[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______________________ To
_______________________
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
filing requirements for the past 90 days.
YES
[X] NO [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by check mark 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):
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
YES [
] NO [X]
As of May 8, 2014 (the latest practicable date), 50,183,342
shares of the registrants common stock, par value $0.001 per share, net of
treasury shares, were outstanding.
Part I. Financial Information
|
|
Item 1. Financial Statements
|
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Balance Sheets
|
|
|
Unaudited
|
|
|
(A)
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
30,875
|
|
$
|
53,665
|
|
Pre-funded social
welfare grants receivable (Note 2)
|
|
4,728
|
|
|
2,934
|
|
Accounts receivable, net of allowances
of March: $1,592; June: $4,701
|
|
132,356
|
|
|
102,614
|
|
Finance loans
receivable, net of allowances of March: $1,815; June: $-
|
|
42,379
|
|
|
8,350
|
|
Inventory (Note 3)
|
|
10,491
|
|
|
12,222
|
|
Deferred income taxes
|
|
5,350
|
|
|
4,938
|
|
Total
current assets before settlement assets
|
|
226,179
|
|
|
184,723
|
|
Settlement assets (Note 4)
|
|
744,782
|
|
|
752,476
|
|
Total current assets
|
|
970,961
|
|
|
937,199
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of March: $92,314; June: $84,808
|
|
46,150
|
|
|
48,301
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
1,347
|
|
|
1,183
|
|
GOODWILL (Note 6)
|
|
179,832
|
|
|
175,806
|
|
INTANGIBLE ASSETS, net (Note 6)
|
|
69,265
|
|
|
77,257
|
|
OTHER LONG-TERM ASSETS, including reinsurance assets (Note
7)
|
|
34,338
|
|
|
36,576
|
|
TOTAL ASSETS
|
|
1,301,893
|
|
|
1,276,322
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Bank overdraft (Note 8)
|
|
-
|
|
|
-
|
|
Accounts payable
|
|
14,592
|
|
|
26,567
|
|
Other payables
|
|
35,682
|
|
|
33,808
|
|
Current portion of
long-term borrowings (Note 9)
|
|
14,005
|
|
|
14,209
|
|
Income taxes payable
|
|
11,749
|
|
|
2,275
|
|
Total current liabilities before settlement obligations
|
|
76,028
|
|
|
76,859
|
|
Settlement obligations (Note 4)
|
|
744,782
|
|
|
752,476
|
|
Total
current liabilities
|
|
820,810
|
|
|
829,335
|
|
DEFERRED INCOME TAXES
|
|
17,343
|
|
|
18,727
|
|
LONG-TERM BORROWINGS (Note 9)
|
|
58,061
|
|
|
66,632
|
|
OTHER LONG-TERM LIABILITIES, including insurance policy
liabilities (Note 7)
|
|
20,117
|
|
|
21,659
|
|
TOTAL
LIABILITIES
|
|
916,331
|
|
|
936,353
|
|
COMMITMENTS AND CONTINGENCIES (Note 17)
|
|
|
|
|
|
|
EQUITY
|
|
COMMON STOCK (Note 10)
|
|
|
|
|
|
|
Authorized:
200,000,000 with $0.001 par
value;
Issued
and outstanding shares, net of treasury - March: 45,783,342; June:
45,592,550
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized
shares: 50,000,000 with $0.001 par
value;
Issued
and outstanding shares, net of treasury: March: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
165,076
|
|
|
160,670
|
|
TREASURY SHARES, AT
COST: March: 13,455,090; June: 13,455,090
|
|
(175,823
|
)
|
|
(175,823
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(97,910
|
)
|
|
(100,858
|
)
|
RETAINED EARNINGS
|
|
494,145
|
|
|
452,618
|
|
TOTAL NET1
EQUITY
|
|
385,547
|
|
|
336,666
|
|
NON-CONTROLLING INTEREST
|
|
15
|
|
|
3,303
|
|
TOTAL EQUITY
|
|
385,562
|
|
|
339,969
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
1,301,893
|
|
$
|
1,276,322
|
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
138,126
|
|
$
|
111,141
|
|
$
|
398,903
|
|
$
|
334,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT processing,
servicing
and support
|
|
63,149
|
|
|
51,461
|
|
|
187,591
|
|
|
143,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administration
|
|
40,586
|
|
|
53,846
|
|
|
121,916
|
|
|
149,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,442
|
|
|
10,560
|
|
|
30,245
|
|
|
31,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
23,949
|
|
|
(4,726
|
)
|
|
59,151
|
|
|
9,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
3,438
|
|
|
2,515
|
|
|
9,993
|
|
|
8,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
1,734
|
|
|
2,023
|
|
|
5,712
|
|
|
6,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
|
|
25,653
|
|
|
(4,234
|
)
|
|
63,432
|
|
|
11,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (note 16)
|
|
8,535
|
|
|
472
|
|
|
22,119
|
|
|
7,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE EARNINGS FROM
EQUITY-ACCOUNTED INVESTMENTS
|
|
17,118
|
|
|
(4,706
|
)
|
|
41,313
|
|
|
4,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
52
|
|
|
22
|
|
|
202
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
17,170
|
|
|
(4,684
|
)
|
|
41,515
|
|
|
4,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADD NET LOSS ATTRIBUTABLE TO NON-
CONTROLLING INTEREST
|
|
(12
|
)
|
|
(3
|
)
|
|
(12
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO NET1
|
$
|
17,182
|
|
$
|
(4,681
|
)
|
$
|
41,527
|
|
$
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, in United
States
dollars
(note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) attributable
to
Net1 shareholders
|
$
|
0.38
|
|
$
|
(0.10
|
)
|
$
|
0.91
|
|
$
|
0.10
|
|
Diluted earnings (loss) attributable
to
Net1 shareholders
|
$
|
0.37
|
|
$
|
(0.10
|
)
|
$
|
0.90
|
|
$
|
0.10
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
17,170
|
|
$
|
(4,684
|
)
|
$
|
41,515
|
|
$
|
4,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized income on asset available for
sale,
net
of tax
|
|
327
|
|
|
-
|
|
|
288
|
|
|
258
|
|
Movement in foreign currency translation reserve
|
|
(2,134
|
)
|
|
(22,993
|
)
|
|
2,838
|
|
|
(12,811
|
)
|
Total other comprehensive (loss) income,
net
of taxes
|
|
(1,807
|
)
|
|
(22,993
|
)
|
|
3,126
|
|
|
(12,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
15,363
|
|
|
(27,677
|
)
|
|
44,641
|
|
|
(7,872
|
)
|
Add comprehensive loss attributable
to
non-controlling interest
|
|
12
|
|
|
3
|
|
|
12
|
|
|
11
|
|
Comprehensive income (loss)
attributable
to Net1
|
$
|
15,375
|
|
$
|
(27,674
|
)
|
$
|
44,653
|
|
$
|
(7,861
|
)
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS
TECHNOLOGIES,
INC.
Consolidated
Statement
of
Changes
in
Equity (dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
shares, net of
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
treasury
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
Balance July 1, 2013
|
|
59,047,640
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
|
45,592,550
|
|
$
|
160,670
|
|
$
|
452,618
|
|
$
|
(100,858
|
)
|
$
|
336,666
|
|
$
|
3,303
|
|
$
|
339,969
|
|
Restricted stock granted
|
|
187,963
|
|
|
|
|
|
|
|
|
|
|
|
187,963
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Exercise of stock option
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
88
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
88
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,826
|
|
|
|
|
|
|
|
|
2,826
|
|
|
|
|
|
2,826
|
|
Reversal of stock-based
compensation charge
|
|
(7,171
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,171
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
(6
|
)
|
Income tax benefit from vested stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
Acquisition of KSNET
non-controlling interest (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,492
|
|
|
|
|
|
(178
|
)
|
|
1,314
|
|
|
(3,276
|
)
|
|
(1,962
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,527
|
|
|
|
|
|
41,527
|
|
|
(12
|
)
|
|
41,515
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,126
|
|
|
3,126
|
|
|
-
|
|
|
3,126
|
|
Balance March 31, 2014
|
|
59,238,432
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
|
45,783,342
|
|
$
|
165,076
|
|
$
|
494,145
|
|
$
|
(97,910
|
)
|
$
|
385,547
|
|
$
|
15
|
|
$
|
385,562
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
17,170
|
|
$
|
(4,684
|
)
|
$
|
41,515
|
|
$
|
4,681
|
|
Depreciation and amortization
|
|
10,442
|
|
|
10,560
|
|
|
30,245
|
|
|
31,051
|
|
Earnings from equity-accounted investments
|
|
(52
|
)
|
|
(22
|
)
|
|
(202
|
)
|
|
(204
|
)
|
Fair value adjustments
|
|
110
|
|
|
(299
|
)
|
|
49
|
|
|
408
|
|
Interest payable
|
|
30
|
|
|
1,054
|
|
|
1,696
|
|
|
3,363
|
|
(Profit) loss on disposal of property,
plant and equipment
|
|
(26
|
)
|
|
3
|
|
|
(42
|
)
|
|
(83
|
)
|
Stock-based compensation charge
|
|
922
|
|
|
1,092
|
|
|
2,820
|
|
|
3,325
|
|
Facility fee amortized
|
|
79
|
|
|
71
|
|
|
657
|
|
|
235
|
|
Increase in accounts receivable, pre-funded social welfare grants receivable and finance loans
receivable
|
|
(6,443
|
)
|
|
(4,818
|
)
|
|
(67,521
|
)
|
|
(3,987
|
)
|
Decrease (Increase) in inventory
|
|
2,821
|
|
|
4,949
|
|
|
979
|
|
|
(2,260
|
)
|
Increase (Decrease) in accounts payable and
other payables
|
|
2,656
|
|
|
4,533
|
|
|
(10,895
|
)
|
|
(1,755
|
)
|
Increase in taxes payable
|
|
8,069
|
|
|
948
|
|
|
9,431
|
|
|
354
|
|
Decrease in deferred taxes
|
|
(1,141
|
)
|
|
(1,201
|
)
|
|
(3,019
|
)
|
|
(4,133
|
)
|
Net cash
provided by operating activities
|
|
34,637
|
|
|
12,186
|
|
|
5,713
|
|
|
30,995
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,848
|
)
|
|
(5,053
|
)
|
|
(17,309
|
)
|
|
(17,103
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
123
|
|
|
31
|
|
|
2,124
|
|
|
387
|
|
Acquisitions, net of cash acquired
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,143
|
)
|
(Investment in equity in) Repayment of loan
by equity-accounted investment
|
|
(25
|
)
|
|
-
|
|
|
(25
|
)
|
|
3
|
|
Proceeds from maturity of investments
related to insurance business
|
|
-
|
|
|
-
|
|
|
-
|
|
|
545
|
|
Other investing activities, net
|
|
571
|
|
|
-
|
|
|
570
|
|
|
-
|
|
Net change in settlement assets
|
|
(277,912
|
)
|
|
(156,363
|
)
|
|
(21,409
|
)
|
|
(168,419
|
)
|
Net cash
used in investing activities
|
|
(282,091
|
)
|
|
(161,385
|
)
|
|
(36,049
|
)
|
|
(186,730
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings obtained (Note 9)
|
|
1,028
|
|
|
-
|
|
|
72,633
|
|
|
-
|
|
Repayment of long-term borrowings (Note 9)
|
|
-
|
|
|
-
|
|
|
(87,008
|
)
|
|
(7,307
|
)
|
Payment of facility fee (Note 9)
|
|
-
|
|
|
-
|
|
|
(872
|
)
|
|
-
|
|
Proceeds from bank overdraft
|
|
-
|
|
|
-
|
|
|
24,580
|
|
|
-
|
|
Repayment of bank overdraft
|
|
(23,335
|
)
|
|
-
|
|
|
(23,335
|
)
|
|
-
|
|
Acquisition of interests in KSNET (Note 10)
|
|
-
|
|
|
-
|
|
|
(1,968
|
)
|
|
-
|
|
Proceeds from issue of common stock
|
|
88
|
|
|
-
|
|
|
88
|
|
|
240
|
|
Net change in settlement obligations
|
|
277,912
|
|
|
156,363
|
|
|
21,409
|
|
|
168,419
|
|
Net cash
provided by financing activities
|
|
255,693
|
|
|
156,363
|
|
|
5,527
|
|
|
161,352
|
|
Effect of exchange rate changes on cash
|
|
274
|
|
|
(2,664
|
)
|
|
2,019
|
|
|
(2,124
|
)
|
Net increase (decrease) in cash and cashequivalents
|
|
8,513
|
|
|
4,500
|
|
|
(22,790
|
)
|
|
3,493
|
|
Cash and cash equivalents beginning of period
|
|
22,362
|
|
|
38,116
|
|
|
53,665
|
|
|
39,123
|
|
Cash and cash equivalents end of
period
|
$
|
30,875
|
|
$
|
42,616
|
|
$
|
30,875
|
|
$
|
42,616
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three
and nine months ended March 31, 2014 and 2013
(All amounts in tables
stated in thousands or thousands of United States Dollars, unless otherwise
stated)
1.
Basis
of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements include all
majority-owned subsidiaries over which the Company exercises control and have
been prepared in accordance with US generally accepted accounting principles
(GAAP) and the rules and regulations of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three and nine months ended March 31, 2014 and 2013, are not necessarily
indicative of the results for the full year. The Company believes that the
disclosures are adequate to make the information presented not misleading.
These
financial statements should be read in conjunction with the financial
statements, accounting policies and financial notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2013. In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments), which are necessary for a fair representation of
financial results for the interim periods presented.
References
to the Company refer to Net1 and its consolidated subsidiaries, unless the
context otherwise requires. References to Net1 are references solely to Net 1
UEPS Technologies, Inc.
The
Company has updated its accounting policy for the allowance for doubtful finance
loans receivable as a result of the increase in its UEPS-based lending book
which is included in finance loans receivable in its unaudited condensed
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.
However, the profile of the loan book has changed due to the expansion of the
UEPS-based lending book during the nine months ended March 31, 2014, and
accordingly an allowance for doubtful finance loans receivable is deemed
required by the Company.
Loan provisions and allowance for doubtful accounts receivable
UEPS-based lending
The
Companys policy is to regularly review the ageing of outstanding amounts due
from borrowers and adjust the provision based on managements estimate of the
recoverability of finance loans receivable. The Company writes off UEPS-based
loans and related service fees if a borrower is in arrears with repayments for
more than three months or dies.
Recent accounting pronouncements adopted
In
February 2013, the FASB issued guidance regarding
Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income
. This guidance
requires entities to present (either on the face of the statement of operations
or in the notes) the effects on the line items of the statement of operations
for amounts reclassified out of accumulated other comprehensive income. The
guidance is effective for the Company beginning July 1, 2013 and is applied
prospectively. The adoption of this guidance did not have a material impact on
the Companys financial statements.
Recent accounting pronouncements not yet adopted as of March 31, 2014
In
March 2013, the FASB issued guidance regarding
Parents Accounting for the
Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or
Groups of Assets Within a Foreign Entity or of an Investment in a Foreign
Entity
. This guidance requires that the parent release any related
cumulative translation adjustment into net income only if the sale or transfer
results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided. The guidance is
effective for the Company beginning July 1, 2014. Early adoption is permitted.
The Company is currently evaluating the impact of this guidance on its financial
statements on adoption.
2.
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 April 2014 payment service commenced on April 1, 2014, but
the Company pre-funded certain merchants participating in the merchant acquiring
system on the last day of March 2014.
7
3.
Inventory
The Companys inventory comprised the following categories as of March 31, 2014
and June 30, 2013.
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Finished goods
|
$
|
10,491
|
|
$
|
12,222
|
|
|
|
$
|
10,491
|
|
$
|
12,222
|
|
4.
Settlement assets and settlement obligations
Settlement
assets comprise (1) cash received from the South African government that the
Company holds pending disbursement to beneficiaries of social welfare grants,
(2) cash received from health care plans which the Company disburses to health
care service providers once it adjudicates claims and (3) cash received from
customers on whose behalf the Company processes payroll payments that the
Company will disburse to customer employees, payroll-related payees and other
payees designated by the customer.
Settlement
obligations comprise (1) amounts that the Company is obligated to disburse to
beneficiaries of social welfare grants, (2) amounts which are due to health care
service providers after claims have been adjudicated and reconciled, provided
that the Company shall have previously received such funds from health care plan
customers and (3) amounts that the Company is obligated to pay to customer
employees, payroll-related payees and other payees designated by the customer.
The
balances at each reporting date may vary widely depending on the timing of the
receipts and payments of these assets and obligations
5.
Fair
value of financial instruments and equity-accounted investments
Fair value of financial instruments
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 uses forward contracts in order to limit its 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.
The Companys outstanding foreign exchange contracts are as follows:
As of March 31, 2014
|
|
|
|
Fair market
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
EUR
|
192,375
|
ZAR
|
14.9984
|
ZAR
|
14.5664
|
April 22, 2014
|
EUR
|
192,375
|
ZAR
|
15.1351
|
ZAR
|
14.5664
|
April 22, 2014
|
EUR
|
192,195
|
ZAR
|
15.2014
|
ZAR
|
14.6290
|
May 20, 2014
|
EUR
|
192,195
|
ZAR
|
15.0637
|
ZAR
|
14.6290
|
May 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.2750
|
ZAR
|
14.7011
|
June 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.1349
|
ZAR
|
14.7011
|
June 20, 2014
|
EUR
|
182,273
|
ZAR
|
15.2077
|
ZAR
|
14.7778
|
July 21, 2014
|
EUR
|
182,273
|
ZAR
|
15.3488
|
ZAR
|
14.7778
|
July 21, 2014
|
EUR
|
180,023
|
ZAR
|
15.4228
|
ZAR
|
14.8537
|
August 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.2819
|
ZAR
|
14.8537
|
August 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.3623
|
ZAR
|
14.9372
|
September 22,
2014
|
EUR
|
180,023
|
ZAR
|
15.5041
|
ZAR
|
14.9372
|
September 22, 2014
|
8
5.
Fair
value of financial instruments and equity-accounted investments (continued)
Fair
value of financial instruments (continued)
Risk management (continued)
Currency exchange risk (continued)
As of March 31, 2014 (continued)
|
|
|
|
Fair market
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
EUR
|
181,571
|
ZAR
|
15.5739
|
ZAR
|
15.0122
|
October 20,
2014
|
EUR
|
181,571
|
ZAR
|
15.4316
|
ZAR
|
15.0122
|
October 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.6552
|
ZAR
|
15.0976
|
November 20,
2014
|
EUR
|
180,023
|
ZAR
|
15.5136
|
ZAR
|
15.0976
|
November 20, 2014
|
EUR
|
180,023
|
ZAR
|
15.5970
|
ZAR
|
15.1859
|
December 22,
2014
|
EUR
|
180,023
|
ZAR
|
15.7391
|
ZAR
|
15.1859
|
December 22, 2014
|
EUR
|
174,425
|
ZAR
|
15.8119
|
ZAR
|
15.2688
|
January 20,
2015
|
EUR
|
174,425
|
ZAR
|
15.6729
|
ZAR
|
15.2688
|
January 20, 2015
|
As of June 30, 2013
|
|
|
|
Fair market
|
|
Notional amount
|
Strike price
|
value price
|
Maturity
|
USD
|
4,000,000
|
ZAR
|
9.0600
|
ZAR
|
10.1397
|
September 30,
2013
|
Translation risk
Translation
risk relates to the risk that the Companys results of operations will vary
significantly as the US dollar is its reporting currency, but it earns most of
its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR
exchange rate has fluctuated significantly over the past two years. As exchange
rates are outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities.
Credit risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its counterparties to minimize overall credit risk. These
policies include an evaluation of a potential counterpartys financial
condition, credit rating, and other credit criteria and risk mitigation tools as
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains a policy
of entering into such transactions only with South African and European
financial institutions that have a credit rating of BBB or better, as determined
by credit rating agencies such as Standard & Poors, Moodys and Fitch
Ratings.
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.
9
5.
Fair
value of financial instruments and equity-accounted investments (continued)
Fair value of financial instruments (continued)
Risk management (continued)
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.
The
following section describes the valuation methodologies the Company uses to
measure its significant financial assets and liabilities at fair value.
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 applies 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 are included in Level 2 investments. In circumstances in which
inputs are generally unobservable, values typically reflect managements
estimates of assumptions that market participants would use in pricing the asset
or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and
similar techniques. Investments valued using such techniques are included in
Level 3 investments.
Asset
measured at fair value using significant unobservable inputs investment in
Finbond Group Limited (Finbond)
The
Company's Level 3 asset represents an investment of 156,788,712 shares of common
stock of Finbond, which are exchange-traded equity securities. Finbonds shares
are traded on the JSE Limited (JSE) and the Company has designated such shares
as available for sale investments. The Company has concluded that the market for
Finbond shares is not active and consequently has employed alternative valuation
techniques in order to determine the fair value of such stock. Currently, the
operations of Finbond relate primarily to the provision of microlending
products. In addition, it has a mutual banking licence and issues financial
products under this licence. In determining the fair value of Finbond, the
Company has considered amongst other things Finbonds historical financial
information (including its most recent public accounts), press releases issued
by Finbond and its published net asset value. The Company believes that the best
indicator of fair value of Finbond is its published net asset value and has used
this value to determine the fair value.
The
fair value of these securities as of March 31, 2014, represented approximately
1% of the Companys total assets, including these securities.
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of March 31, 2014, according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in
other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,778
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,778
|
|
|
Investment in Finbond (available for
sale assets
included in other long-term assets)
|
|
-
|
|
|
-
|
|
|
7,662
|
|
|
7,662
|
|
|
Other
|
|
-
|
|
|
138
|
|
|
-
|
|
|
138
|
|
|
Total assets at fair
value
|
$
|
1,778
|
|
$
|
138
|
|
$
|
7,662
|
|
$
|
9,578
|
|
10
5.
Fair
value of financial instruments and equity-accounted investments (continued)
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
-
|
|
$
|
170
|
|
$
|
-
|
|
$
|
170
|
|
|
Total liabilities at fair value
|
$
|
-
|
|
$
|
170
|
|
$
|
-
|
|
$
|
170
|
|
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2013, according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in
other long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,833
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,833
|
|
|
Investment in Finbond
(available for sale assets
included in other
long-term assets)
|
|
-
|
|
|
-
|
|
|
8,303
|
|
|
8,303
|
|
|
Other
|
|
-
|
|
|
147
|
|
|
-
|
|
|
147
|
|
|
Total assets at
fair value
|
$
|
1,833
|
|
$
|
147
|
|
$
|
8,303
|
|
$
|
10,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
-
|
|
$
|
436
|
|
$
|
-
|
|
$
|
436
|
|
|
Total
liabilities at fair value
|
$
|
-
|
|
$
|
436
|
|
$
|
-
|
|
$
|
436
|
|
Changes
in the Companys investment in Finbond (Level 3 that are measured at fair value
on a recurring basis) were insignificant during the three and nine months ended
March 31, 2014 and 2013, respectively. There have been no transfers in or out of
Level 3 during the three and nine months ended March 31, 2014 and 2013,
respectively.
Assets and liabilities measured at fair value on a nonrecurring
basis
The
Company measures its assets at fair value on a nonrecurring basis when they are
deemed to be other-than-temporarily impaired. The Company has no liabilities
that are measured at fair value on a nonrecurring basis. The Company reviews the
carrying values of its assets when events and circumstances warrant and
considers all available evidence in evaluating when declines in fair value are
other-than-temporary.
The
fair values of the Companys assets are determined using the best information
available, and may include quoted market prices, market comparables, and
discounted cash flow projections. An impairment charge is recorded when the cost
of the assets exceeds its fair value and the excess is determined to be
other-than-temporary. The Company has not recorded any impairment charges during
the reporting periods presented herein.
11
6.
Goodwill and intangible assets
Goodwill
Summarized below is the movement in the carrying value of goodwill
for the nine months ended March 31, 2014:
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Gross value
|
|
|
impairment
|
|
|
value
|
|
|
Balance as of June 30, 2013
|
$
|
218,558
|
|
$
|
(42,752
|
)
|
$
|
175,806
|
|
|
Foreign currency
adjustment
(1)
|
|
6,032
|
|
|
(2,006
|
)
|
|
4,026
|
|
|
Balance as of March 31, 2014
|
$
|
224,590
|
|
$
|
($44,758
|
)
|
$
|
179,832
|
|
(1)
the foreign currency adjustment represents the effects of the fluctuations
between the South African rand and the Korean won, and the US dollar on the
carrying value.
Goodwill has been allocated to the Companys reportable segments
as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
SA transaction-based
activities
|
$
|
28,532
|
|
$
|
30,525
|
|
International transaction-based activities
|
|
121,656
|
|
|
113,972
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
29,644
|
|
|
31,309
|
|
Total
|
$
|
179,832
|
|
$
|
175,806
|
|
Intangible assets
Carrying value and amortization of intangible assets
Summarized
below is the carrying value and accumulated amortization of the intangible
assets as of March 31, 2014 and June 30, 2013:
|
|
As
of March 31, 2014
|
|
|
As
of June 30, 2013
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
94,309
|
|
$
|
(37,373
|
)
|
$
|
56,936
|
|
$
|
90,469
|
|
$
|
(29,818
|
)
|
$
|
60,651
|
|
Software and unpatented technology
|
|
35,851
|
|
|
(27,512
|
)
|
|
8,339
|
|
|
34,951
|
|
|
(22,151
|
)
|
|
12,800
|
|
FTS patent
|
|
3,620
|
|
|
(3,620
|
)
|
|
-
|
|
|
3,873
|
|
|
(3,873
|
)
|
|
-
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
Trademarks
|
|
6,671
|
|
|
(2,681
|
)
|
|
3,990
|
|
|
6,611
|
|
|
(2,805
|
)
|
|
3,806
|
|
Customer database
|
|
574
|
|
|
(574
|
)
|
|
-
|
|
|
614
|
|
|
(614
|
)
|
|
-
|
|
Total finite-lived
intangible assets
|
$
|
145,531
|
|
$
|
(76,266
|
)
|
$
|
69,265
|
|
$
|
141,024
|
|
$
|
(63,767
|
)
|
$
|
77,257
|
|
Aggregate
amortization expense on the finite-lived intangible assets for the three and
nine months ended March 31, 2014, was approximately $4.6 million and $12.5
million, respectively (three and nine months ended March 31, 2013, was
approximately $4.4 million and $14.0 million, respectively).
Future
estimated annual amortization expense for the next five fiscal years and
thereafter, assuming exchange rates prevailing on March 31, 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.
2014
|
$
|
16,229
|
|
2015
|
|
15,080
|
|
2016
|
|
11,280
|
|
2017
|
|
8,958
|
|
2018
|
|
8,958
|
|
Thereafter
|
$
|
20,671
|
|
12
7.
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 nine months ended March 31, 2014:
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
assets (1)
|
|
|
contracts (2)
|
|
Balance as of June 30, 2013
|
$
|
19,557
|
|
$
|
(19,711
|
)
|
Foreign currency adjustment
(3)
|
|
(1,276
|
)
|
|
1,287
|
|
Balance as of March 31, 2014
|
$
|
18,281
|
|
$
|
(18,424
|
)
|
|
(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).
Assets and policy holder liabilities under investment contracts
Summarized
below is the movement in assets and policy holder liabilities under investment
contracts during the nine months ended March 31, 2014:
|
|
|
|
|
Investment
|
|
|
|
Assets (1)
|
|
|
contracts (2)
|
|
Balance as of June 30, 2013
|
$
|
953
|
|
$
|
(953
|
)
|
Foreign currency adjustment
(3)
|
|
(62
|
)
|
|
62
|
|
Balance as of March 31, 2014
|
$
|
891
|
|
$
|
(891
|
)
|
|
(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.
8.
Short-term credit facility South Africa
The Companys short-term South African credit facility with Nedbank Limited
comprises an overdraft facility of up to ZAR 250 million and indirect and
derivative facilities of up to ZAR 150 million, which include letters of
guarantee, letters of credit and forward exchange contracts. The Company
temporarily increased its overdraft facility to ZAR 500 million for the four
months to March 31, 2014, after which it reverted back to ZAR 250 million. As of
March 31, 2014, the interest rate on the overdraft facility was 7.85% . 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 the Companys
ability to dispose of or encumber its assets, incur additional indebtedness or
engage in certain business combinations. As of March 31, 2014, the Company had
not utilized any of its ZAR 250.0 million ($23.6 million, translated at exchange
rates applicable as of March 31, 2014) overdraft facility. The Company had
utilized approximately ZAR 143.1 million ($13.5 million, translated at exchange
rates applicable as of March 31, 2014) of its facility 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 17). As of June 30, 2013, the Company had utilized none of this facility.
13
8.
Short-term credit facility Korea
The
Company obtained a KRW 10 billion short-term overdraft facility from Hana Bank,
a Korean bank, in January 2014. As of March 31, 2014, the interest rate on the
overdraft facility was 4.98% . The Company has ceded the warehouse it owns in
Korea as security for its repayment obligations under the facility. As of March
31, 2014, the Company had not utilized any of its KRW 10.0 billion ($9.3
million, translated at exchange rates applicable as of March 31, 2014) overdraft
facility. The facility expires in January 2015.
9.
Long-term borrowings
In
October 2013, the Company refinanced its existing long-term Korean credit
facility and signed a new five-year senior secured facilities agreement (the
Facilities Agreement) with a consortium of Korean banks. The Facilities
Agreement provides for three separate facilities to the Companys wholly owned
subsidiary, Net1 Applied Technologies Korea (Net1 Korea): a Facility A loan of
up to KRW 60.0 billion ($56.0 million), a Facility B loan of up to KRW 15
billion ($14.0 million) and a Facility C revolving credit facility of up to KRW
10.0 billion ($9.3 million) (all facilities denominated in KRW and translated at
exchange rates applicable as of March 31, 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 existing 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 a further KRW 1.1 billion ($1.0
million) in January 2014 to pay interest due under the Facilities Agreement.
Interest
on the loans and revolving credit facility is payable quarterly and is based on
the 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 March 31, 2014 and therefore
the interest rate in effect as of March 31, 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. The Company paid facilities fees of approximately KRW 0.9
billion on October 29, 2013 and amortized approximately $0.1 million and $0.6
million, respectively, during the three and nine months ended March 31, 2014. A
commitment fee of 0.3% is payable on any un-drawn and un-cancelled amount of the
revolving credit facility. Total interest expense related to the new and
refinanced facilities during the three and nine months ended March 31, 2014 and
2013, was $1.1 million and $3.7 million; and $1.7 million and $5.3 million,
respectively.
The
Facility A loan is repayable in three scheduled annual installments of KRW 10
billion each beginning 30 months after initial drawdown and one final
installment of KRW 30 billion on the maturity date, namely October 29, 2018. The
Facility B loan is repayable in full on October 29, 2014. The Facility C
revolving credit facility is repayable in full on the maturity date. Prepayment
of the revolving credit facility may be withdrawn at any time up to three months
before the maturity date.
The
loans under the Facilities Agreement are secured by a pledge by Net1 Korea of
its entire equity interest in KSNET and a pledge by the immediate parent of Net1
Korea (also one of the Companys subsidiaries) of its entire equity interest in
Net1 Korea. The Facilities Agreement contains customary covenants that require
Net1 Korea to maintain agreed leverage and debt service coverage ratios and
restricts Net1 Koreas ability to make certain distributions with respect to its
capital stock, prepay other debt, encumber its assets, incur additional
indebtedness, or engage in certain business combinations. The loans under the
Facilities Agreement are without recourse to, and the covenants and other
agreements contained therein do not apply to, the Company or any of the
Companys subsidiaries (other than Net1 Korea).
The
Companys refinanced KRW 92.4 billion Korean senior secured loan facility is
described in Note 13 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2013. The
Company has expensed the remaining prepaid facility fees related to the
refinanced facility of approximately $0.4 million during the nine months ended
March 31, 2014. The third scheduled repayment related to this refinanced
facility of $7.3 million was paid on October 29, 2012.
14
10. Capital structure
The
following table presents reconciliation between the number of shares, net of
treasury, presented in the consolidated statement of changes in equity during
the nine months ended March 31, 2014 and 2013, respectively, and the number of
shares, net of treasury, excluding non-vested equity shares that have not vested
during the nine months ended March 31, 2014 and 2013, respectively:
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Number of shares, net of treasury:
|
|
|
|
|
|
|
Statement
of changes in equity
|
|
45,783,342
|
|
|
45,600,471
|
|
Less: Non-vested
equity shares that have not vested
|
|
(385,778
|
)
|
|
(461,417
|
)
|
Number of shares, net of treasury excluding
non-vested
equity shares that have not vested
|
|
45,397,564
|
|
|
45,139,054
|
|
December 2013 Black Economic Empowerment transactions
On
December 10, 2013, the Company entered into definitive agreements relating to
two Black Economic Empowerment (BEE) transactions. As of March 31, 2014, the
transactions had not been implemented because the agreed conditions had not been
satisfied. Subsequently, the conditions were satisfied and the transactions were
implemented on April 16, 2014.
Pursuant
to these 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)
for a purchase price of ZAR 60.00 per share. The ZAR 60.00 per share purchase
price for the BEE shares, which are contractually restricted as to resale as
described below, was paid in ZAR and represents 75% of the closing price of the
Companys common stock on the JSE on December 6, 2013, the date the Company
completed final negotiation of the terms of these BEE transactions.
The
Relationship Agreements provided that the entire purchase price for the BEE
shares 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 are 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 being 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 bear interest at a rate equal to the Johannesburg Interbank Rate (638
basis points as of March 31, 2014) plus 300 basis points. Interest on the loans
is payable semi-annually in arrears on January 1 and July 1 of each year. 10% of
the outstanding principal amount of the loans will be 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 will be 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 will be payable on the fifth
anniversary of the date of issuance of the BEE shares. Further, the entire
outstanding principal amount of the loans will be payable if the price of the
Companys common stock on the JSE equals or exceeds ZAR 120.00 per share at any
time during term of the loans. Upon the occurrence of certain trigger events
with respect to a BEE partner, the BEE shares held by that BEE partner may be
repurchased by the Company or one of its designees. These trigger events include
the following:
-
failure by the BEE partner to pay any amount due on its loan (including
interest) to the lender (in this case, the Company may repurchase only that
number of shares which would raise sufficient funds to settle any amount due
and unpaid);
-
any other breach by the BEE partner (or in certain circumstances its
shareholders) of any provision of the Relationship Agreement, including
without limitation, its failure to maintain its BEE status;
-
the Companys common stock trades at or below ZAR 60.00 on the JSE or at
or below the equivalent trading price on Nasdaq;
-
the occurrence of certain insolvency events or liquidation proceedings
affecting the BEE partner; or
-
the BEE partner fails to satisfy any judgment or arbitration award granted
or made against it within 7 days.
15
10. Capital structure
(continued)
December 2013 Black Economic Empowerment transactions (continued)
If
the trigger event involves a failure by a BEE partner to pay any amount due on
its loan, then the repurchase price is the volume-weighted average price of the
Companys common stock on the Nasdaq for the period of 30 trading days prior to
the trigger event, or 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
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 may be
made to fund the repayment of principal and interest on the loans. 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.
The loans to the BEE partners do not provide that they are recourse only to the
BEE shares. Nevertheless, the Company expects 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.
Acquisition of KSNET non-controlling interests
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 Korean tax efficiencies in the future and is currently
discussing the feasibility with its Korean tax advisors. The transaction was
accounted for as an equity transaction with a non-controlling interest and
accordingly, no gain or loss was recognized in the Companys consolidated
statement of operations. The carrying amount of the non-controlling interest was
adjusted to reflect the change in ownership interest in KSNET. The difference
between the fair value of the consideration paid and the amount by which the
non-controlling interest was adjusted, of $1.5 million, was recognized in equity
attributable to Net1.
11. Accumulated other
comprehensive (loss) income
The
table below presents the change in accumulated other comprehensive (loss) income
per component during the nine months ended March 31, 2014:
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
(loss) on
|
|
|
|
|
|
|
Foreign
|
|
|
asset
|
|
|
|
|
|
|
currency
|
|
|
available
|
|
|
|
|
|
|
translation
|
|
|
for sale, net
|
|
|
|
|
|
|
reserve
|
|
|
of tax
|
|
|
Total
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Balance as of June 30, 2013
|
$
|
(101,188
|
)
|
$
|
330
|
|
$
|
(100,858
|
)
|
Movement in foreign currency
translation reserve
|
|
2,660
|
|
|
-
|
|
|
2,660
|
|
Unrealized loss on
asset available for sale, net of
tax of $112
|
|
-
|
|
|
288
|
|
|
288
|
|
Balance as
of March 31, 2014
|
$
|
(98,528
|
)
|
$
|
618
|
|
$
|
(97,910
|
)
|
There
were no reclassifications from accumulated other comprehensive loss to
comprehensive (loss) income during the nine months ended March 31, 2014 or 2013,
respectively.
16
12. Stock-based compensation
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the nine months ended
March 31, 2014 and 2013:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
|
|
exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
Number of
|
|
|
price
|
|
|
Term
|
|
|
Value
|
|
|
Value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2013
|
|
2,648,583
|
|
|
15.15
|
|
|
5.98
|
|
|
313
|
|
|
|
|
Granted under Plan: August 2013
|
|
224,896
|
|
|
7.35
|
|
|
10.00
|
|
|
568
|
|
|
2.53
|
|
Exercised
|
|
(10,000
|
)
|
|
8.75
|
|
|
|
|
|
12
|
|
|
|
|
Forfeited
|
|
(136,420
|
)
|
|
23.51
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31,
2014
|
|
2,727,059
|
|
|
14.12
|
|
|
5.63
|
|
|
2,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2012
|
|
2,247,583
|
|
|
16.28
|
|
|
6.43
|
|
|
602
|
|
|
|
|
Granted under Plan: August 2012
|
|
431,000
|
|
|
8.75
|
|
|
10.00
|
|
|
1,249
|
|
|
2.90
|
|
Exercised
|
|
(30,000
|
)
|
|
7.98
|
|
|
|
|
|
24
|
|
|
|
|
Outstanding March 31, 2013
|
|
2,648,583
|
|
|
15.15
|
|
|
6.74
|
|
|
978
|
|
|
|
|
The
fair value of each option is estimated on the date of grant using the Cox Ross
Rubinstein binomial model that uses the assumptions noted in the following
table. The estimated expected volatility is calculated based on the Companys
250 day volatility. The estimated expected life of the option was determined
based historical behavior of employees who were granted options with similar
terms. The Company has estimated no forfeitures for options awarded in August
2013 and 2014, respectively. The table below presents the range of assumptions
used to value options granted during the three and nine months ended March 31,
2014 and 2013:
|
Three and nine months ended
|
|
March 31,
|
|
2014
|
|
2013
|
Expected volatility
|
50%
|
|
49%
|
Expected dividends
|
0%
|
|
0%
|
Expected life (in years)
|
3
|
|
3
|
Risk-free rate
|
0.9%
|
|
0.3%
|
During
the three and nine months ended March 31, 2014, terminated employees forfeited
136,420 stock options. There were no forfeitures during the three and nine
months ended March 31, 2013.
The following table presents stock options vesting and expecting to vest as of
March 31, 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
price
|
|
|
Term
|
|
|
Value
|
|
|
|
shares
|
|
|
($)
|
|
|
(in years)
|
|
|
($000)
|
|
Vested and expecting to vest March 31,
2014
|
|
2,727,059
|
|
|
14.12
|
|
|
5.63
|
|
|
2,290
|
|
These options have an exercise price range of $6.59 to $24.46.
17
12. Stock-based compensation
(continued)
Stock option and restricted stock activity (continued)
Options (continued)
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
shares
|
|
|
price ($)
|
|
|
(in years)
|
|
|
($000)
|
|
Exercisable
|
|
1,998,497
|
|
|
16.08
|
|
|
4.80
|
|
|
1,057
|
|
During
each of the three months ended March 31, 2014 and 2013, respectively, no stock
options became exercisable. During the nine months ended March 31, 2014 and
2013, respectively, 358,333 and 244,666 stock options became exercisable.
Included in the 244,666 stock options are 30,000 stock options with respect to
which the Remuneration Committee of the Board agreed to accelerate vesting, in
August 2012, prior to the resignation of a non-employee director. During the
three and nine months ended March 31, 2014, the Company received approximately
$0.1 million from 10,000 stock options exercised. During the nine months ended
March 31, 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 three months ended March 31, 2013. The Company
issues new shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the nine months
ended March 31, 2014 and 2013:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock
|
|
|
($000)
|
|
Non-vested June 30, 2013
|
|
405,226
|
|
|
4,393
|
|
Granted August 2013
|
|
187,963
|
|
|
1,382
|
|
Vested August 2013
|
|
(16,907
|
)
|
|
161
|
|
Vested February 2014
|
|
(183,333
|
)
|
|
1,742
|
|
Forfeitures October
2013
|
|
(7,171
|
)
|
|
84
|
|
Non-vested March 31,
2014
|
|
385,778
|
|
|
3,534
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2012
|
|
646,617
|
|
|
7,061
|
|
Granted August 2012
|
|
21,569
|
|
|
189
|
|
Granted February 2013
|
|
(183,333
|
)
|
|
1,016
|
|
Vested August 2012
|
|
(23,436
|
)
|
|
216
|
|
Non-vested March 31,
2013
|
|
461,417
|
|
|
4,988
|
|
The
fair value of restricted stock vesting during the three months ended March 31,
2014 and 2013, respectively, was $1.7 million and $1.0 million. The fair value
of restricted stock vesting during the nine months ended March 31, 2014 and
2013, respectively, was $1.9 million and $1.2 million. A non-employee director
resigned during the nine months ended March 31, 2014, and forfeited 7,171 shares
of restricted stock. 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
fair value of restricted stock is based on the closing price of the Companys
stock quoted on The Nasdaq Global Select Market on the date of grant.
18
12. Stock-based compensation
(continued)
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a stock compensation charge of $0.9 million and $1.1
million for the three months ended March 31, 2014 and 2013, respectively, which
comprised:
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
Three months ended
March 31, 2014
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
922
|
|
$
|
-
|
|
$
|
922
|
|
Total three months ended March 31, 2014
|
$
|
922
|
|
$
|
-
|
|
$
|
922
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2013
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
1,092
|
|
$
|
-
|
|
$
|
1,092
|
|
Total three months ended March 31, 2013
|
$
|
1,092
|
|
$
|
-
|
|
$
|
1,092
|
|
The
Company has recorded a stock compensation charge of $2.8 million and $3.3
million for the nine months ended March 31, 2014 and 2013, respectively, which
comprised:
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
Nine months ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
2,826
|
|
$
|
-
|
|
$
|
2,826
|
|
Reversal of stock compensation charge related to restricted
stock forfeited
|
|
(6
|
)
|
|
-
|
|
|
(6
|
)
|
Total nine months ended March 31, 2014
|
$
|
2,820
|
|
$
|
-
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
3,325
|
|
$
|
-
|
|
$
|
3,325
|
|
Total nine months ended March 31, 2013
|
$
|
3,325
|
|
$
|
-
|
|
$
|
3,325
|
|
The
stock-based compensation charges have been allocated to selling, general and
administration based on the allocation of the cash compensation paid to the
employees.
As
of March 31, 2014, the total unrecognized compensation cost related to stock
options was approximately $1.1 million, which the Company expects to recognize
over approximately three years. As of March 31, 2014, the total unrecognized
compensation cost related to restricted stock awards was approximately $3.0
million, which the Company expects to recognize over approximately two years.
As
of each of March 31, 2014 and June 30, 2013, respectively, the Company has
recorded a deferred tax asset of approximately $1.5 million related to the
stock-based compensation charge recognized related to employees and directors of
Net1 as it is able to deduct the grant date fair value for taxation purposes in
the United States.
13. 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 three and nine months ended March 31, 2014 and 2013,
reflects only undistributed earnings. The computation below of basic earnings
per share excludes the net income attributable to shares of unvested restricted
stock (participating non-vested restricted stock) from the numerator and
excludes the dilutive impact of these unvested shares of restricted stock from
the denominator.
19
13. Earnings per share
(continued)
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 February 2012 and August 2013 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 17 to the Companys audited
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended June 30, 2013.
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:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands except percent
|
|
|
(in thousands except percent
|
|
|
|
and
|
|
|
and
|
|
|
|
per share data)
|
|
|
per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Net1
|
$
|
17,182
|
|
$
|
(4,681
|
)
|
$
|
41,527
|
|
$
|
4,692
|
|
Undistributed earnings
(loss)
|
|
17,182
|
|
|
(4,681
|
)
|
|
41,527
|
|
|
4,692
|
|
Percent allocated to common
shareholders (Calculation 1)
|
|
99%
|
|
|
99%
|
|
|
99%
|
|
|
99%
|
|
Numerator for
earnings (loss) per share: basic and diluted
|
$
|
16,944
|
|
$
|
(4,634
|
)
|
$
|
40,917
|
|
$
|
4,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share: weighted-average
common shares
outstanding
|
|
45,142
|
|
|
45,098
|
|
|
45,070
|
|
|
45,018
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance shares related to acquisition
|
|
-
|
|
|
16
|
|
|
-
|
|
|
5
|
|
Stock options
|
|
91
|
|
|
26
|
|
|
106
|
|
|
37
|
|
Denominator for diluted earnings per
share:
adjusted weighted average common
shares
outstanding and assumed conversion
|
|
45,233
|
|
|
45,140
|
|
|
45,176
|
|
|
45,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.38
|
|
$
|
(0.10
|
)
|
$
|
0.91
|
|
$
|
0.10
|
|
Diluted
|
$
|
0.37
|
|
$
|
(0.10
|
)
|
$
|
0.90
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares outstanding (A)
|
|
45,142
|
|
|
45,098
|
|
|
45,070
|
|
|
45,018
|
|
Basic weighted-average common
shares outstanding
and unvested restricted
shares expected to vest (B)
|
|
45,776
|
|
|
45,557
|
|
|
45,742
|
|
|
45,552
|
|
Percent
allocated to common shareholders (A) / (B)
|
|
99%
|
|
|
99%
|
|
|
99%
|
|
|
99%
|
|
Options
to purchase 2,040,339 shares of the Companys common stock at prices ranging
from $7.35 to $24.46 per share were outstanding during the three and nine months
ended March 31, 2014, but were not included in the computation of diluted
earnings per share because the options exercise price were greater than the
average market price of the Companys common shares. The options, which expire
at various dates through August 21, 2023, were still outstanding as of March 31,
2014.
20
14. Supplemental cash flow
information
The
following table presents the supplemental cash flow disclosures for the three
and nine months ended March 31, 2014 and 2013:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Cash received from interest
|
$
|
3,422
|
|
$
|
2,395
|
|
$
|
9,886
|
|
$
|
8,104
|
|
Cash paid for interest
|
$
|
1,651
|
|
$
|
2,020
|
|
$
|
5,317
|
|
$
|
6,073
|
|
Cash paid for income taxes
|
$
|
1,570
|
|
$
|
1,701
|
|
$
|
16,097
|
|
$
|
12,180
|
|
15. 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. A description of the Companys operating segments is
contained in Note 22 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2013.
The following tables summarize segment information which is prepared in
accordance with GAAP:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
64,864
|
|
$
|
59,009
|
|
$
|
200,133
|
|
$
|
181,137
|
|
International transaction-based
activities
|
|
34,994
|
|
|
33,119
|
|
|
109,099
|
|
|
97,881
|
|
Smart card accounts
|
|
10,612
|
|
|
8,657
|
|
|
33,178
|
|
|
25,240
|
|
Financial services
|
|
11,099
|
|
|
1,651
|
|
|
19,725
|
|
|
4,483
|
|
Hardware, software and
related technology sales
|
|
16,557
|
|
|
8,705
|
|
|
36,768
|
|
|
25,524
|
|
Total
|
|
138,126
|
|
|
111,141
|
|
|
398,903
|
|
|
334,265
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
3,433
|
|
|
1,492
|
|
|
8,665
|
|
|
9,360
|
|
International
transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
259
|
|
|
308
|
|
|
784
|
|
|
1,095
|
|
Hardware, software and related
technology sales
|
|
76
|
|
|
135
|
|
|
595
|
|
|
722
|
|
Total
|
|
3,768
|
|
|
1,935
|
|
|
10,044
|
|
|
11,177
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
11,145
|
|
|
(4,197
|
)
|
|
37,825
|
|
|
4,136
|
|
International transaction-based
activities
|
|
1,322
|
|
|
(1,362
|
)
|
|
4,738
|
|
|
(1,331
|
)
|
Smart card accounts
|
|
3,025
|
|
|
2,467
|
|
|
9,456
|
|
|
7,194
|
|
Financial services
|
|
5,119
|
|
|
1,147
|
|
|
6,902
|
|
|
3,292
|
|
Hardware, software and
related technology sales
|
|
4,000
|
|
|
1,699
|
|
|
8,540
|
|
|
4,478
|
|
Subtotal: Operating
segments
|
|
24,611
|
|
|
(246
|
)
|
|
67,461
|
|
|
17,769
|
|
Corporate/Eliminations
|
|
(662
|
)
|
|
(4,480
|
)
|
|
(8,310
|
)
|
|
(8,198
|
)
|
Total
|
|
23,949
|
|
|
(4,726
|
)
|
|
59,151
|
|
|
9,571
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
International
transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Subtotal:
Operating segments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
3,438
|
|
|
2,515
|
|
|
9,993
|
|
|
8,195
|
|
Total
|
$
|
3,438
|
|
$
|
2,515
|
|
$
|
9,993
|
|
$
|
8,195
|
|
21
15. Operating segments
(continued)
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
28
|
|
$
|
244
|
|
$
|
71
|
|
$
|
589
|
|
|
International
transaction-based activities
|
|
2
|
|
|
-
|
|
|
46
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
418
|
|
|
-
|
|
|
807
|
|
|
-
|
|
|
Hardware, software and related technology
sales
|
|
181
|
|
|
81
|
|
|
540
|
|
|
207
|
|
|
Subtotal:
Operating segments
|
|
629
|
|
|
325
|
|
|
1,464
|
|
|
796
|
|
|
Corporate/Eliminations
|
|
1,105
|
|
|
1,698
|
|
|
4,248
|
|
|
5,321
|
|
|
Total
|
|
1,734
|
|
|
2,023
|
|
|
5,712
|
|
|
6,117
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
2,895
|
|
|
3,198
|
|
|
7,827
|
|
|
9,628
|
|
|
International transaction-based activities
|
|
7,364
|
|
|
7,049
|
|
|
21,834
|
|
|
20,753
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
115
|
|
|
163
|
|
|
348
|
|
|
347
|
|
|
Hardware, software and related
technology sales
|
|
68
|
|
|
150
|
|
|
236
|
|
|
323
|
|
|
Subtotal: Operating segments
|
|
10,442
|
|
|
10,560
|
|
|
30,245
|
|
|
31,051
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
10,442
|
|
|
10,560
|
|
|
30,245
|
|
|
31,051
|
|
|
Income taxation expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
3,113
|
|
|
(1,245
|
)
|
|
10,571
|
|
|
991
|
|
|
International
transaction-based activities
|
|
17
|
|
|
(587
|
)
|
|
661
|
|
|
(1,167
|
)
|
|
Smart card accounts
|
|
848
|
|
|
691
|
|
|
2,647
|
|
|
2,014
|
|
|
Financial services
|
|
1,320
|
|
|
327
|
|
|
1,723
|
|
|
937
|
|
|
Hardware, software and related technology
sales
|
|
1,095
|
|
|
409
|
|
|
2,097
|
|
|
1,039
|
|
|
Subtotal:
Operating segments
|
|
6,393
|
|
|
(405
|
)
|
|
17,699
|
|
|
3,814
|
|
|
Corporate/Eliminations
|
|
2,142
|
|
|
877
|
|
|
4,420
|
|
|
3,358
|
|
|
Total
|
|
8,535
|
|
|
472
|
|
|
22,119
|
|
|
7,172
|
|
|
Net income (loss) attributable to Net1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
8,003
|
|
|
(3,199
|
)
|
|
27,182
|
|
|
2,552
|
|
|
International transaction-based activities
|
|
1,591
|
|
|
(642
|
)
|
|
4,577
|
|
|
193
|
|
|
Smart card accounts
|
|
2,177
|
|
|
1,776
|
|
|
6,808
|
|
|
5,178
|
|
|
Financial services
|
|
3,394
|
|
|
839
|
|
|
4,432
|
|
|
2,409
|
|
|
Hardware, software and related
technology sales
|
|
2,729
|
|
|
1,210
|
|
|
5,912
|
|
|
3,239
|
|
|
Subtotal: Operating segments
|
|
17,894
|
|
|
(16
|
)
|
|
48,911
|
|
|
13,571
|
|
|
Corporate/Eliminations
|
|
(712
|
)
|
|
(4,665
|
)
|
|
(7,384
|
)
|
|
(8,879
|
)
|
|
Total
|
|
17,182
|
|
|
(4,681
|
)
|
|
41,527
|
|
|
4,692
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
302
|
|
|
2,583
|
|
|
2,601
|
|
|
7,552
|
|
|
International
transaction-based activities
|
|
4,231
|
|
|
2,074
|
|
|
13,744
|
|
|
8,844
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
222
|
|
|
357
|
|
|
408
|
|
|
629
|
|
|
Hardware, software and related technology
sales
|
|
93
|
|
|
39
|
|
|
556
|
|
|
78
|
|
|
Subtotal:
Operating segments
|
|
4,848
|
|
|
5,053
|
|
|
17,309
|
|
|
17,103
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
4,848
|
|
$
|
5,053
|
|
$
|
17,309
|
|
$
|
17,103
|
|
The
segment information as reviewed by the chief operating decision maker does not
include a measure of segment assets per segment as all of the significant assets
are used in the operations of all, rather than any one, of the segments. The
Company does not have dedicated assets assigned to a particular operating
segment. Accordingly, it is not meaningful to attempt an arbitrary allocation
and segment asset allocation is therefore not presented.
It
is impractical to disclose revenues from external customers for each product and
service or each group of similar products and services.
22
16. Income tax
Income tax in interim periods
For
the purposes of interim financial reporting, the Company determines the
appropriate income tax provision by first applying the effective tax rate
expected to be applicable for the full fiscal year to ordinary income. This
amount is then adjusted for the tax effect of significant unusual or
extraordinary items, for instance, changes in tax law, valuation allowances and
non-deductible transaction-related expenses that are reported separately, and
have an impact on the tax charge. The cumulative effect of any change in the
enacted tax rate, if and when applicable, on the opening balance of deferred tax
assets and liabilities is also included in the tax charge as a discrete event in
the interim period in which the enactment date occurs.
For
the three and nine months ended March 31, 2014, the tax charge was calculated
using the expected effective tax rate for the year. The Companys effective tax
rate for the three and nine months ended March 31, 2014, was 33.3% and 34.9%,
respectively, and was higher than the South African statutory rate primarily as
a result of non-deductible expenses (including interest expense related to the
Companys long-term Korean borrowings and stock-based compensation charges).
The
Companys effective tax rate for the three months ended March 31, 2013, was
(11.1%) and is negative as a result of the loss before income taxes and differed
from the South African statutory rate primarily as a result of a valuation
allowance for foreign tax credits, non-deductible expenses (including interest
expense related to the Companys long-term Korean borrowings and stock-based
compensation charges) and South African dividend withholding taxes. The
Companys effective tax rate for the nine months ended March 31, 2013, was 61.6%
and was higher than the South African statutory rate primarily as a result of a
valuation allowance for foreign tax credits, non-deductible expenses (including
interest expense related to the Companys long-term Korean borrowings and
stock-based compensation charges) and South African dividend withholding
taxes.
Uncertain tax positions
There
were no changes during the three and nine months ended March 31, 2014. As of
March 31, 2014, the Company had accrued interest related to uncertain tax
positions of approximately $0.2 million on its balance sheet.
The
Company does not expect changes related to its unrecognized tax benefits will
have a significant impact on its results of operations or financial position in
the next 12 months.
The
Company files income tax returns mainly in South Africa, Korea, Austria,
Botswana, the Russian Federation and in the US federal jurisdiction. As of March
31, 2014, the Company is no longer subject to any new income tax examination by
the South African Revenue Service for years before June 30, 2009. In 2011, the
Korea National Tax Service had completed the examination of the Companys
returns in Korea related to years 2006 through 2010. The Company is subject to
income tax in other jurisdictions outside South Africa and Korea, none of which
are individually material to its financial position, cash flows, or results of
operations.
17. Commitments and
contingencies
Guarantees
The
South African Revenue Service and certain of the Companys customers, suppliers
and other business partners have asked the Company to provide them with
guarantees, including standby letters of credit, issued by a South African bank.
The Company is required to procure these guarantees for these third parties to
operate its business.
Nedbank
has issued guarantees to these third parties amounting to ZAR 143.1 million
($13.5 million, translated at exchange rates applicable as of March 31, 2014)
and thereby utilizing part of the Companys short-term facility. The Company in
turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for the
same amount. 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 unaudited condensed consolidated balance sheet as of March 31, 2014. The
maximum potential amount that the Company could pay under these guarantees is
ZAR 143.1 million ($13.5 million, translated at exchange rates applicable as of
March 31, 2014). The guarantees have reduced the amount available for borrowings
under the Companys short-term credit facility described in Note 8.
23
17. Commitments and
contingencies (continued)
Contingencies
Securities Litigation
On
December 24, 2013, Net1, its chief executive officer and its chief financial
officer were named as defendants in a purported class action lawsuit filed in
the United States District Court for the Southern District of New York alleging
violations of the federal securities laws.
The
lawsuit alleges that Net1 made materially false and misleading statements
regarding its business and compliance policies in its SEC filings and other
public disclosures. The lawsuit was brought on behalf of a purported shareholder
of Net1 and all other similarly situated shareholders who purchased its
securities between August 27, 2009 and November 27, 2013. The lawsuit seeks
unspecified damages. The Company believes this lawsuit has no merit and intends
to defend it vigorously.
The
Company is subject to a variety of insignificant claims and suits that arise
from time to time in the ordinary course of business.
Management
currently believes that the resolution of these matters, individually or in the
aggregate, will not have a material adverse impact on the Companys financial
position, results of operations and cash flows.
18.
Subsequent
events
On
April 17, 2014, the South African Constitutional Court (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 (SASSA) in
awarding a contract to the Companys wholly-owned subsidiary, 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 Court's ruling
and any award must be for a period of five years. In addition, the Court
required new and independent Bid Evaluation and Bid Adjudication Committees to
be appointed to evaluate and adjudicate the new tender process. If a new tender
is not awarded, the declaration of invalidity of the current contract between
SASSA and CPS will further be suspended until the completion of the five-year
period for which the contract was originally awarded.
24
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended June 30, 2013, and the unaudited condensed
consolidated financial statements and the accompanying notes included in this
Form 10-Q.
Forward-looking statements
Some
of the statements in this Form 10-Q constitute forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industrys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed, implied or inferred by these
forward-looking statements. Such factors include, among other things, those
listed under Item 1A.Risk Factors and elsewhere in our Annual Report on Form
10-K for the year ended June 30, 2013, and Item 1ARisk Factors and elsewhere
in this Form 10-Q. 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.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we do not know whether we can achieve positive future results,
levels of activity, performance, or goals. Actual events or results may differ
materially. We undertake no obligation to update any of the forward-looking
statements after the date of this Form 10-Q to conform those statements to
reflect the occurrence of unanticipated events, except as required by applicable
law.
You
should read this Form 10-Q and the documents that we reference herein and the
documents we have filed as exhibits hereto and which we have filed with the
Securities and Exchange Commission completely and with the understanding that
our actual future results, levels of activity, performance and achievements may
be materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements.
Recent Developments
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. In addition, the Constitutional Court required new and independent Bid
Evaluation and Bid Adjudication Committees to be appointed to evaluate and
adjudicate the new tender process. If a new tender is not awarded, the
declaration of invalidity of the current contract between SASSA and CPS will
further be suspended until the completion of the five-year period for which the
contract was originally awarded.
See Part II, Item 1Legal Proceedings, for additional details.
Implementation
of December 2013 Black Economic Empowerment, or BEE, transactions
On
April 16, 2014, we implemented our two previously-announced BEE transactions and
issued an aggregate of 4,400,000 shares of our common stock to our BEE partners
for ZAR 60.00 per share. Refer to note 10 to our unaudited condensed
consolidated financial statements for a full description of the BEE
transactions.
Growth in mobile value-added services
Our
Net1 Mobile Solutions business unit introduced a new suite of mobile value-added
services, commencing with a prepaid airtime product during the first quarter of
fiscal 2014. We continued to see adoption of this product during the third
quarter of fiscal 2014. This product allows our customers in South Africa to
electronically purchase prepaid airtime without having to visit a physical
prepaid airtime vendor. Net1 Mobile Solutions also introduced a similar service
under the brand "Pasavute" in partnership with Telecom Networks Malawi during
the third quarter 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.
25
At
March 31, 2014, we had over 2.4 million registered users, effecting more than
one million transactions per day during peak periods. In December 2013, Net1
Mobile Solutions 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.
Pay in Private
During
the third quarter of fiscal 2014, our Net1 Mobile Solutions business unit
launched our Mobile Virtual Card, or MVC, technology through Pay in Private in
the United States in partnership with a US-based marketer with experience in
online financial services. The Pay in Private solution offers unmatched security
and accessibility to transact online using a mobile handset using our
proprietary one-time use MVC Debit MasterCard generated by a smart phone app.
Financial services
In
the beginning of fiscal 2014, our Financial Services business unit commenced the
national rollout of our financial services offering in the six provinces in
which we did not offer our product during fiscal 2013. We have experienced
significant growth in our lending book during fiscal 2014 compared with 2013,
however, during the third quarter of fiscal 2014, the growth rate slowed down as
it appears there is less demand for our financial services offering during the
beginning of the calendar year, following the summer holiday period in South
Africa. This seasonal trend seems to be confirmed by the re-acceleration of the
growth rate during March and April 2014.
Critical Accounting Policies
Our
unaudited condensed consolidated financial statements have been prepared in
accordance with US GAAP, which requires management to make estimates and
assumptions about future events that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities. As future
events and their effects cannot be determined with absolute certainty, the
determination of estimates requires managements judgment based on a variety of
assumptions and other determinants such as historical experience, current and
expected market conditions and certain scientific evaluation techniques.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially may result in materially different results under
different assumptions and conditions. Management has identified the following
critical accounting policies that are described in more detail in our Annual
Report on Form 10-K for the year ended June 30, 2013:
-
Business combinations and the recoverability of goodwill;
-
Intangible assets acquired through acquisitions;
-
Deferred taxation;
-
Stock-based compensation and equity instrument issued pursuant to BEE
transaction;
-
Accounts receivable and allowance for doubtful accounts receivable; and
-
Research and development.
During
fiscal 2014, we created an allowance for doubtful finance loans receivable
related to our financial services segment as a result of UEPS-based loans
provided to our customers. Our policy is to regularly review the ageing of
outstanding amounts due from borrowers and adjust the provision based on
managements estimate of the recoverability of finance loans receivable. We
write off UEPS-based loans and related service fees if a borrower is in arrears
with repayments for more than three months or dies.
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.
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.
Recent accounting pronouncements adopted
Refer
to Note 1 to our unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements adopted, including the
dates of adoption and the effects on our condensed consolidated financial
statements.
26
Recent accounting pronouncements not yet adopted as of March 31,
2014
Refer
to Note 1 to our unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements not yet adopted as of March
31, 2014, including the expected dates of adoption and effects on our 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
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
ZAR : $ average exchange rate
|
|
10.8622
|
|
|
8.9461
|
|
|
10.3375
|
|
|
8.6355
|
|
|
8.8462
|
|
Highest ZAR : $ rate during period
|
|
11.2667
|
|
|
9.3645
|
|
|
11.2667
|
|
|
9.3645
|
|
|
10.3587
|
|
Lowest ZAR : $ rate during period
|
|
10.4848
|
|
|
8.4067
|
|
|
9.6324
|
|
|
8.0444
|
|
|
8.0444
|
|
Rate at end of period
|
|
10.5833
|
|
|
9.2451
|
|
|
10.5833
|
|
|
9.2451
|
|
|
9.8925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,071
|
|
|
1,090
|
|
|
1,083
|
|
|
1,107
|
|
|
1,112
|
|
Highest KRW : $ rate during period
|
|
1,089
|
|
|
1,126
|
|
|
1,168
|
|
|
1,156
|
|
|
1,162
|
|
Lowest KRW : $ rate during period
|
|
1,053
|
|
|
1,019
|
|
|
1,052
|
|
|
1,019
|
|
|
1,019
|
|
Rate at end of period
|
|
1,071
|
|
|
1,121
|
|
|
1,071
|
|
|
1,121
|
|
|
1,144
|
|
27
Translation exchange rates for financial reporting purposes
For
financial reporting purposes we are required to translate our results of
operations from ZAR and KRW to US dollars on a monthly basis. Thus, the average
rates used to translate this data for the three and nine months ended March 31,
2014 and 2013, vary 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
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
Income and expense items: $1
= ZAR .
|
|
10.8743
|
|
|
8.4662
|
|
|
10.3801
|
|
|
8.4578
|
|
|
8.7105
|
|
Income and expense items: $1 = KRW
|
|
1,070
|
|
|
1,113
|
|
|
1,076
|
|
|
1,112
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
10.5833
|
|
|
9.2451
|
|
|
10.5833
|
|
|
9.2451
|
|
|
9.8925
|
|
Balance sheet items: $1 = KRW
|
|
1,071
|
|
|
1,121
|
|
|
1,071
|
|
|
1,121
|
|
|
1,144
|
|
Results of operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in our unaudited condensed 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.
Nine
months ended March 31, 2013, includes SmartSwitch Botswana from December 1, 2012
and Pbel (renamed Net1 Mobile Solutions during the third quarter of fiscal 2014)
from September 1, 2012.
28
We
analyze our business and operations in terms of five inter-related but
independent operating segments: (1) South African transaction-based activities,
(2) international transaction-based activities, (3) smart card accounts, (4)
financial services, and (5) hardware, software and related technology sales. In
addition, corporate and corporate office activities that are impracticable to
ascribe directly to any of the other operating segments, as well as any
inter-segment eliminations, are included in corporate/eliminations.
Third quarter of fiscal 2014 compared to third quarter of fiscal 2013
The
following factors had an influence on our results of operations during the third
quarter of 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 28% against the ZAR during the
third quarter of fiscal 2014, which negatively impacted our reported results;
-
SASSA implementation complete:
Our SASSA contract
implementation is complete. We incurred implementation-related expenditure,
including smart card costs, of approximately $20.6 million during the third
quarter of fiscal 2013;
-
Growth in financial services:
The year-over-year expansion
of our financial services offering during the third quarter of fiscal 2014,
resulted in higher revenue and operating income from UEPS-based lending;
-
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 the third quarter of fiscal 2014, which
has lower margins compared with our other South African businesses;
-
Increased contribution by KSNET:
Our results were positively
impacted by growth in our Korean operations;
-
Ad hoc hardware sales in fiscal 2014:
We sold more terminals
and cards during the third quarter of fiscal 2014 as a result of ad hoc orders
received from our customers;
-
Lower US government investigation-related and US lawsuit expenses:
We incurred fewer US government investigation-related expenses during
the third quarter of fiscal 2014 compared to during 2013, which was partially
offset by an increase in US lawsuit-related expenses; and
-
Fiscal 2013 bad debt provision:
In fiscal 2013 we provided
$2.3 million related to the expired NUETS Iraqi customer contracts.
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with
US GAAP.
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
$%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
138,126
|
|
|
111,141
|
|
|
24%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
63,149
|
|
|
51,461
|
|
|
23%
|
|
Selling, general and
administration
|
|
40,586
|
|
|
53,846
|
|
|
(25%
|
)
|
Depreciation and amortization
|
|
10,442
|
|
|
10,560
|
|
|
(1%
|
)
|
Operating income (loss)
|
|
23,949
|
|
|
(4,726
|
)
|
|
nm
|
|
Interest income
|
|
3,438
|
|
|
2,515
|
|
|
37%
|
|
Interest expense
|
|
1,734
|
|
|
2,023
|
|
|
(14%
|
)
|
Income (loss) before income tax expense
|
|
25,653
|
|
|
(4,234
|
)
|
|
nm
|
|
Income tax expense
|
|
8,535
|
|
|
472
|
|
|
1,708%
|
|
Net income (loss) before earnings from
equity-accounted investments
|
|
17,118
|
|
|
(4,706
|
)
|
|
nm
|
|
Earnings from
equity-accounted investments
|
|
52
|
|
|
22
|
|
|
136%
|
|
Net income (loss)
|
|
17,170
|
|
|
(4,684
|
)
|
|
nm
|
|
Add net loss attributable to
non-controlling interest
|
|
(12
|
)
|
|
(3
|
)
|
|
300%
|
|
Net income (loss) attributable to us
|
|
17,182
|
|
|
(4,681
|
)
|
|
nm
|
|
29
|
|
In South African Rand
|
|
Table 4
|
|
(US GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
1,502,024
|
|
|
940,942
|
|
|
60%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
686,701
|
|
|
435,680
|
|
|
58%
|
|
Selling, general and administration
|
|
441,345
|
|
|
455,871
|
|
|
(3%
|
)
|
Depreciation and amortization
|
|
113,549
|
|
|
89,403
|
|
|
27%
|
|
Operating income (loss)
|
|
260,429
|
|
|
(40,012
|
)
|
|
nm
|
|
Interest income
|
|
37,386
|
|
|
21,292
|
|
|
76%
|
|
Interest expense
|
|
18,856
|
|
|
17,127
|
|
|
10%
|
|
Income (loss) before income tax expense
|
|
278,959
|
|
|
(35,847
|
)
|
|
nm
|
|
Income tax expense
|
|
92,812
|
|
|
3,996
|
|
|
2,223%
|
|
Net income (loss) before earnings from equity-accounted
investments
|
|
186,147
|
|
|
(39,843
|
)
|
|
nm
|
|
Earnings from equity-accounted investments
|
|
565
|
|
|
186
|
|
|
204%
|
|
Net income (loss)
|
|
186,712
|
|
|
(39,657
|
)
|
|
nm
|
|
Add net loss attributable to
non-controlling interest
|
|
(130
|
)
|
|
(25
|
)
|
|
420%
|
|
Net income (loss) attributable to us
|
|
186,842
|
|
|
(39,632
|
)
|
|
nm
|
|
The
increase in revenue was primarily due to a higher contribution from KSNET, more
ad hoc terminal and card sales, 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, and an
increase in the number of UEPS-based loans.
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.
Our
selling, general and administration expense decreased due to the substantial
elimination of SASSA contract implementation costs and fewer legal and other
fees incurred related to the US government investigations and the US lawsuit,
which was partially offset by increases in goods and services purchased from
third parties.
Our
operating income (loss) margin for the third quarter of fiscal 2014 and 2013 was
17% and (4)%, respectively. We discuss the components of operating income (loss)
margin under Results of operations by operating segment. The increase is
primarily attributable to the elimination of implementation costs 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 or FIHRST
intangible asset amortization as the these intangible assets were fully
amortized at the end of June 2013. The tables below present the
acquisition-related intangible asset amortization that has been allocated to our
operating segments:
|
|
Three months ended
|
|
Table 5
|
|
March 31,
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
4,587
|
|
|
|
4,384
|
|
South African transaction-based
activities
|
|
1,163
|
|
|
|
1,070
|
|
International
transaction-based activities
|
|
3,358
|
|
|
|
3,228
|
|
Hardware, software and related
technology sales
|
|
66
|
|
|
|
86
|
|
|
|
Three months ended
|
|
Table 6
|
|
March 31,
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
49,881
|
|
|
|
37,113
|
|
South African transaction-based
activities
|
|
12,648
|
|
|
|
9,067
|
|
International
transaction-based activities
|
|
36,516
|
|
|
|
27,329
|
|
Hardware, software and related
technology sales
|
|
717
|
|
|
|
717
|
|
30
Interest
on surplus cash increased to $3.4 million (ZAR 37.4 million) from $2.5 million
(ZAR 21.3 million) due primarily to higher average daily ZAR cash balances.
In
US dollars, interest expense decreased to $1.7 million (ZAR 18.9 million) from
$2.0 million (ZAR 17.1 million) primarily due to a lower average long-term debt
balance on our Korean debt as well as lower interest rate resulting from our
refinancing concluded in October 2013.
Third
quarter fiscal 2014 tax expense was $8.5 million (ZAR 92.8 million) compared to
$0.5 million (ZAR 4 million) in fiscal 2013. Our effective tax rate for fiscal
2014 was 33.3% and was higher than the South African statutory rate as a result
of non-deductible expenses (including interest expense related to our long-term
Korean borrowings and stock-based compensation charges). Our effective tax rate
for the three months ended March 31, 2013, was (11.1)% and is negative as a
result of the loss before income taxes and differed from the South African
statutory rate primarily as a result of a valuation allowance for foreign tax
credits, non-deductible expenses (including interest expense related to our
long-term 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 7
|
|
In United States Dollars (US GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
|
% of
|
|
|
|
2013
|
|
|
|
% of
|
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
|
total
|
|
|
|
$ 000
|
|
|
|
total
|
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
64,864
|
|
|
|
47%
|
|
|
|
59,009
|
|
|
|
53%
|
|
|
|
10%
|
|
International
transaction-based activities
|
|
34,994
|
|
|
|
25%
|
|
|
|
33,119
|
|
|
|
30%
|
|
|
|
6%
|
|
Smart card accounts
|
|
10,612
|
|
|
|
8%
|
|
|
|
8,657
|
|
|
|
8%
|
|
|
|
23%
|
|
Financial services
|
|
11,099
|
|
|
|
8%
|
|
|
|
1,651
|
|
|
|
1%
|
|
|
|
572%
|
|
Hardware, software and related technology
sales
|
|
16,557
|
|
|
|
12%
|
|
|
|
8,705
|
|
|
|
8%
|
|
|
|
90%
|
|
Total
consolidated revenue
|
|
138,126
|
|
|
|
100%
|
|
|
|
111,141
|
|
|
|
100%
|
|
|
|
24%
|
|
Consolidated operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
11,145
|
|
|
|
47%
|
|
|
|
(4,197
|
)
|
|
|
89%
|
|
|
|
(366%
|
)
|
Operating income before
amortization
|
|
12,308
|
|
|
|
|
|
|
|
(3,127
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(1,163
|
)
|
|
|
|
|
|
|
(1,070
|
)
|
|
|
|
|
|
|
9%
|
|
International transaction-based activities
|
|
1,322
|
|
|
|
6%
|
|
|
|
(1,362
|
)
|
|
|
29%
|
|
|
|
nm
|
|
Operating
income before amortization
|
|
4,680
|
|
|
|
|
|
|
|
1,866
|
|
|
|
|
|
|
|
151%
|
|
Amortization of
intangible assets
|
|
(3,358
|
)
|
|
|
|
|
|
|
(3,228
|
)
|
|
|
|
|
|
|
4%
|
|
Smart card accounts
|
|
3,025
|
|
|
|
13%
|
|
|
|
2,467
|
|
|
|
(52%
|
)
|
|
|
23%
|
|
Financial services
|
|
5,119
|
|
|
|
21%
|
|
|
|
1,147
|
|
|
|
(24%
|
)
|
|
|
346%
|
|
Hardware, software and
related technology sales
|
|
4,000
|
|
|
|
17%
|
|
|
|
1,699
|
|
|
|
(36%
|
)
|
|
|
135%
|
|
Operating income before
amortization
|
|
4,066
|
|
|
|
|
|
|
|
1,785
|
|
|
|
|
|
|
|
128%
|
|
Amortization of intangible assets
|
|
(66
|
)
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
(23%
|
)
|
Corporate/eliminations
|
|
(662
|
)
|
|
|
(4%
|
)
|
|
|
(4,480
|
)
|
|
|
94%
|
|
|
|
(85%
|
)
|
Total
consolidated operating income (loss)
|
|
23,949
|
|
|
|
100%
|
|
|
|
(4,726
|
)
|
|
|
100%
|
|
|
|
nm
|
|
31
Table 8
|
|
In South African Rand (US GAAP)
|
|
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
|
000
|
|
|
|
total
|
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
705,351
|
|
|
|
47%
|
|
|
|
499,582
|
|
|
|
53%
|
|
|
|
41%
|
|
International
transaction-based activities
|
|
380,535
|
|
|
|
25%
|
|
|
|
280,392
|
|
|
|
30%
|
|
|
|
36%
|
|
Smart card accounts
|
|
115,398
|
|
|
|
8%
|
|
|
|
73,292
|
|
|
|
8%
|
|
|
|
57%
|
|
Financial services
|
|
120,694
|
|
|
|
8%
|
|
|
|
13,978
|
|
|
|
1%
|
|
|
|
763%
|
|
Hardware, software and related technology
sales
|
|
180,046
|
|
|
|
12%
|
|
|
|
73,698
|
|
|
|
8%
|
|
|
|
144%
|
|
Total
consolidated revenue
|
|
1,502,024
|
|
|
|
100%
|
|
|
|
940,942
|
|
|
|
100%
|
|
|
|
60%
|
|
Consolidated operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
121,194
|
|
|
|
47%
|
|
|
|
(35,533
|
)
|
|
|
89%
|
|
|
|
(441%
|
)
|
Operating income before
amortization
|
|
133,842
|
|
|
|
|
|
|
|
(26,466
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(12,648
|
)
|
|
|
|
|
|
|
(9,067
|
)
|
|
|
|
|
|
|
39%
|
|
International transaction-based activities
|
|
14,376
|
|
|
|
6%
|
|
|
|
(11,531
|
)
|
|
|
29%
|
|
|
|
nm
|
|
Operating
income before amortization
|
|
50,892
|
|
|
|
|
|
|
|
15,798
|
|
|
|
|
|
|
|
222%
|
|
Amortization of
intangible assets
|
|
(36,516
|
)
|
|
|
|
|
|
|
(27,329
|
)
|
|
|
|
|
|
|
34%
|
|
Smart card accounts
|
|
32,895
|
|
|
|
13%
|
|
|
|
20,886
|
|
|
|
(52%
|
)
|
|
|
57%
|
|
Financial services
|
|
55,666
|
|
|
|
21%
|
|
|
|
9,711
|
|
|
|
(24%
|
)
|
|
|
473%
|
|
Hardware, software and
related technology sales
|
|
43,497
|
|
|
|
17%
|
|
|
|
14,384
|
|
|
|
(36%
|
)
|
|
|
202%
|
|
Operating income before
amortization
|
|
44,214
|
|
|
|
|
|
|
|
15,101
|
|
|
|
|
|
|
|
193%
|
|
Amortization of intangible assets
|
|
(717
|
)
|
|
|
|
|
|
|
(717
|
)
|
|
|
|
|
|
|
-
|
|
Corporate/eliminations
|
|
(7,199
|
)
|
|
|
(4%
|
)
|
|
|
(37,929
|
)
|
|
|
94%
|
|
|
|
(81%
|
)
|
Total
consolidated operating income (loss)
|
|
260,429
|
|
|
|
100%
|
|
|
|
(40,012
|
)
|
|
|
100%
|
|
|
|
nm
|
|
South African transaction-based activities
In
ZAR, the increase in segment revenue was primarily due to more low-margin
transaction fees generated from beneficiaries using the South African National
Payment System, incremental prepaid airtime sales driven by the rollout of our
prepaid airtime product, and reflect the elimination of inter-company
transactions.
Our
operating income margin for fiscal 2014 and 2013 was 17% and (7)%, respectively,
and has increased primarily due to the elimination of SASSA implementation costs
in fiscal 2014, partially offset by the increase in low-margin prepaid airtime
sales.
South African transaction processors:
The table below presents the total volume and value processed during the third
quarter of fiscal 2014 and 2013:
Table 9
|
|
Total volume (000s)
|
|
|
Total value $ (000)
|
|
|
Total value ZAR (000)
|
|
Transaction
processor
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
CPS
|
|
28,829
|
|
|
28,727
|
|
|
2,517,122
|
|
|
3,031,625
|
|
|
27,371,937
|
|
|
25,666,342
|
|
EasyPay
|
|
99,706
|
|
|
105,708
|
|
|
2,438,669
|
|
|
2,815,953
|
|
|
26,518,814
|
|
|
23,840,425
|
|
Net1 Mobile Solutions (A)
|
|
45,629
|
|
|
5,933
|
|
|
1,925,571
|
|
|
2,381,514
|
|
|
20,939,237
|
|
|
20,162,374
|
|
MediKredit
|
|
2,677
|
|
|
2,706
|
|
|
257,479
|
|
|
175,651
|
|
|
2,799,902
|
|
|
1,487,096
|
|
(A)
during fiscal 2014 FIHRST was integrated into Net1 Mobile Solutions. Volumes
and values for 2013 represent FIHRST only.
CPS
volumes moderately increased due to the organic growth in the number of
beneficiaries added by SASSA, partially offset by SASSAs suspension of former
grant recipient cardholders who had not presented themselves for enrollment
during the third quarter of fiscal 2014. EasyPay volumes have decreased due to
fewer sales of prepaid airtime, but the decrease was partially offset by an
increase in transaction switching and other value-added services. Net1 Mobile
Solutions volumes have increased primarily due to the launch of prepaid airtime
product in fiscal 2014.
32
International transaction-based activities
KSNET
continues to contribute the majority of our revenues and operating income in
this operating segment. Revenue increased primarily due to KSNETs revenue
growth during the third quarter of fiscal 2014 and 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 the third quarter of
fiscal 2014 was higher due to increase in revenue contribution from KSNET and
due to the NUETS Iraqi customer bad debt provision in fiscal 2013, but partially
offset by ongoing losses related to our XeoHealth launch in the United States
and at Net1 Virtual Card, as well as ongoing competition in the Korean
marketplace.
Operating
income margin for the segment is lower than for most of our South African
transaction-based businesses. Operating income margin for the third quarter of
fiscal 2014 and 2013 was 4% and (4)%, respectively (excluding intangible
amortization, 13% and 6%, respectively.)
Smart card accounts
In
ZAR, our revenue from this operating segment was higher because the number of
smart card-based accounts has increased as a result of full implementation of
the SASSA contract. Operating income margin from providing smart card accounts
for the third quarter of fiscal 2014 and 2013 was 29% and 28%, respectively.
In
ZAR, revenue from the provision of smart card-based accounts increased in
proportion to the increased number of recipients serviced through our SASSA
contract. Approximately 9.6 million smart card-based accounts were active at
March 31, 2014 compared to approximately 6.5 million active accounts as at March
31, 2013.
Financial services
UEPS-based lending contributes the majority of the revenue and operating income
in this operating segment. Revenue and operating income increased primarily due
to the year-over-year increase in the number of loans granted as we rolled out
our product nationally in the first half of fiscal 2014. The increase in
operating income was partially offset by the higher UEPS-based lending operating
cost base in fiscal 2014 and the re-allocation of UEPS-based lending corporate
and administration overhead expenses to this segment. Smart Life did not
contribute to operating income in the third quarter of fiscal 2014 as it is
currently unable to issue new insurance policies as a result of the suspension
of its license by the Financial Services Board, or FSB, in January 2013.
Third
quarter of fiscal 2014 includes the re-allocation of UEPS-based lending
corporate administration and overhead expenses to this segment from the South
African transaction-based activities segment. We were not able to accurately
quantify these expenses for last year and therefore did not allocate such costs
to this segment during the third quarter of fiscal 2013.
Operating
income margin for the financial services segment decreased to 46% from 69%,
primarily as a result of the higher UEPS-based lending operating cost base in
fiscal 2014 and corporate overhead expense re-allocation described above.
Hardware, software and related technology sales
In
ZAR, the increase in revenue and operating income resulted from more ad hoc
terminal and smart card sales. We continue to expect significant quarter over
quarter fluctuations in revenue, operating income and operating margin due to
the ad hoc nature of orders in this operating segment.
Corporate/eliminations
The
decrease in our corporate expenses resulted primarily from fewer legal fees
incurred in connection with the US government investigations compared the third
quarter of fiscal 2014, partially offset by higher other corporate head
office-related expenses.
Our
corporate expenses also include expenditure related to compliance with Sarbanes;
non-executive directors fees; employee and executive salaries and bonuses;
stock-based compensation; legal and audit fees; directors and officers insurance
premiums; telecommunications expenses; property-related expenditures including
utilities, rental, security and maintenance; and elimination entries.
33
Year to date fiscal 2014 compared to year to date fiscal 2013
The
following factors had an influence on our results of operations during the year
to date 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 23% against the ZAR during the
year to date fiscal 2014 which negatively impacted our reported results;
-
SASSA implementation complete:
We incurred
implementation-related expenditure, including smart card costs, of
approximately $57.5 million during the year to date fiscal 2013;
-
Higher revenue resulting from an increase in low-margin prepaid
airtime sales:
Our revenue has increased as a result of the deployment
of our prepaid airtime product during the year to date fiscal 2014, which has
lower margins compared with our other South African businesses;
-
National rollout of our financial services offering:
The
national rollout of our financial services offering resulted in higher revenue
from UEPS-based lending. Profitability in the financial services 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 the year to date fiscal 2014 as a result of ad hoc orders
received from our customers;
-
Fewer US government investigation-related expenses:
We
incurred fewer US government investigation-related expenses during the year to
date fiscal 2014 compared with 2013; and
-
Fiscal 2013 bad debt provision:
In fiscal 2013 we provided
$2.3 million related to the expired NUETS Iraqi customer contracts.
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with
US GAAP.
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
|
Table 10
|
|
(US GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
398,903
|
|
|
334,265
|
|
|
19%
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
187,591
|
|
|
143,789
|
|
|
30%
|
|
Selling, general and
administration
|
|
121,916
|
|
|
149,854
|
|
|
(19%
|
)
|
Depreciation and amortization
|
|
30,245
|
|
|
31,051
|
|
|
(3%
|
)
|
Operating income
|
|
59,151
|
|
|
9,571
|
|
|
518%
|
|
Interest income
|
|
9,993
|
|
|
8,195
|
|
|
22%
|
|
Interest expense
|
|
5,712
|
|
|
6,117
|
|
|
(7%
|
)
|
Income before income tax expense
|
|
63,432
|
|
|
11,649
|
|
|
445%
|
|
Income tax expense
|
|
22,119
|
|
|
7,172
|
|
|
208%
|
|
Net income before earnings from
equity-accounted investments
|
|
41,313
|
|
|
4,477
|
|
|
823%
|
|
Earnings from
equity-accounted investments
|
|
202
|
|
|
204
|
|
|
(1%
|
)
|
Net income
|
|
41,515
|
|
|
4,681
|
|
|
787%
|
|
Add net loss attributable to
non-controlling interest
|
|
(12
|
)
|
|
(11
|
)
|
|
9%
|
|
Net income attributable to us
|
|
41,527
|
|
|
4,692
|
|
|
785%
|
|
34
|
|
In South African Rand
|
|
Table 11
|
|
(US GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
4,140,654
|
|
|
2,827,147
|
|
|
46%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
1,947,214
|
|
|
1,216,139
|
|
|
60%
|
|
Selling, general and administration
|
|
1,265,501
|
|
|
1,267,435
|
|
|
(0%
|
)
|
Depreciation and amortization
|
|
313,947
|
|
|
262,624
|
|
|
20%
|
|
Operating income
|
|
613,992
|
|
|
80,949
|
|
|
658%
|
|
Interest income
|
|
103,728
|
|
|
69,312
|
|
|
50%
|
|
Interest expense
|
|
59,291
|
|
|
51,736
|
|
|
15%
|
|
Income before income tax expense
|
|
658,429
|
|
|
98,525
|
|
|
568%
|
|
Income tax expense
|
|
229,597
|
|
|
60,659
|
|
|
279%
|
|
Net income before earnings from equity-accounted
investments
|
|
428,832
|
|
|
37,866
|
|
|
1,032%
|
|
Earnings from equity-accounted investments
|
|
2,097
|
|
|
1,725
|
|
|
22%
|
|
Net income
|
|
430,929
|
|
|
39,591
|
|
|
988%
|
|
Add net loss attributable to
non-controlling interest
|
|
(125
|
)
|
|
(93
|
)
|
|
34%
|
|
Net income attributable to us
|
|
431,054
|
|
|
39,684
|
|
|
986%
|
|
The
increase in revenue was primarily due to a higher contribution from KSNET, more
ad hoc terminal and card sales, 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, and an
increase in the number of UEPS-based loans.
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 fewer 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 the year to date fiscal 2014 and 2013, was 15% and
3%, respectively. We discuss the components of operating income margin under
Results of operations by operating segment. The increase is primarily
attributable to the substantial elimination of implementation costs 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. The tables below present the
acquisition-related intangible asset amortization that has been allocated to our
operating segments:
|
|
Nine months ended
|
|
Table 12
|
|
March 31,
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
12,453
|
|
|
|
13,954
|
|
South African transaction-based
activities
|
|
2,232
|
|
|
|
4,003
|
|
International
transaction-based activities
|
|
10,013
|
|
|
|
9,697
|
|
Hardware, software and related
technology sales
|
|
208
|
|
|
|
254
|
|
|
|
Nine months ended
|
|
Table 13
|
|
March 31,
|
|
|
|
2014
|
|
|
|
2013
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
129,253
|
|
|
|
118,024
|
|
South African transaction-based
activities
|
|
23,165
|
|
|
|
33,857
|
|
International
transaction-based activities
|
|
103,936
|
|
|
|
82,015
|
|
Hardware, software and related
technology sales
|
|
2,152
|
|
|
|
2,152
|
|
35
Interest
on surplus cash increased to $10.0 million (ZAR 103.7 million) from $8.2 million
(ZAR 69.3 million), due primarily to higher average daily ZAR cash balances.
In
US dollars, interest expense decreased to $5.7 million (ZAR 59.3 million) from
$6.1 million (ZAR 51.7 million) due to a lower average long-term debt balance on
our Korean debt as well as lower interest rate resulting from our refinancing
concluded in October 2013.
Year
to date fiscal 2014 tax expense was $22.1 million (ZAR 229.6 million) compared
to $7.2 million (ZAR 60.7 million) in fiscal 2013. Our effective tax rate for
fiscal 2014, was 34.9% and was higher than the South African statutory rate as a
result of non-deductible expenses (including interest expense related to our
long-term Korean borrowings and stock-based compensation charges). Our effective
tax rate for the year to date fiscal 2013, was 61.6% 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 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 14
|
|
In United States Dollars (US GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
|
% of
|
|
|
2013
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$000
|
|
|
|
total
|
|
|
$ 000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
200,133
|
|
|
|
50%
|
|
|
181,137
|
|
|
|
54%
|
|
|
10%
|
|
International transaction-based activities
|
|
109,099
|
|
|
|
27%
|
|
|
97,881
|
|
|
|
29%
|
|
|
11%
|
|
Smart card accounts
|
|
33,178
|
|
|
|
8%
|
|
|
25,240
|
|
|
|
8%
|
|
|
31%
|
|
Financial services
|
|
19,725
|
|
|
|
5%
|
|
|
4,483
|
|
|
|
1%
|
|
|
340%
|
|
Hardware, software and related technology
sales
|
|
36,768
|
|
|
|
10%
|
|
|
25,524
|
|
|
|
8%
|
|
|
44%
|
|
Total consolidated revenue
|
|
398,903
|
|
|
|
100%
|
|
|
334,265
|
|
|
|
100%
|
|
|
19%
|
|
Consolidated operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
37,825
|
|
|
|
64%
|
|
|
4,136
|
|
|
|
43%
|
|
|
815%
|
|
Operating income before
amortization
|
|
40,057
|
|
|
|
|
|
|
8,139
|
|
|
|
|
|
|
392%
|
|
Amortization of intangible assets
|
|
(2,232
|
)
|
|
|
|
|
|
(4,003
|
)
|
|
|
|
|
|
(44%
|
)
|
International transaction-based activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,738
|
|
|
|
8%
|
|
|
(1,331
|
)
|
|
|
(14%
|
)
|
|
nm
|
|
Operating income before
amortization
|
|
14,751
|
|
|
|
|
|
|
8,366
|
|
|
|
|
|
|
76%
|
|
Amortization of intangible assets
|
|
(10,013
|
)
|
|
|
|
|
|
(9,697
|
)
|
|
|
|
|
|
3%
|
|
Smart card accounts
|
|
9,456
|
|
|
|
16%
|
|
|
7,194
|
|
|
|
75%
|
|
|
31%
|
|
Financial services
|
|
6,902
|
|
|
|
12%
|
|
|
3,292
|
|
|
|
34%
|
|
|
110%
|
|
Hardware, software and related technology
sales
|
|
8,540
|
|
|
|
14%
|
|
|
4,478
|
|
|
|
47%
|
|
|
91%
|
|
Operating income before amortization
|
|
8,748
|
|
|
|
|
|
|
4,732
|
|
|
|
|
|
|
85%
|
|
Amortization of
intangible assets
|
|
(208
|
)
|
|
|
|
|
|
(254
|
)
|
|
|
|
|
|
(18%
|
)
|
Corporate/eliminations
|
|
(8,310
|
)
|
|
|
(14%
|
)
|
|
(8,198
|
)
|
|
|
(85%
|
)
|
|
1%
|
|
Total consolidated
operating income
|
|
59,151
|
|
|
|
100%
|
|
|
9,571
|
|
|
|
100%
|
|
|
518%
|
|
36
Table 15
|
|
In South African Rand (US GAAP)
|
|
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
2,077,401
|
|
|
|
50%
|
|
|
1,532,021
|
|
|
|
54%
|
|
|
36%
|
|
International
transaction-based activities
|
|
1,132,459
|
|
|
|
27%
|
|
|
827,858
|
|
|
|
29%
|
|
|
37%
|
|
Smart card accounts
|
|
344,391
|
|
|
|
8%
|
|
|
213,475
|
|
|
|
8%
|
|
|
61%
|
|
Financial services
|
|
204,747
|
|
|
|
5%
|
|
|
37,916
|
|
|
|
1%
|
|
|
440%
|
|
Hardware, software and related technology
sales
|
|
381,656
|
|
|
|
10%
|
|
|
215,877
|
|
|
|
8%
|
|
|
77%
|
|
Total
consolidated revenue
|
|
4,140,654
|
|
|
|
100%
|
|
|
2,827,147
|
|
|
|
100%
|
|
|
46%
|
|
Consolidated operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
392,627
|
|
|
|
64%
|
|
|
34,981
|
|
|
|
43%
|
|
|
1,022%
|
|
Operating income before
amortization
|
|
415,792
|
|
|
|
|
|
|
68,838
|
|
|
|
|
|
|
504%
|
|
Amortization of intangible assets
|
|
(23,165
|
)
|
|
|
|
|
|
(33,857
|
)
|
|
|
|
|
|
(32%
|
)
|
International transaction-based activities
|
|
49,181
|
|
|
|
8%
|
|
|
(11,257
|
)
|
|
|
(14%
|
)
|
|
nm
|
|
Operating
income before amortization
|
|
153,117
|
|
|
|
|
|
|
70,758
|
|
|
|
|
|
|
116%
|
|
Amortization of
intangible assets
|
|
(103,936
|
)
|
|
|
|
|
|
(82,015
|
)
|
|
|
|
|
|
27%
|
|
Smart card accounts
|
|
98,154
|
|
|
|
16%
|
|
|
60,845
|
|
|
|
75%
|
|
|
61%
|
|
Financial services
|
|
71,643
|
|
|
|
12%
|
|
|
27,843
|
|
|
|
34%
|
|
|
157%
|
|
Hardware, software and
related technology sales
|
|
88,646
|
|
|
|
14%
|
|
|
37,874
|
|
|
|
47%
|
|
|
134%
|
|
Operating income before
amortization
|
|
90,798
|
|
|
|
|
|
|
40,026
|
|
|
|
|
|
|
127%
|
|
Amortization of intangible assets
|
|
(2,152
|
)
|
|
|
|
|
|
(2,152
|
)
|
|
|
|
|
|
-
|
|
Corporate/eliminations
|
|
(86,259
|
)
|
|
|
(14%
|
)
|
|
(69,337
|
)
|
|
|
(85%
|
)
|
|
24%
|
|
Total
consolidated operating income
|
|
613,992
|
|
|
|
100%
|
|
|
80,949
|
|
|
|
100%
|
|
|
658%
|
|
South African transaction-based activities
In
ZAR, the increases in segment revenue were primarily due to more low-margin
transaction fees generated from beneficiaries using the South African National
Payment System, incremental prepaid airtime sales driven by the rollout of our
prepaid airtime product, and reflect the elimination of inter-company
transactions.
Our
operating income margin for fiscal 2014 and 2013 was 19% and 2%, respectively,
and has increased primarily due to the substantial elimination of SASSA
implementation costs in fiscal 2014 and partially offset by the increase in
low-margin prepaid airtime sales.
South African transaction processors:
The table below presents the total volume and value processed during the year to
date fiscal 2014 and 2013:
Table 16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total volume (000s)
|
|
|
Total value $ (000)
|
|
|
Total value ZAR (000)
|
|
Transaction
processor
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
CPS
|
|
85,692
|
|
|
85,669
|
|
|
7,894,032
|
|
|
9,184,743
|
|
|
81,940,837
|
|
|
77,682,718
|
|
EasyPay
|
|
305,623
|
|
|
319,508
|
|
|
7,935,448
|
|
|
8,525,275
|
|
|
82,370,747
|
|
|
72,105,069
|
|
Net1 Mobile Solutions (A) .
|
|
104,311
|
|
|
18,098
|
|
|
6,233,573
|
|
|
7,289,395
|
|
|
64,705,111
|
|
|
61,652,241
|
|
MediKredit
|
|
7,514
|
|
|
7,684
|
|
|
660,132
|
|
|
508,863
|
|
|
6,852,238
|
|
|
4,303,865
|
|
(A)
during fiscal 2014 FIHRST was integrated into Net1 Mobile Solutions. Volumes
and values for 2013 represent FIHRST only.
CPS
volumes moderately increased due to the organic growth in the number of
beneficiaries added by SASSA, partially offset by SASSAs suspension of former
grant recipient cardholders who had not presented themselves for enrollment
during the third quarter of fiscal 2014. EasyPay volumes have decreased due to
fewer sales of prepaid airtime, but the decrease was partially offset by an
increase in transaction switching and other value-added services. Net1 Mobile
Solutions volumes have increased primarily due to the launch of prepaid airtime
product in fiscal 2014.
37
International transaction-based activities
Revenue
increased primarily due to KSNETs revenue growth during the year to date fiscal
2014 and 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 the year to date 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 and at Net1 Virtual Card, as well as ongoing competition in the Korean
marketplace.
Operating
income margin for the year to date fiscal 2014 and 2013 was 4% and (1)%,
respectively (excluding intangible amortization, 14% and 9%,
respectively.)
Smart card accounts
In
ZAR, our revenue from this operating segment was higher because the number of
smart card-based accounts has increased as a result of full implementation of
the SASSA contract. Operating income margin from providing smart card accounts
for the year to date fiscal 2014 and 2013 was 29% and 29%, respectively.
In
ZAR, revenue from the provision of smart card-based accounts increased in
proportion to the increased number of recipients serviced through our SASSA
contract. Approximately 9.6 million smart card-based accounts were active at
March 31, 2014 compared to approximately 6.5 million active accounts as at March
31, 2013.
Financial services
Revenue
increased primarily due to the increase in the number of loans granted as we
rolled out our product nationally. Operating income decreased primarily as a
result of related start-up expenses, establishment of the allowance for doubtful
finance loans receivable and the re-allocation of UEPS-based lending corporate
and administration overhead expenses to this segment. Smart Life did not
contribute to operating income in the year to date fiscal 2014 due to the FSB
suspension.
Year
to date fiscal 2014 includes the re-allocation of UEPS-based lending corporate
administration and overhead expenses to this segment from the South African
transaction-based activities segment. We were not able to accurately quantify
these expenses for last year and therefore did not allocate such costs to this
segment during the year to date fiscal 2013.
Operating income margin for the financial services segment decreased to 35% from
73%, primarily as a result of the roll-out expenditures, allowance for doubtful
finance loans receivable and corporate overhead expense re-allocation described
above.
Hardware, software and related technology sales
In ZAR, the increase in revenue and operating income resulted from more ad hoc
terminal and smart card sales. We continue to expect significant quarter over
quarter fluctuations in revenue, operating income and operating margin due to
the ad hoc nature of orders in this operating segment.
Corporate/eliminations
The
increase in our corporate expenses resulted primarily from increases in general
corporate legal 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 expenditure related to compliance with Sarbanes;
non-employee directors fees; employee and executive salaries and bonuses;
stock-based compensation; audit fees; directors and officers insurance premiums;
telecommunications expenses; property-related expenditures including utilities,
rental, security and maintenance; and elimination entries.
Liquidity and Capital Resources
At
March 31, 2014, our cash balances were $30.9 million, which comprised mainly
ZAR-denominated balances of ZAR 157.8 million ($14.9 million), KRW-denominated
balances of KRW 11.2 billion ($10.5 million) and US dollar-denominated balances
of $4.3 million and other currency deposits, primarily euro, of $1.1 million.
The decrease in our cash balances from June 30, 2013, was primarily due to the
expansion of our UEPS-based lending business, working capital changes, the
repayment of a portion of our Korean debt and acquisition of all of the
remaining shares of KSNET that we did not already own.
38
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 Korea in short-term investment
accounts at Korean banking institutions.
Historically,
we have financed most of our operations, research and development, working
capital, capital expenditures and acquisitions through our internally generated
cash. When considering whether to borrow under our financing facilities, we
consider the cost of capital, cost of financing, opportunity cost of utilizing
surplus cash and availability of tax efficient structures to moderate financing
costs.
We
have a ZAR 400 million South African Rand-denominated short-term credit facility
with Nedbank Limited, a South African bank. This 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 March 31, 2014, we had
no amounts outstanding under the overdraft facility and had utilized ZAR 143.1
million ($13.5 million, translated at exchange rates applicable as of March 31,
2014) of the indirect and derivative facilities to support cross-guarantees
issued to Nedbank for guarantees issued by Nedbank to various third parties on
our behalf. As of March 31, 2014, the interest rate on the overdraft facility
was 7.85% . The short-term facility is repayable on demand. Refer to Note 8 to
the unaudited condensed consolidated financial statements for more information
about the terms of South African short-term facility.
We
also have a KRW 10 billion Korean won denominated overdraft facility with Hana
Bank, a Korean bank. As of March 31, 2014, we had no amounts outstanding under
the overdraft facility. As of March 31, 2014, the interest rate on the overdraft
facility was 4.98% . Any amounts outstanding under this overdraft facility are
repayable in full in January 2015. Refer to Note 8 to the unaudited condensed
consolidated financial statements for more information about the terms of Korean
overdraft facility.
We
have a KRW 85.0 billion Korean won denominated five-year senior secured term
loan and revolving credit facility with a group of group of Korean banks. As of
March 31, 2014, we had outstanding long-term debt of KRW 77.2 billion
(approximately $71.2 million translated at exchange rates applicable as of March
31, 2014). The loans bear interest at the Korean CD rate in effect from time to
time (2.65% as of March 31, 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 9 to the
unaudited condensed consolidated financial statements for more information about
the terms of our long-term Korean facility.
Cash flows from operating activities
Third quarter of fiscal 2014
Net
cash provided by operating activities for the third quarter of fiscal 2014 was
$34.6 million (ZAR 376.2 million) compared to $12.2 million (ZAR 103.2 million)
for the third quarter of fiscal 2013. Excluding the impact of interest received,
interest paid under our Korean debt and taxes presented in the table below, the
increase in cash from operating activities resulted from improved trading
activity, the substantial elimination of implementation costs related to our
SASSA contract in fiscal 2014, partially offset by the expansion of our
UEPS-based lending book.
We
paid no taxes in South Africa during the third quarter of fiscal 2014. We paid
provisional Korean taxes of $1.6 million related to our tax year ended December
31, 2013. During the third quarter of fiscal 2013, we paid first and second
provisional South African taxes of $0.47 million (ZAR 4.3 million) and $0.1
million (ZAR 0.7 million), respectively, related to our 2013 tax year and
dividend withholding tax of $0.2 million (ZAR 1.9 million). We also paid
provisional Korean taxes of $0.9 million related to our tax year ended December
31, 2012.
39
Taxes paid during the third quarter of fiscal 2014 and 2013 were as follows:
Table 17
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
-
|
|
|
473
|
|
|
-
|
|
|
4,339
|
|
Second provisional tax payment
|
|
-
|
|
|
82
|
|
|
-
|
|
|
728
|
|
Taxation refunds received
|
|
(36
|
)
|
|
-
|
|
|
(400
|
)
|
|
(4
|
)
|
Dividend withholding taxation
|
|
-
|
|
|
213
|
|
|
-
|
|
|
1,871
|
|
Total South African taxes paid
|
|
(36
|
)
|
|
768
|
|
|
(400
|
)
|
|
6,934
|
|
Foreign taxes
paid: primarily Korea
|
|
1,606
|
|
|
933
|
|
|
17,330
|
|
|
8,180
|
|
Total tax paid
|
|
1,570
|
|
|
1,701
|
|
|
16,930
|
|
|
15,114
|
|
We
expect to pay our second provisional payments in South Africa related to our
2014 tax year in the fourth quarter of fiscal 2014.
Year to date fiscal 2014
Net
cash provided by operating activities for the year to date fiscal 2014 was $5.7
million (ZAR 59.1 million) compared to cash provided by operating activities of
$31.0 million (ZAR 262.1 million) for the year to date fiscal 2013. Excluding
the impact of interest received, interest paid under our Korean debt 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 and the substantial elimination of
implementation costs related to our SASSA contract in fiscal 2014.
During the year to date fiscal 2014, we paid South African tax of $13.3 million
(ZAR 137.8 million) related to our 2014 tax year and $0.2 million (ZAR 2.4
million) related to prior tax years. We also paid provisional Korean taxes of
$2.6 million related to our tax year ended December 31, 2013. During the year to
date fiscal 2013, we paid first and second provisional South African taxes of
$6.8 million (ZAR 54.7 million) and $0.08 million (ZAR 0.7 million),
respectively, related to our 2013 tax year, $3.1 million (ZAR 27.0 million)
related to prior tax years and dividend withholding taxes of $0.6 million (ZAR
5.4 million). We also paid provisional Korean taxes of $1.7 million related to
our tax year ended December 31, 2012.
Taxes paid during the year to date fiscal 2014 and 2013 were as follows:
Table 18
|
|
Nine months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
First provisional payments
|
|
13,292
|
|
|
6,757
|
|
|
137,773
|
|
|
58,693
|
|
Second provisional payments
|
|
-
|
|
|
82
|
|
|
-
|
|
|
728
|
|
Taxation paid related to prior years
|
|
228
|
|
|
3,110
|
|
|
2,360
|
|
|
26,978
|
|
Taxation refunds received
|
|
(36
|
)
|
|
(118
|
)
|
|
(400
|
)
|
|
(1,010
|
)
|
Dividend withholding taxation
|
|
-
|
|
|
611
|
|
|
-
|
|
|
5,371
|
|
Total South African taxes paid
|
|
13,484
|
|
|
10,442
|
|
|
139,733
|
|
|
90,760
|
|
Foreign taxes
paid: primarily Korea
|
|
2,613
|
|
|
1,738
|
|
|
27,507
|
|
|
14,992
|
|
Total tax paid
|
|
16,097
|
|
|
12,180
|
|
|
167,240
|
|
|
105,752
|
|
Cash flows from
investing activities
Third quarter of fiscal 2014
Cash
used in investing activities for the third quarter of fiscal 2014 includes
capital expenditure of $4.8 million (ZAR 52.7 million), primarily for the
acquisition of payment processing terminals in Korea.
Cash
used in investing activities for the third quarter of fiscal 2013 includes
capital expenditure of $5.1 million (ZAR 46.7 million), primarily for computer
equipment for our SASSA contract and acquisition of payment processing terminals
in Korea.
40
Year to date fiscal 2014
Cash
used in investing activities for the year to date fiscal 2014 includes capital
expenditure of $17.3 million (ZAR 178.9 million), primarily for the acquisition
of payment processing terminals in Korea.
Cash
used in investing activities for the year to date fiscal 2013 includes capital
expenditure of $17.1 million (ZAR 144.7 million), primarily for computer
equipment, payment vehicles and related equipment for our SASSA contract and
acquisition of payment processing terminals in Korea. During the year to date
fiscal 2013 we paid, net of cash acquired, $1.9 million (ZAR 16.2 million) for
Net1 Mobile Solutions and $0.2 million for SmartSwitch Botswana.
Cash flows from
financing activities
Third quarter of fiscal 2014
During
the third quarter of fiscal 2014, we utilized approximately $1.0 million of our
Korean borrowings to pay quarterly interest due.
There were no cash flows from financing activities during the third quarter of
fiscal 2013.
Year to date fiscal 2014
During
the year to date fiscal 2014, we refinanced our Korean debt and received $87
million from Korean banks. In October 2013, we used $72.6 million of these new
borrowings and $14.4 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 Korean borrowings of approximately $0.9 million. In January 2014, we
utilized approximately $1.0 million of these new borrowings to pay quarterly
interest due in Korea.
We
paid approximately $2.0 million for substantially all of the shares of KSNET we
did not already own during the second quarter of fiscal 2014. As discussed
above, we utilized our South African short-term facility during the year to date
fiscal 2014 and owe approximately $37.8 million as of March 31, 2014.
During
the year to date fiscal 2013, we made a scheduled $7.3 million long-term debt
repayment and received $0.2 million from the exercise of stock options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We
expect capital spending for the fourth quarter of fiscal 2014 to primarily
include the acquisition of payment terminals for the expansion of our operations
in Korea.
Our
historical capital expenditures for the third quarter of fiscal 2014 and 2013
are discussed under Liquidity and Capital ResourcesCash flows from investing
activities. All of our capital expenditures for the past three fiscal years
were funded through internally-generated funds. We had outstanding capital
commitments as of March 31, 2014, of $0.1 million related mainly to computer
equipment. We expect to fund these expenditures through internally-generated
funds.
41
Contingent Liabilities, Commitments and Contractual
Obligations
The following table sets forth our contractual obligations as of March 31,
2014:
Table 19
|
|
Payments due by Period, as of March 31, 2014 (in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term debt obligations
(A)
|
|
84,420
|
|
|
17,820
|
|
|
24,869
|
|
|
41,731
|
|
|
-
|
|
Operating lease obligations
|
|
7,853
|
|
|
3,787
|
|
|
3,742
|
|
|
324
|
|
|
-
|
|
Purchase obligations
|
|
6,507
|
|
|
6,507
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
125
|
|
|
125
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other long-term obligations
(B)(C)
|
|
20,117
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,117
|
|
Total
|
|
119,022
|
|
|
28,239
|
|
|
28,611
|
|
|
42,055
|
|
|
20,117
|
|
|
(A)
|
Includes $72.1 million of long-term debt and interest
payable at the rate applicable on March 31, 2014, under our Korean debt
facility.
|
|
|
|
|
(B)
|
Includes policy holder liabilities of $19.3 million
related to our insurance business.
|
|
|
|
|
(C)
|
We have excluded cross-guarantees in the aggregate
amount of $13.5 million issued as of March 31, 2014, to Nedbank to secure
guarantees it has issued to third parties on our behalf as the amounts
that will be settled in cash are not known and the timing of any payments
is uncertain.
|
42
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
In
addition to the tables below, see note 5 to the unaudited condensed consolidated
financial statements for a discussion of market risk.
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of March 31, 2014, as a result of
changes in the Korean CD. The effect of a hypothetical 1% increase and a 1%
decrease in each of the Korean CD rate as of March 31, 2014, are shown. The
selected 1% hypothetical change does not reflect what could be considered the
best or worst case scenarios.
|
|
As of March 31, 2014
|
|
Table 20
|
|
|
|
|
Hypothetical
|
|
|
Estimated annual
|
|
|
|
|
|
|
change in
|
|
|
expected interest
|
|
|
|
|
|
|
Korean CD
|
|
|
charge after
|
|
|
|
|
|
|
rate or South
|
|
|
hypothetical change in
|
|
|
|
Annual
|
|
|
Africa
|
|
|
Korean CD rate or
|
|
|
|
expected
|
|
|
overdraft
|
|
|
South African
|
|
|
|
interest
|
|
|
facility rate,
|
|
|
overdraft facility rate,
|
|
|
|
charge
|
|
|
as
|
|
|
as appropriate
|
|
|
|
($ 000)
|
|
|
appropriate
|
|
|
($ 000)
|
|
Interest on Korean long-term
debt
|
|
4,125
|
|
|
1%
|
|
|
4,845
|
|
|
|
|
|
|
(1%
|
)
|
|
3,404
|
|
The following table summarizes our exchange-traded equity securities with equity
price risk as of March 31, 2014. The effects of a hypothetical 10% increase and
a 10% decrease in market prices as of March 31, 2014, is also shown. The
selected 10% hypothetical change does not reflect what could be considered the
best or worst case scenarios. Indeed, results could be far worse due both to the
nature of equity markets and the aforementioned liquidity risk.
|
|
As of March 31, 2014
|
|
Table 21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
7,662
|
|
|
10%
|
|
|
8,428
|
|
|
0.20%
|
|
|
|
|
|
|
(10%
|
)
|
|
6,896
|
|
|
(0.20%
|
)
|
Item 4. 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) promulgated under the Securities Exchange Act of 1934, as
amended, as of March 31, 2014. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on this evaluation, the chief executive officer
and the chief financial officer concluded that our disclosure controls and
procedures were effective as of March 31, 2014.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting
during the fiscal quarter ended March 31, 2014, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
43