 and 2012:
2014
2013
2012
Number of shares, net of treasury:
Statement of changes in equity .......................................................
Less: Non-vested equity shares that have not vested as of end of
year (Note 18) ................................................................................
Number of shares, net of treasury excluding non-vested
equity shares that have not vested ............................................
47,819,299
45,592,550
45,548,902
385,778
405,226
646,617
47,433,521
45,187,324
44,902,285
Common stock repurchases
The Company’s Board of Directors has authorized the repurchase of up to $100 million of common stock. The authorization
does not have an expiration date.
The share repurchase authorization will be used at management’s discretion, subject to limitations imposed by SEC Rule
10b-18 and other legal requirements and subject to price and other internal limitations established by the Board. Repurchases will
be funded from the Company’s available cash. Share repurchases may be made through open market purchases, privately
negotiated transactions, or both. There can be no assurance that the Company will purchase any shares or any particular number
of shares.
The authorization may be suspended, terminated or modified at any time for any reason, including market conditions, the
cost of repurchasing shares, liquidity and other factors that management deems appropriate. During the year ended June 30, 2012,
the Company repurchased 180,656 shares for approximately $1.1 million. The Company did not repurchase any of its shares
during the years ended June 30, 2014 and 2013, under this authorization. However, during the year ended June 30, 2014, the
Company repurchased 2,428,122 shares for approximately $24.9 million as described below under “—December 2013 Black
Economic Empowerment transactions—Salient terms of the BEE Relationship Agreements”.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. COMMON STOCK (continued)
December 2013 Black Economic Empowerment transactions
On December 10, 2013, the Company entered into definitive agreements relating to two Black Economic Empowerment
(“BEE”) transactions. On April 16, 2014, the Company implemented these transactions and issued 4,400,000 shares of its
common stock to its BEE partners after all the agreed conditions had been satisfied. On June 6, 2014, the Company repurchased
approximately 2.4 million of these shares of common stock and the BEE partners used the proceeds from the repurchase to settle
their obligations due to the South African subsidiary of the Company, as described below.
Salient terms of the BEE Relationship Agreements
Pursuant to Relationship Agreements between the Company and its BEE partners, the Company sold an aggregate of
4,400,000 shares of its common stock (“BEE shares”), which are contractually restricted as to resale as described below, for a
purchase price of ZAR 60.00 per share. This price represented 75% of the closing price of the Company’s common stock on the
JSE on December 6, 2013, the date the Company completed final negotiation of the terms of these BEE transactions.
The Relationship Agreements provided for the entire purchase price for the BEE shares to be financed through a five-year
loan to be extended to each of the BEE partners by a South African subsidiary of the Company. The obligations of the BEE
partners under the loans were several, and not joint. Each of the BEE partners granted the lender a security interest in all the BEE
shares purchased by such BEE partner to secure the repayment of its loan. The principal amount of the loans made by the
subsidiary was contributed by Net1 to the equity capital of the subsidiary. As a result of the making of the loans, the net cash
position of the Company after the sale of the BEE shares remained unchanged.
The loans bore interest at a rate equal to the Johannesburg Interbank Rate plus 300 basis points. Interest on the loans was
payable semi-annually in arrears on January 1 and July 1 of each year. 10% of the outstanding principal amount of the loans was
payable on each of the first and second anniversaries of the date of issuance of the BEE shares, 15% of the outstanding principal
amount of the loans was payable on each of the third and fourth anniversaries of the date of issuance of the BEE shares and the
remaining outstanding principal amount of the loans was payable on the fifth anniversary of the date of issuance of the BEE
shares. Further, the entire outstanding principal amount of the loans was payable if the price of the Company’s common stock on
the JSE equals or exceeds ZAR 120.00 per share at any time during term of the loans. The loans to the BEE partners did not
provide that they were recourse only to the BEE shares. Nevertheless, the Company expected that the sole source of repayment of
the loans will be proceeds from the sale of its shares by the BEE partners from time to time, in open market or in privately
negotiated transactions.
Upon the occurrence of certain “trigger events” with respect to a BEE partner, the BEE shares held by that BEE partner may
be repurchased by the Company or one of its designees. These trigger events include the following:
•
•
•
•
•
failure by the BEE partner to pay any amount due on its loan (including interest) to the lender (in this case, the Company
may repurchase only that number of shares which would raise sufficient funds to settle any amount due and unpaid);
any other breach by the BEE partner (or in certain circumstances its shareholders) of any provision of the Relationship
Agreement, including without limitation, its failure to maintain its BEE status;
the Company’s common stock trades at or below ZAR 60.00 on the JSE or at or below the equivalent trading price on
Nasdaq;
the occurrence of certain insolvency events or liquidation proceedings affecting the BEE partner; or
the BEE partner fails to satisfy any judgment or arbitration award granted or made against it within 7 days.
If the trigger event involved a failure by a BEE partner to pay any amount due on its loan, then the repurchase price is the
volume-weighted average price of the Company’s common stock on the Nasdaq for the period of 30 trading days prior to the
trigger event (“30-day VWAP”). In the case of other trigger events, the repurchase price is the lower of the 30-day VWAP or
ZAR 60.00 per share.
The Company’s share price exceeded ZAR 120.00 on June 4, 2014 and all outstanding amounts then became due and
payable. The BEE partners were unable to pay all outstanding amounts due on June 5, 2014, and accordingly a trigger event
occurred. The Company purchased a total of 2,428,122 shares of its common stock, at the determined VWAP of ZAR109.98,
from the BEE partners. The BEE partners used the proceeds from the sale of these shares in order to settle all outstanding
amounts due to the South African subsidiary of the Company.
F-34
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
14. COMMON STOCK (continued)
December 2013 Black Economic Empowerment transactions (continued)
Salient terms of the BEE Relationship Agreements (continued)
The BEE shares are contractually restricted as to resale for a period of five years from the date of issuance, with the
exception of periodic sales which would have been made to fund the repayment of principal and interest on the loans if they had
not been repaid in full in June 2014. In addition, the Company may call the BEE shares then owned by the BEE partners, either in
exchange for a minority interest in CPS or for a cash payment equal to the 30-day VWAP. Further, after the fifth anniversary of
the date of issuance of the BEE shares, the Company will have a right of first refusal on the shares owned by the BEE partners.
Acquisition of KSNET non-controlling interests
During the year ended June 30, 2014, the Company acquired all of the issued share capital of KSNET, Inc. that it did not
previously own for approximately $2.0 million in cash. The Company intends to realize certain South Korean tax efficiencies in
the future and is currently discussing the feasibility with its South Korean tax advisors. The transaction was accounted for as an
equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the Company’s consolidated
statement of operations. The carrying amount of the non-controlling interest was adjusted to reflect the change in ownership
interest in KSNET. The difference between the fair value of the consideration paid and the amount by which the non-controlling
interest was adjusted, of $1.5 million, was recognized in total Net1 equity.
15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The table below presents the change in accumulated other comprehensive (loss) income per component during years ended
June 30, 2014, 2013 and 2012:
Accumulated
Net
unrealized
income (loss)
on asset
available for
sale, net of
tax
‘000
$(2,132)
-
1,547
(585)
-
915
330
-
-
288
$618
Accumulated
Foreign
currency
translation
reserve
‘000
$(31,647)
(43,490)
-
(75,137)
(26,051)
-
(101,188)
13,552
4,277
-
$(83,359)
Total
‘000
$(33,779)
(43,490)
1,547
(75,722)
(26,051)
915
(100,858)
13,552
4,277
288
$(82,741)
Balance as of July 1, 2011 ..............................................................
Movement in foreign currency translation reserve ...................
Unrealized loss on asset available for sale, net of tax of $602 .
Balance as of June 30, 2012 ...........................................................
Movement in foreign currency translation reserve ...................
Unrealized loss on asset available for sale, net of tax of $356 .
Balance as of June 30, 2013 ...........................................................
Movement in foreign currency translation reserve ...................
Release of foreign currency translation reserve related to sale/
liquidation of businesses ..........................................................
Unrealized loss on asset available for sale, net of tax of $112 .
Balance as of June 30, 2014 ................................................
The Company released a net loss of $4.3 million from its foreign currency translation reserve to selling, general and
administration expense on its consolidated statement of operations during the year ended June 30, 2014, as a result of the sale and
liquidation of certain subsidiaries (See also Note 19). There were no other reclassifications from accumulated other
comprehensive loss to comprehensive (loss) income during the year ended June 30, 2014. There were no reclassifications from
accumulated other comprehensive loss to comprehensive (loss) income during the year ended June 30, 2013.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
16. REVENUE
Services rendered – comprising mainly fees and commissions ........
Loan-based fees received ..................................................................
Sale of goods – comprising mainly hardware and software sales .....
2014
2013
2012
$518,297
33,560
29,799
$581,656
$430,268
6,613
15,266
$452,147
$362,679
8,433
19,152
$390,264
Services rendered – comprising mainly fees and commissions for the year ended June 30, 2014, includes a once-off receipt
of $26.6 million related to the recovery of additional implementation costs incurred during the beneficiary re-registration process
during the years ended June 30, 2013 and 2012. During the years ended June 30, 2014, 2013 and 2012, the Company did not
recognize any revenue using the percentage of completion method.
17. EQUITY INSTRUMENTS ISSUED PURSUANT TO BEE TRANSACTIONS
2014 transactions
On April 16, 2014, the Company issued 4,400,000 shares of its common stock pursuant to the BEE transactions discussed in
Note 14. The charge related to the equity instruments issued pursuant to the BEE transactions was determined to be
approximately $11.3 million and was expensed in full during the year ended June 30, 2014, because the BEE partners owned the
shares on the issue date. This was a book entry and no cash was actually paid. The charge recorded was determined as the
difference between the fair value of the loans provided to the BEE partners and the fair value of the equity instruments granted to
the BEE partners.
The fair value of the loans provided to the BEE partners was determined to be their face value. The fair value of the equity
instruments was calculated utilizing an adjusted Monte Carlo simulation discounted cash flow model which was developed for the
purpose of the valuation of these BEE transactions. Cash flows were calculated for each simulated share price path, taking into
account the bespoke features of the BEE transactions, as well as the expected interest and capital repayments (funded through the
expected sales of BEE shares). The “adjustment” to the Monte Carlo simulation model incorporates a “jump diffusion” process to
the standard Geometric Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the
Company’s share price movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the
idiosyncrasies of the observed Company share price movements. For each simulation, the resulting expected cash flows were
discounted to the valuation date.
The Company used an expected volatility of 21.04%, an expected life of five years, a risk free rate of 7.90% and no future
dividends in its calculation of the fair value of the equity instrument. The estimated expected volatility was calculated based on
the Company’s 30 day VWAP share price using the exponentially weighted moving average of returns.
2012 transaction
On April 19, 2012, the Company issued an option to purchase 8,955,000 shares of its common stock to a BEE consortium
pursuant to a BEE transaction that it entered into on January 25, 2012. The option expired unexercised on April 19, 2013. The fair
value of the option was determined as approximately $14.2 million and was expensed in full during the year ended June 30, 2012
because the option vested immediately on the grant date. This was a book entry and no cash was actually paid. Accordingly, the
expense recorded during the year ended June 30, 2012, was not reversed during the year ended June 30, 2013, because the option
had vested in full on the grant date.
The fair value was determined on the date that all conditions to the BEE transaction had been fulfilled using the Cox Ross
Rubinstein binomial model. The Company used an expected volatility of 47%, an expected life of one year, a risk free rate of
0.90% and no future dividends in its calculation of the fair value. The estimated expected volatility was calculated based on the
Company’s 250 day volatility.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION
Amended and Restated Stock Incentive Plan
The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) has been approved by its shareholders. No
evergreen provisions are included in the Plan. This means that the maximum number of shares issuable under the Plan is fixed
and cannot be increased without shareholder approval, the plan expires by its terms upon a specified date, and no new stock
options are awarded automatically upon exercise of an outstanding stock option. Shareholder approval is required for the
repricing of awards or the implementation of any award exchange program. The Plan permits Net1 to grant to its employees,
directors and consultants incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
performance-based awards and other awards based on its common stock. The Remuneration Committee of the Company’s Board
of Directors (“Remuneration Committee”) administers the Plan.
The total number of shares of common stock issuable under the Plan is 8,552,580. The maximum number of shares for
which awards, other than performance-based awards, may be granted in any combination during a calendar year to any participant
is 569,120. The maximum limits on performance-based awards that any participant may be granted during a calendar year are
569,120 shares subject to stock option awards and $20 million with respect to awards other than stock options. Shares that are
subject to awards which terminate or lapse without the payment of consideration may be granted again under the Plan. Shares
delivered to the Company as part or full payment for the exercise of an option or to satisfy withholding obligations upon the
exercise of an option may be granted again under the Plan in the Remuneration Committee’s discretion. No awards may be
granted under the Plan after June 7, 2019, but awards granted on or before such date may extend to later dates.
Options
General Terms of Awards
Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of
grant, with vesting conditioned upon the recipient’s continuous service through the applicable vesting date and expire 10 years
after the date of grant. The options generally become exercisable in accordance with a vesting schedule ratably over a period of
five years from the date of grant. The Company issues new shares to satisfy stock option award exercises but may also use
treasury shares.
Valuation Assumptions
The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the
assumptions noted in the following table. The estimated expected volatility is calculated based on the Company’s 250 day
volatility. The estimated expected life of the option was determined based historical behavior of employees who were granted
options with similar terms. The Company has estimated no forfeitures for options awarded in 2014, 2013 and 2012. The table
below presents the range of assumptions used to value options granted during the years ended June 30, 2014, 2013 and 2012:
Expected volatility ................................................
Expected dividends ...............................................
Expected life (in years) ........................................
Risk-free rate .........................................................
2014
50%
0%
3
0.9%
2013
49%
0%
3
0.3%
2012
37% - 39%
0%
3
1.9% - 0.9%
Restricted Stock
General Terms of Awards
Shares of restricted stock are considered to be participating non-vested equity shares (specifically contingently returnable
shares) for the purposes of calculating earnings per share (refer Note 21) because, as discussed in more detail below, the recipient
is obligated to transfer any unvested restricted stock back to the Company for no consideration and these shares of restricted stock
are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Restricted stock generally vests
ratably over a three year period, with vesting conditioned upon the recipient’s continuous service through the applicable vesting
date and under certain circumstances, the achievement of certain performance targets, as described below.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
General Terms of Awards (continued)
Restricted stock awarded to non-employee directors and employees of the Company vests ratably over a three-year period.
Recipients are entitled to all rights of a stockholder of the Company except as otherwise provided in the restricted stock
agreements. These rights include the right to vote and receive dividends and/or other distributions. However, the restricted stock
agreements generally prohibit transfer of any nonvested and forfeitable restricted stock. If a recipient ceases to be a member of the
Board of Directors or an employee for any reason, all shares of his restricted stock that are not then vested and nonforfeitable will
be immediately forfeited and transferred to the Company for no consideration.
The Company issues new shares to satisfy restricted stock awards.
Valuation Assumptions
The fair value of restricted stock is based on the closing price of the Company’s stock quoted on The Nasdaq Global Select
Market on the date of grant.
Performance Conditions - Restricted Stock Granted in October and November 2010
In October 2010, the Remuneration Committee approved an award of 60,000 shares of restricted stock to an executive
officer of the Company. Under the terms of the award, the shares would vest on June 30, 2014, conditioned upon the employee’s
continuous service through June 30, 2014, and on the employee receiving an incremental incentive bonus, as defined in the
employee’s employment agreement for each of the periods ended June 30, 2011, 2012, 2013 and 2014. Any outstanding award
shares that had not become vested and nonforfeitable as of June 30, 2014, would be forfeited by the recipient on June 30, 2014,
and transferred to the Company for no consideration. The October 2010 restricted stock award did not vest because the financial
performance target was not met for June 30, 2011. Refer also “—Stock option and restricted stock activity—restricted stock”
below.
In November 2010, the Remuneration Committee approved an award of 83,000 shares of restricted stock to two of the
Company’s executive officers. The award provided for vesting of one-third of the award shares on each of November 10, 2011,
2012 and 2013, conditioned upon each recipient’s continuous service through the applicable vesting date and the Company
achieving the financial performance target for that vesting date. Specifically, the financial performance targets were Fundamental
EPS, as defined below, of $1.44, $1.60 and $1.90 for the years ended June 30, 2011, 2012 and 2013, respectively. For the purpose
of this award, Fundamental EPS was calculated as Company’s diluted earnings per share as reflected in the Company’s
consolidated financial statements, measured in U.S. dollars and determined in accordance with GAAP, adjusted to exclude the
effects related to the amortization of intangible assets and acquisition-related costs, stock-based compensation charges, foreign
exchange gains and losses arising from foreign currency hedging transactions, and other items that the Committee determined in
its discretion to be appropriate (for example, accounting changes and one-time or unusual items), and assumes a constant tax rate
equal to the Company’s effective tax rate for the year ended June 30, 2010. If Fundamental EPS for the specified fiscal year was
not equal to or exceeded the Fundamental EPS target for such year, no award shares would vest or become nonforfeitable on the
corresponding vesting date but would have been available to become vested and nonforfeitable as of a subsequent vesting date if
the Fundamental EPS target for a subsequent fiscal year was met; provided that the recipient’s service continued through such
subsequent vesting date.
Any outstanding award shares that have not become vested and nonforfeitable as of November 10, 2013, will be forfeited by
the recipient on November 10, 2013, and transferred to the Company for no consideration. One-third of the award shares vested
on November 10, 2011. The remaining two-thirds of the restricted stock award did not vest because the financial performance
target of $1.90 was not met for June 30, 2013. Refer also “—Stock option and restricted stock activity—restricted stock” below.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Stock Appreciation Rights
The Remuneration Committee also may grant stock appreciation rights, either singly or in tandem with underlying stock
options. Stock appreciation rights entitle the holder upon exercise to receive an amount in any combination of cash or shares of
common stock (as determined by the Remuneration Committee) equal in value to the excess of the fair market value of the shares
covered by the right over the grant price. No stock appreciation rights have been granted.
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June 30, 2014, 2013 and 2012:
Outstanding – July 1, 2011................
Granted under Plan: August 2011 ........
Granted under Plan: October 2011.......
Forfeitures ............................................
Outstanding – June 30, 2012 .............
Granted under Plan: August 2012 ........
Exercised..............................................
Outstanding – June 30, 2013 .............
Granted under Plan: August 2013 ........
Exercised..............................................
Forfeited ...............................................
Outstanding – June 30, 2014 .............
Number of
shares
2,120,656
165,000
202,000
(240,073)
2,247,583
431,000
(30,000)
2,648,583
224,896
(26,667)
(136,420)
2,710,392
Weighted
Average
Remaining
Contractual
Term
(in years)
Weighted
average
exercise
price ($)
Aggregate
Intrinsic
Value
($’000)
Weighted
Average
Grant
Date Fair
Value ($)
18.44
6.59
7.98
21.68
16.28
8.75
7.98
15.15
7.35
7.00
23.51
14.16
6.82
10.00
10.00
6.43
10.00
5.98
10.00
5.38
243
297
442
-
602
1,249
24
313
568
91
-
3,909
1.80
2.19
-
2.90
2.53
The following table presents stock options vesting and expecting to vest as of June 30, 2014:
Weighted
average
exercise
price
($)
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
($’000)
Number of
shares
Vested and expecting to vest
– June 30, 2014 .....................
2,710,392
14.16
5.38
3,909
These options have an exercise price range of $6.59 to $24.46.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Options (continued)
The following table presents stock options that are exercisable as of June 30, 2014:
Number of
shares
2,085,830
Weighted
average
exercise
price ($)
16.01
Weighted
Average
Remaining
Contractual
Term
(in years)
4.54
Aggregate
Intrinsic
Value
($’000)
1,789
Exercisable – June 30, 2014 .........
During the years ended June 30, 2014, 2013 and 2012, approximately 462,333, 442,666, and 300,000 stock options became
exercisable, respectively. Included in the 442,666 stock options are 30,000 stock options with respect to which the Remuneration
Committee of the Board agreed to accelerate vesting prior to the resignation of a non-employee director. The stock option vesting
was accelerated in recognition of this director’s long service and valued contributions. During the year ended June 30, 2014, the
Company received $0.2 million from 26,667 stock options exercised by employees. During the year ended June 30, 2013, the
Company received approximately $0.2 million from 30,000 stock options exercised by the non-employee director that resigned.
No stock options were exercised during the year ended June 30, 2012. During the years ended June 30, 2014 and 2012,
respectively, employees forfeited 136,420 and 240,073 stock options. There were no forfeitures during the years ended
June 30, 2013. The Company issues new shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the years ended June 30, 2014, 2013 and 2012:
Number of
Shares of
Restricted
Stock
Weighted
Average Grant
Date Fair Value
($’000)
Non-vested – July 1, 2011 ........................................
Granted – August 2011 ............................................
Granted – February 2012 .........................................
Granted – May 2012 ................................................
Vested - August 2011
Vested - November 2011 ....................................
Total vested ..............................................................
Forfeitures ................................................................
Non-vested – June 30, 2012 ..................................
Granted – August 2012 ............................................
Vested – August 2012 ........................................
Vested – February 2013 .....................................
Vested – May 2013 ............................................
Total vested ..............................................................
Forfeitures ................................................................
Non-vested – June 30, 2013 ..................................
Granted – August 2013 ............................................
Vested – August 2013 ........................................
Vested – February 2014 .....................................
Total vested ..............................................................
Forfeitures ................................................................
Non-vested – June 30, 2014 ..................................
103,672
30,155
550,000
2,574
(6,141)
(27,667)
(33,808)
(5,976)
646,617
21,569
(23,436)
(183,333)
(858)
(207,627)
(55,333)
405,226
187,963
(16,907)
(183,333)
(200,240)
(7,171)
385,778
F-40
199
6,111
23
40
209
50
7,061
189
216
1,016
7
407
4,393
1,382
161
1,742
84
3,534
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Restricted stock (continued)
The fair value of restricted stock vested during the years ended June 30, 2014, 2013 and 2012, was $1.9 million, $1.2 million
and $0.2 million, respectively. Non-employee directors resigning during the years ended June 30, 2014 and 2012, respectively
forfeited 7,171 and 5,976 shares of restricted stock that had not vested. Included in the 23,436 shares of restricted stock that
vested in August 2012 are 8,547 shares with respect to which the Remuneration Committee of the Board agreed to accelerate
vesting prior to the resignation of a non-employee director. The second and third tranche totaling 55,333 shares of restricted stock
granted in November 2010 to two executive officers did not vest because the agreed performance target was not achieved.
Forfeited shares of restricted stock are returned to the Company and, in accordance with the Plan, are available for future
issuances by the Remuneration Committee.
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a net stock compensation charge of $3.7 million, $3.9 million and $2.8 million for the years
ended June 30, 2014, 2013 and 2012, respectively, which comprised:
Allocated to
cost of goods
sold, IT
processing,
servicing
and support
Total
charge
(reversal)
Allocated to
selling,
general and
administration
Year ended June 30, 2014
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to restricted stock
forfeited .........................................................................................
Total – year ended June 30, 2014 ...............................................
Year ended June 30, 2013
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to restricted stock
forfeited .........................................................................................
Total – year ended June 30, 2013 ...............................................
Year ended June 30, 2012
Stock-based compensation charge ................................................
Reversal of stock compensation charge related to options
forfeited .........................................................................................
Total – year ended June 30, 2012 ...............................................
$3,724
(6)
$3,718
$4,387
(480)
$3,907
$2,909
(134)
$2,775
$-
-
$-
$-
-
$-
$-
-
$-
$3,724
(6)
$3,718
$4,387
(480)
$3,907
$2,909
(134)
$2,775
The stock compensation charge and reversals have been allocated to cost of goods sold, IT processing, servicing and support
and selling, general and administration based on the allocation of the cash compensation paid to the employees.
As of June 30, 2014, the total unrecognized compensation cost related to stock options was approximately $0.9 million,
which the Company expects to recognize over approximately two years. As of June 30, 2014, the total unrecognized
compensation cost related to restricted stock awards was approximately $2.3 million, which the Company expects to recognize
over approximately two years.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
STOCK-BASED COMPENSATION (continued)
Tax consequences
There are no tax consequences related to options and restricted stock granted to employees of Company subsidiaries
incorporated in South Africa. The Company has recorded a deferred tax asset of approximately $1.6 million and $1.4 million,
respectively, for the years ended June 30, 2014 and 2013, related to the stock-based compensation charge recognized related to
employees of Net1 as it is able to deduct the difference between the market value on date of exercise by the option recipient and
the exercise price from income subject to taxation in the United States.
19. DECONSOLIDATION OF BUSINESSES SOLD OR LIQUIDATED AND DISPOSAL OF BUSINESS
The profit (loss) on deconsolidation of businesses sold or liquidated and disposal of business during the years ended June 30,
2014, 2013 and 2012 are summarized in the table below:
Profit on sale of MediKredit Integrated Healthcare Solutions Proprietary Limited
(“MediKredit”).......................................................................................................................
Profit on disposal of assets related to the business of Net 1 Universal Electronic
Technological Solutions (Pty) Ltd (“NUETS business”) .......................................................
Loss on liquidation of Net1 UTA ..........................................................................................
Profit on liquidation of SmartSwitch Nigeria ........................................................................
Net profit (loss) for the year ended June 30, ......................................................................
$4,125
2,081
(6,261)
-
$(55)
$-
-
-
-
$-
$-
-
-
3,994
$3,994
2014
2013
2012
2014 transactions
Sale of MediKredit
On June 17, 2014, the Company sold its MediKredit subsidiary to an unrelated third party. The Company has recorded a
profit of approximately $4.1 million related to the sale in selling, general and administration expense on its consolidated statement
of operations for the year ended June 30, 2014. The profit has been allocated to corporate/eliminations. The sales price will be
paid in three tranches, approximately 57% on June 17, 2014, approximately 14% on June 1, 2015, and the remainder on
June 1, 2016. In addition, the parties have agreed that MediKredit may continue to operate at the Company’s premises at no cost
to the purchaser until September 30, 2014. Furthermore, the parties have agreed that MediKredit will provide certain
development, support and maintenance services (collectively “Services”) related to technology used in the United States at no
cost to the Company up to an amount of $0.3 million, translated at the foreign exchange rates applicable as of June 30, 2014. The
Company determined that the Services comprise part of the sales price of MediKredit and have increased the profit on sale
accordingly. In addition, the Company has determined that the provision of an operating area within the Company’s premises
represents an obligation on it, and has reduced the profit on sale accordingly. The fair value of the Services and free rental of
premises has been determined using prices that would have been charged between unrelated third parties. Finally, the Company
was required to release a gain of approximately $2.0 million from its foreign currency transaction reserve which has been
included in the profit on sale. During the year ended June 30, 2014, the Company incurred transaction-related expenditure of
$0.01 million related to the sale of MediKredit.
The purchaser is contingently obligated to pay the Company additional amounts based on future expansion of the
MediKredit business in certain circumstances. The Company has not recorded any of these amounts during the year ended
June 30, 2014, as none of the contingent events have occurred as of June 30, 2014.
F-42
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19. DECONSOLIDATION OF BUSINESSES SOLD OR LIQUIDQATED AND DISPOSAL OF BUSINESS
(continued)
2014 transactions (continued)
Disposal of assets related to NUETS business
On June 30, 2014, the Company sold the NUETS business, which consisted primarily of customer contracts, other than
contracts for UEPS systems in Botswana and Namibia, and equipment for approximately $2.2 million in cash. The Company
received $0.2 million of these cash proceeds in June 2014, and the remaining $2.0 million was received in July 2014, and is
included in accounts receivable, net, as of June 30, 2014. The Company has recorded a profit of approximately $2.1 million on
the sale in selling, general and administration expense on its consolidated statement of operations for the year ended
June 30, 2014. The profit has been allocated to corporate/eliminations. The shareholders of the purchaser comprise a former
employee of the Company, a US-based economic development equity fund and other unrelated individuals and private
companies. The Company has provided the purchaser with a non-exclusive, perpetual, worldwide license to use the Company’s
UEPS technology. The purchaser may not use this technology in South Africa to provide payment services and specifically may
not use the technology in any manner to service the Ministry of Social Development in South Africa and/or SASSA. The parties
have agreed that the Company will provide certain administrative and technical support services related to the NUETS business
until March 2015. During the year ended June 30, 2014, the Company incurred transaction-related expenditure of $0.06 million
related to the sale of NUETS business.
Liquidation of Net1 UTA
The Company has substantially liquidated its Net1 UTA business due to an inability to implement and expand its technology
into new markets on a profitable basis. Net1 UTA’s operations were streamlined a number of years ago and the Company did not
incur significant cash costs to liquidate Net1 UTA. However, the Company was required to release approximately $6.3 million
from its foreign currency transaction reserve which has resulted in a loss on liquidation of Net1 UTA. This non-cash loss on
liquidation of Net1 UTA has been recorded in selling, general and administration expense on its consolidated statement of
operations for the year ended June 30, 2014. The loss has been allocated to corporate/eliminations.
2012 transaction
Liquidation of SmartSwitch Nigeria
The Company ceased operations in the Federation of Nigeria due to an inability to implement its technology on a profitable
basis. During the year ended June 30, 2012, the Company, together with the other shareholders, agreed to liquidate SmartSwitch
Nigeria, the company through which operating activities in Nigeria were performed. SmartSwitch Nigeria was capitalized
primarily with shareholder loans. The shareholders of SmartSwitch Nigeria agreed to waive all outstanding capital and interest
repayments related to the loan funding initially provided as part of the liquidation processes. The non-cash profit on liquidation of
SmartSwitch Nigeria of $4.0 million includes the write back of all assets and liabilities, including non-controlling interest loans,
of SmartSwitch Nigeria, except for expected liabilities related to the liquidation of SmartSwitch Nigeria. The Company has
recorded the profit in selling, general and administration expense on its consolidated statement of operations for the year ended
June 30, 2012. The profit has been allocated to corporate/eliminations.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES
Income tax provision
The table below presents the components of income before income taxes for the years ended June 30, 2014, 2013 and 2012:
South Africa ...................................................................
United States ..................................................................
Other ..............................................................................
Income before income taxes ........................................
$121,338
(9,923)
(2,273)
$109,142
$38,654
(10,075)
(1,300)
$27,279
$67,054
(6,340)
(333)
$60,381
2014
2013
2012
Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2014,
2013 and 2012:
2014
2013
2012
Current income tax
South Africa ................................................................
United States ...............................................................
Other ...........................................................................
Deferred taxation (benefit) charge .................................
South Africa ................................................................
United States ...............................................................
Other ...........................................................................
Capital gains tax.............................................................
Secondary taxation on companies ..................................
Change in tax rate ..........................................................
Foreign tax credits generated – United States ................
Income tax provision ...................................................
$61,902
41,326
14,838
5,738
(7,887)
(3,345)
(107)
(4,435)
202
-
-
(14,838)
$39,379
$33,968
15,418
16,061
2,489
(4,915)
(2,037)
(331)
(2,547)
7
-
-
(14,404)
$14,656
$49,092
26,787
20,746
1,559
(4,598)
(2,941)
31
(1,688)
1,465
327
(18,315)
(12,035)
$15,936
There were no significant capital gains taxes paid during the years ended June 30, 2014 and 2013, respectively. The capital
gains tax paid during the year ended June 30, 2012, represents the taxes paid resulting from an intercompany capital transaction in
South Africa.
The Company’s South African subsidiary paid a dividend to Net1 after the tax law had changed but before the effective date
of the South African dividends withholding tax which resulted in the payment of STC in the third quarter of the year ended June
30, 2012. For the first half of the year ended June 30, 2012, the Company’s effective tax rate included an accrual for STC and
therefore any STC obligation arising during these periods was charged against the STC liability provided. This STC liability was
released during the year end June 30, 2012, as a result of the change in tax law discussed below.
There were no changes to the enacted tax rate in the years ended June 30, 2014 and 2013. On December 20, 2011, there was
a change in South African tax law to impose a dividends withholding tax (a tax levied and withheld by a company on distributions
to its shareholders) to replace STC. The change was effective on April 1, 2012. As a result, the Company has recorded a net
deferred taxation benefit of approximately $18.3 million in income taxation expense in its consolidated statements of operations
during the year ended June 30, 2012.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Income tax provision (continued)
The movement in the valuation allowance for the year ended June 30, 2014, relates to releases of the valuation allowance
resulting from the utilization of foreign tax credits during the year and deconsolidation of net operating loss carryforwards for
MediKredit. The movement in the valuation allowance for the year ended June 30, 2013, relates to valuation allowances for
foreign tax credits and valuation allowances related to net operating loss carryforwards for the Company’s South African
subsidiaries, primarily MediKredit. As a result of the change in South African tax law during the year ended June 30, 2012, and
the Company’s intention to permanently reinvest its undistributed earnings in South Africa, the Company did not believe it would
be able to recover foreign tax credits previously recognized of $8.2 million. The movement in the valuation allowance during the
year ended June 30, 2012, included a valuation allowance related to this foreign tax credits.
Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended
June 30, 2014, 2013 and 2012, taxation computation. Net1 applied net operating losses against this income. Net1 generated
foreign tax credits as a result of the inclusion of the dividends in its taxable income. Net1 has applied certain of these foreign tax
credits against its current income tax provision for the year ended June 30, 2014, 2013 and 2012, respectively.
A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company’s
effective tax rate, for the years ended June 30, 2014, 2013 and 2012 is as follows:
2014
2013
2012
Income tax rate reconciliation:
Income taxes at fully-distributed South African tax rates .....
Non-deductible items .........................................................
Foreign tax rate differential ................................................
Foreign tax credits ..............................................................
Taxation on deemed dividends in the United States ..........
Capital gains tax paid .........................................................
Secondary taxation on companies ......................................
Movement in valuation allowance .....................................
Prior year adjustments ........................................................
Change in tax law ...............................................................
Income tax provision .......................................................
28.00%
4.71%
1.89%
(13.59%)
13.46%
0.19%
-%
1.23%
0.19%
-%
36.08%
28.00%
6.78%
10.39%
(52.80%)
57.32%
0.03%
-%
9.40%
(5.39%)
-%
53.73%
28.00%
6.60%
7.22%
(21.12%)
31.29%
2.43%
0.54%
1.23%
0.53%
(30.33%)
26.39%
The non-deductible items during the year ended June 30, 2014, relates principally to expenses that are not deductible for tax
purposes, including the charge related to the equity awards issued pursuant to the Company’s BEE transactions, stock-based
compensation charges, costs incurred to support foreign related entities and interest expense. The non-deductible items during the
year ended June 30, 2013, relates principally to expenses that are not deductible for tax purposes, including stock-based
compensation charges, costs incurred to support foreign related entities and interest expense. The non-deductible items during the
year ended June 30, 2012, relates principally to expenses that are not deductible for tax purposes, including stock-based
compensation charges, interest expense and an equity award issued pursuant to the Company’s BEE transaction. The foreign tax
rate differential represents the difference between statutory tax rates in South Africa and foreign jurisdictions, primarily the
United States.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Deferred tax assets and liabilities
Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the
temporary differences that gave rise to the Company’s deferred tax assets and liabilities as at June 30, and their classification,
were as follows:
2014
2013
Total deferred tax assets
Net operating loss carryforwards ............................................................
Provisions and accruals ...........................................................................
FTS patent ...............................................................................................
Intangible assets ......................................................................................
Foreign tax credits ...................................................................................
Other .......................................................................................................
Total deferred tax assets before valuation allowance ......................
Valuation allowances ........................................................................
Total deferred tax assets, net of valuation allowance ................
$1,901
5,470
909
123
23,338
7,765
39,506
(25,153)
14,353
$12,024
3,164
1,088
17,150
24,637
5,537
63,600
(54,117)
9,483
Total deferred tax liabilities:
Intangible assets ......................................................................................
Other .......................................................................................................
Total deferred tax liabilities ..............................................................
16,600
5,824
22,424
18,729
4,543
23,272
Reported as
Current deferred tax assets ......................................................................
Long term deferred tax liabilities ............................................................
Net deferred income tax liabilities ....................................................
7,451
15,522
$8,071
4,938
18,727
$13,789
Decrease in total deferred tax assets before valuation allowance
Net operating loss carryforwards
Net operating loss carryforwards have decreased primarily due to the sale of MediKredit and substantial liquidation of
Net1 UTA during the year ended June 30, 2014. Net operating loss carryforwards related to these entities as of June 30, 2013,
were provided in full in previous years. In addition, the Company provided for the full net operating losses incurred by
MediKredit and Net1 UTA during the year ended June 30, 2014. The Company deconsolidated MediKredit’s net operating loss
carryforwards and associated valuation allowance of $3.1 million when it was sold in June 2014. Furthermore, as a result of the
substantial liquidation of Net1 UTA in 2014, the full valuation allowance of $8.9 million has been applied against its net
operating loss carryforwards.
Intangible assets
Included in total deferred tax assets – intangible assets as of June 30, 2013, is an intangible asset related to license rights in
Net1 UTA. These license rights are termed software for Austrian tax purposes and were valued for Austrian tax purposes based
on previous license payments at €50.76 million in June 2006. The Company expected to amortize these license rights in its tax
returns over a period of 15 years. Any unused amounts were not expected to be carried forward to the subsequent year of
assessment. During the years ended June 30, 2014, 2013 and 2012, Net1 UTA utilized approximately $0.02 million, $0.05 million
and $0.04 million, respectively, of these license rights against its taxable income. As a result of the substantial liquidation of
Net1 UTA in 2014, the full valuation allowance of $8.0 million has been applied against the gross carrying value of this deferred
tax asset. Accordingly, there was no impact on the Company’s income tax expense during the year ended June 30, 2014.
F-46
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Decrease in total deferred tax assets (continued)
Intangible assets (continued)
Net1 Applied Technologies Austria GmbH (“Net1Austria”) generated tax deductible goodwill related to the acquisition of
Net1 UTA in August 2008 and under Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as defined
under Austrian tax law, over a period of 15 years. Unused amounts are carried forward to subsequent years of assessment and are
included in net operating loss carryforwards. The Company did not utilize the goodwill deferred tax asset during the years ended
June 30, 2014 and 2013, respectively. As a result of the substantial liquidation of Net1 UTA in 2014, the full valuation allowance
of $7.9 million has been applied against the gross carrying value of this deferred tax asset. Accordingly, there was no impact on
the Company’s income tax expense during the year ended June 30, 2014.
Decrease in total deferred tax liabilities
Intangible assets
Deferred tax liabilities – intangible assets have decreased during the year ended June 30, 2014, primarily as a result of the
amortization of the underlying KSNET intangible assets during the year.
Decrease in valuation allowance
At June 30, 2014, the Company had deferred tax assets of $14.4 million (2013: $9.5 million), net of the valuation allowance.
Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax
asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At June 30, 2014, the Company had a valuation allowance of $25.2 million (2013: $54.1 million) to reduce its deferred tax
assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2014 and 2013, is
presented below:
July 1, 2012 .............................................
Reversed to statement of operations .......
Charged to statement of operations .........
Utilized ...................................................
Foreign currency adjustment ...................
June 30, 2013
Reversed to statement of operations
Charged to statement of operations .........
Utilized ...................................................
Deconsolidation ......................................
Foreign currency adjustment ...................
June 30, 2014 ....................................
Foreign
tax
credits
$19,089
-
5,547
-
-
24,636
(1,412)
113
-
-
-
$23,337
Tax
deductible
goodwill
$17,985
-
-
(1,643)
615
16,957
-
-
(17,682)
-
725
$-
Net
operating
loss carry-
forwards
$9,560
-
2,621
-
(367)
11,814
-
1,329
(9,016)
(3,075)
192
$1,244
Total
$47,496
-
8,201
(1,733)
153
54,117
(1,412)
1,442
(26,698)
(3,075)
779
$25,153
FTS
patent
Other
$660
-
-
(90)
(96)
474
-
-
-
-
(105)
$369
$202
-
33
-
1
236
-
-
-
-
(33)
$203
F-47
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
20.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2014, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
Year of expiration
US net
operating loss
carry
forwards
2024 ........................................................................................................
$3,340
During the year ended June 30, 2014 and 2013, Net1 generated additional foreign tax credits related to the cash dividends
received. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of June 30, 2014 and 2013,
respectively. The unused foreign tax credits generated expire after ten years in 2023, 2022, 2021, 2020 and 2019.
South Africa
Net operating losses incurred in South Africa generally expire if a company does not trade during the year. In South Africa,
the subsidiary companies that incurred the losses are currently trading and will continue to trade for the foreseeable future.
Uncertain tax positions
As of each of June 30, 2014 and 2013, respectively the Company has unrecognized tax benefits of $1.2 million, all of which
would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, South Korea,
Austria, Botswana and in the US federal jurisdiction. As of June 30, 2014, the Company’s South African subsidiaries are no
longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2009. The Company
is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial
position, statement of cash flows, or results of operations. The Company does not expect the change related to unrecognized tax
benefits will have a significant impact on its results of operations or financial position in the next 12 months.
The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2014, 2013
and 2012:
Unrecognized tax benefits - opening balance .........................................
Gross decreases - tax positions in prior periods ...................................
Gross increases - tax positions in current period ..................................
Lapse of statute limitations ..................................................................
Foreign currency adjustment ................................................................
Unrecognized tax benefits - closing balance .....................................
2014
$1,150
-
38
-
(28)
$1,160
2013
$1,314
(170)
216
-
(210)
$1,150
2012
$2,664
(1,159)
97
-
(288)
$1,314
As of each of June 30, 2014 and 2013, the Company had accrued interest related to uncertain tax positions of
approximately $0.2 million, respectively, on its balance sheet.
F-48
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21.
EARNINGS PER SHARE
Basic earnings per share include shares of restricted stock that meet the definition of a participating security because these
shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic earnings per share
have been calculated using the two-class method and basic earnings per share for the years ended June 30, 2014, 2013 and 2012,
reflects only undistributed earnings. The computation below of basic earnings per share excludes the net income attributable to
shares of unvested restricted stock (participating non-vested restricted stock) from the numerator and excludes the dilutive impact
of these unvested shares of restricted stock from the denominator.
Diluted earnings per share has been calculated to give effect to the number of shares of additional common stock that would
have been outstanding if the potential dilutive instruments had been issued in each period. Stock options are included in the
calculation of diluted earnings per share utilizing the treasury stock method and are not considered to be participating securities as
the stock options do not contain non-forfeitable dividend rights. The calculation of diluted earnings per share includes the dilutive
effect of a portion of the restricted stock granted to employees in October 2010, November 2010 and February 2012 as these
shares of restricted stock are considered contingently returnable shares for the purposes of the diluted earnings per share
calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions are
discussed in Note 18.
The following table presents net income attributable to Net1 (income from continuing operations) and the share data used in
the basic and diluted earnings per share computations using the two-class method for the years ended June 30, 2014, 2013 and
2012:
2014
2013
(in thousands except percent and
per share data)
2012
Numerator:
Net income attributable to Net1 ................................................................................
Undistributed earnings ................................................................................................
Percent allocated to common shareholders (Calculation 1) ...............................
Numerator for earnings per share: basic and diluted ...........................................
$70,111
70,111
99%
$69,376
$12,977
12,977
99%
$12,836
$44,651
44,651
99%
$44,397
Denominator:
Denominator for basic earnings per share: weighted-average common
shares outstanding ........................................................................................................
Effect of dilutive securities: .......................................................................................
Performance shares related to acquisition .......................................................
Stock options ..........................................................................................................
Denominator for diluted earnings per share: adjusted weighted
average common shares outstanding and assumed conversion ...........
45,997
45,057
44,930
-
119
95
30
-
45
46,116
45,182
44,975
Earnings per share:
Basic ..............................................................................................................
Diluted ...........................................................................................................
$1.51
$1.50
$0.28
$0.28
$0.99
$0.99
(Calculation 1)
Basic weighted-average common shares outstanding (A) .............................
Basic weighted-average common shares outstanding and unvested
restricted shares expected to vest (B) ............................................................
Percent allocated to common shareholders (A) / (B).....................................
45,997
45,057
44,930
46,484
99%
45,553
99%
45,187
99%
Options to purchase 1,516,240 shares of the Company’s common stock at prices ranging from $7.35 to $24.46 per share
were outstanding during the year ended June 30, 2014, but were not included in the computation of diluted earnings per share
because the options’ exercise price were greater than the average market price of the Company’s common shares. The options,
which expire at various dates through on August 22, 2022, were still outstanding as of June 30, 2014.
F-49
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
22.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information:
The following table presents the supplemental cash flow disclosures for the years ended June 30, 2014, 2013 and 2012:
Cash received from interest ...........................................................................
2014
$14,703
2013
$12,043
Cash paid for interest .....................................................................................
$6,969
$7,927
Cash paid for income taxes ............................................................................
$42,417
$21,900
2012
$9,180
$9,773
$30,704
The cash flows associated with the December 2013 BEE transactions and buy back of shares from the BEE partners as
described in Note 14 were all denominated in South African rand and net settled and there were no actual cash flow transactions
between the parties. The Company would have recorded the following movements in its investing and financing activities in its
consolidated statement of cash flows for the year ended June 30, 2014, if cash had actually flowed between the parties as follows:
Cash (used in ) provided by investing activities:
Loans provided to BEE partners ..............................................................
Loans repaid by BEE partners ..................................................................
($25,054)
$24,574
2014
Cash provided by (used in) financing activities:
Issue of shares of the Company’s common stock to BEE partners ..........
Purchase of shares from BEE partners .....................................................
$25,054
($24,858)
In addition, the equity instrument charges discussed in Note 17 and expensed during the years ended June 30, 2014 and
2012, respectively, are book entries and were not paid in cash.
23. OPERATING SEGMENTS
Change to internal reporting structure and restatement of previously reported information
During June 2014, the Company’s chief operating decision maker simplified its operating and internal reporting structures
from five reportable segments to three. Previously reported information has been restated.
Operating segments
The Company discloses segment information as reflected in the management information systems reports that its chief
operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or reports material revenues.
The Company currently has three reportable segments: South African transaction processing, International transaction
processing and Financial inclusion and applied technologies. The South African transaction processing and Financial inclusion and
applied technologies segments operate mainly within South Africa and the International transaction processing segment operates
mainly within South Korea. The Company’s reportable segments offer different products and services and require different
resources and marketing strategies and share the Company’s assets.
F-50
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
Operating segments (continued)
The South African transaction processing segment currently consists mainly of a welfare benefit distribution service provided
to the South African government and transaction processing for retailers, utilities, medical-related claim service customers and
banks. Fee income is earned based on the number of recipient cardholders paid. Utility providers and banks are charged a fee for
transaction processing services performed on their behalf at retailers. This segment has individually significant customers that each
provides more than 10% of the total revenue of the Company. For the year ended June 30, 2014, there was one such customer,
providing 27% of total revenue (2013: one such customer, providing 42% of total revenue; 2012: one such customer, providing
41% of total revenue).
The International transaction processing segment consists mainly of activities in South Korea from which the Company
generates revenue from the provision of payment processing services to merchants and card issuers through its VAN. This
segment generates fee revenue from the provision of payment processing services and to a lesser extent from the sale of goods,
primarily point of sale terminals, to customers in South Korea. The segment also generates transaction fee revenue from
transaction processing of UEPS-enabled smartcards in Botswana and, until February 2013, through NUETS initiative in Iraq as
well as transaction processing of medical-related claims in the United States.
The Financial inclusion and applied technologies segment derives revenue from the provision of smart card accounts, as a
fixed monthly fee per card is charged for the maintenance of these accounts, and the provision of short-term loans as a principal.
This segment also includes fee income and associated expenses from merchants and card holders using the Company’s merchant
acquiring system, the sale of prepaid products (electricity and airtime) as well as the sale of hardware and software. Finally, the
Company earns premium income from the sale of life insurance products and investment income through its insurance business.
Corporate/eliminations includes the Company’s head office cost center and the amortization of acquisition-related intangible
assets. The charges related to the BEE equity instrument issued during the years ended June 30, 2014 and 2012 (refer to Note 17),
and the profit related to the deconsolidation of subsidiaries and disposal of business (refer to Note 19), during the years ended June
30, 2014 and 2012, has been allocated to corporate/eliminations.
The reconciliation of the reportable segments revenue to revenue from external customers for the years ended June 30, 2014,
2013 and 2012, respectively, is as follows:
Revenue
Reportable
Segment
Inter-
segment
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2014 .........................
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2013 .........................
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Total for the year ended June 30, 2012 .........................
$261,577
152,725
207,595
621,897
242,739
135,954
108,001
486,694
194,630
120,625
90,792
$406,047
$11,543
-
28,698
40,241
495
-
34,052
34,547
3,011
-
12,772
$15,783
From
external
customers
$250,034
152,725
178,897
581,656
242,244
135,954
73,949
452,147
191,619
120,625
78,020
$390,264
F-51
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
The Company does not allocate interest income, interest expense or income tax expense to its reportable segments. The
Company evaluates segment performance based on segment operating income before acquisition-related intangible asset
amortization which represents operating income before acquisition-related intangible asset amortization and allocation of expenses
allocated to Corporate/Eliminations, all under GAAP. The reconciliation of the reportable segments measure of profit or loss to
income before income taxes for the years ended June 30, 2014, 2013 and 2012, respectively, is as follows:
For the years ended June 30,
2013
2012
2014
Reportable segments measure of profit or loss ................. $144,038
(42,240)
14,817
(7,473)
Income before income taxes ....................................... $109,142
Operating income: Corporate/Eliminations ...................
Interest income ..............................................................
Interest expense .............................................................
$50,383
(27,221)
12,083
(7,966)
$27,279
$94,439
(33,289)
8,576
(9,345)
$60,381
The following tables summarize segment information which is prepared in accordance with GAAP for the years ended
June 30, 2014, 2013 and 2012:
For the years ended June 30,
2013
2012
2014
Revenues
South African transaction processing ............................... $261,577
152,725
International transaction processing .................................
207,595
Financial inclusion and applied technologies ...................
621,897
Total ..............................................................................
Operating income (loss)
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments ........................................
Corporate/Eliminations ..............................................
Total .....................................................................
61,401
21,952
60,685
144,038
(42,240)
101,798
Depreciation and amortization
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments ........................................
Corporate/Eliminations ..............................................
Total .....................................................................
Expenditures for long-lived assets
South African transaction processing ...............................
International transaction processing .................................
Financial inclusion and applied technologies ...................
Subtotal: Operating segments .......................................
Corporate/Eliminations .............................................
Total ....................................................................
7,036
15,823
874
23,733
16,553
40,286
3,425
19,393
1,088
23,906
-
$23,906
$242,739
135,954
108,001
486,694
(21,316)
14,208
57,491
50,383
(27,221)
23,162
7,516
14,183
678
22,377
18,222
40,599
9,400
12,490
857
22,747
-
$22,747
$194,630
120,625
90,792
406,047
33,906
14,649
45,884
94,439
(33,289)
61,150
2,982
13,209
751
16,942
19,557
36,499
23,332
14,994
841
39,167
-
$39,167
The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets
per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company
does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an
arbitrary allocation and segment asset allocation is therefore not presented.
F-52
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
23. OPERATING SEGMENTS (continued)
It is impractical to disclose revenues from external customers for each product and service or each group of similar products
and services.
Geographic Information
Revenues based on the geographic location from which the sale originated for the years ended June 30, are presented in the
table below:
South Africa ...........................................................................
South Korea ...........................................................................
Rest of world ..........................................................................
Total .................................................................................
$428,931
146,667
6,058
$581,656
$317,916
129,338
4,893
$452,147
$272,063
114,096
4,105
$390,264
2014
2013
2012
Long-lived assets based on the geographic location for the years ended June 30, are presented in the table below:
South Africa ........................................................................
South Korea ........................................................................
Rest of world ......................................................................
Total ................................................................................
$105,627
229,830
6,593
$342,050
$117,858
213,589
7,676
$339,123
$140,308
224,272
6,911
$371,491
Long-lived assets
2013
2014
2012
24. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company leases certain premises. At June 30, 2014, the future minimum payments under operating leases consist of:
Due within 1 year ....................................
Due within 2 years ..................................
Due within 3 years ..................................
Due within 4 years ..................................
Due within 5 years ..................................
$3,490
2,608
1,126
363
$-
Operating lease payments related to the premises and equipment were $7.5 million, $15.9 million and $7.5 million,
respectively, for the years ended June 2014, 2013 and 2012, respectively.
Capital commitments
As of June 30, 2014 and 2013, the Company had outstanding capital commitments of approximately $0.2 million and
$0.3 million, respectively.
Purchase obligations
As of June 30, 2014 and 2013, the Company had purchase obligations totaling $5.5 million and $3.9 million, respectively.
The purchase obligations as of June 30, 2014, primarily include inventory that will be delivered to the Company and sold to
customers in the next twelve months.
F-53
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
24. COMMITMENTS AND CONTINGENCIES (continued)
Guarantees
The South African Revenue Service and certain of the Company’s customers, suppliers and other business partners have
asked the Company to provide them with guarantees, including standby letters of credit, issued by a South African bank. The
Company is required to procure these guarantees for these third parties to operate its business.
Nedbank has issued guarantees to these third parties amounting to ZAR 135.1 million ($12.8 million, translated at exchange
rates applicable as of June 30, 2014) and thereby utilizing part of the Company’s short-term facility. The Company in turn has
provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 125.0 million ($11.8 million, translated at exchange
rates applicable as of June 30, 2014). The Company pays commission of between 0.2% per annum to 2.0% per annum of the face
value of these guarantees and does not recover any of the commission from third parties.
The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of
June 30, 2014. The maximum potential amount that the Company could pay under these guarantees is ZAR 135.1 million
($12.8 million, translated at exchange rates applicable as of June 30, 2014). The guarantees have reduced the amount available for
borrowings under the Company’s short-term credit facility described in Note 12.
Contingencies
Securities Litigation
On December 24, 2013, Net1, its chief executive officer and its chief financial officer were named as defendants in a
purported class action lawsuit filed in the United States District Court for the Southern District of New York alleging violations of
the federal securities laws.
The lawsuit alleges that Net1 made materially false and misleading statements regarding its business and compliance
policies in its SEC filings and other public disclosures. The lawsuit was brought on behalf of a purported shareholder of Net1 and
all other similarly situated shareholders who purchased its securities between August 27, 2009 and November 27, 2013. The
lawsuit seeks unspecified damages. The Company believes this lawsuit has no merit and intends to defend it vigorously.
The Company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of
business.
Management currently believes that the resolution of these matters, individually or in the aggregate, will not have a material
adverse impact on the Company’s financial position, results of operations and cash flows.
25. RELATED PARTY TRANSACTIONS
As described in Note 3, on September 14, 2012, the Company acquired all of the outstanding and issued ordinary shares in
N1MS. In 2010, the Company had engaged the services of N1MS to perform software development services, primarily software
utilized on mobile phones and by cash-accepting kiosks. All software developed under this engagement became the Company’s
property. During the years ended June 30, 2013 and 2012, the Company recognized expenses of approximately $0.1 million and
$0.8, respectively, for software development services provided by N1MS prior to it becoming a subsidiary of the Company. As of
June 30, 2013, and since acquisition, the Company’s has eliminated all intercompany balance sheet accounts with N1MS on
consolidation.
F-54
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2014, 2013 and 2012
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
26. UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited consolidated statements of operations information for each quarter of
fiscal 2014 and 2013:
Three months ended
Jun 30,
2014
Mar 31,
2014
Dec 31,
2013
(In thousands except per share data)
Sep 30,
2013
Year
ended
June 30,
2014
Revenue .............................................................................. $182,753 $138,126 $137,283
18,802
Operating income ................................................................
Net income attributable to Net1 ..........................................
$12,749
Net income per share, in United States dollars ..................
Basic earnings attributable to Net1 shareholders .............
Diluted earnings attributable to Net1 shareholders ..........
23,949
$17,182
42,647
$28,584
$0.59
$0.58
$0.38
$0.37
$0.28
$0.28
$123,494 $581,656
101,798
$70,111
16,400
$11,596
$0.25
$0.25
$1.51
$1.50
Three months ended
Jun 30,
2013
Mar 31,
2013
Dec 31,
2012
(In thousands except per share data)
Sep 30,
2012
Year
ended
June 30,
2013
Revenue .............................................................................. $117,882 $111,141 $111,442
4,972
Operating (loss) income ......................................................
Net income (loss) attributable to Net1 ................................
$2,629
Net income (loss per share, in United States dollars ..........
Basic earnings (loss) attributable to Net1 shareholders ...
Diluted earnings (loss) attributable to Net1 shareholders
(4,726)
$(4,681)
13,591
$8,285
$ (0.10)
$ (0.10)
$ 0.06
$ 0.06
$ 0.18
$ 0.18
$111,682 $452,147
23,162
$12,977
9,325
$6,744
$ 0.15
$ 0.15
$0.28
$ 0.28
27.
SUBSEQUENT EVENTS
On August 27, 2014, the Company entered into a sale and subscription agreement with Business Venture Investments No
1567 (Proprietary) Limited (RF) (“BVI”), one of the Company’s BEE partners, in preparation for any new potential SASSA
tender. Pursuant to the sale and subscription agreement: (i) the Company repurchased BVI’s remaining 1,837,432, shares of the
Company’s common stock for approximately $9.2 million in cash (translated at exchange rates prevailing as of August 27, 2014)
and (ii) BVI has subscribed for new ordinary shares of CPS representing approximately 12.5% of CPS’ ordinary shares
outstanding after the subscription for $1.4 million in cash (translated at exchange rates prevailing as of August 27, 2014). In
connection with transactions described above, the CPS shareholder agreement that was negotiated as part of the original
December 2013 Relationship Agreement became effective.
*********************
F-55