UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-31203
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida | 98-0171860 |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or organization) | Identification No.) |
President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices)
Registrants telephone number, including area code: 27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 per share | NASDAQ Global Select Market |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No
[X]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ]
No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act (Check one):
[ ] Large accelerated filer | [ X ] Accelerated filer |
[ ] Non-accelerated filer | [ ] Smaller reporting company |
(Do not check if a smaller reporting company) | |
[ ] Emerging growth company |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of December 31, 2016 (the last business day of the registrants most recently completed second fiscal quarter), based upon the closing price of the common stock as reported by The Nasdaq Global Select Market on such date, was $279,962,886. This calculation does not reflect a determination that persons are affiliates for any other purposes.
As of August 21, 2017, 56,343,902 shares of the registrants common stock, par value $0.001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30,
2017
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PART I
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1ARisk Factors. In some cases, you can identify forward-looking statements by terminology such as may, will, should, could, would, expects, plans, intends, anticipates, believes, estimates, predicts, potential or continue or the negative of such terms and other comparable terminology. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no obligation to release publicly any revisions to the forward-looking statements after the date of this Annual Report. You should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us during our 2018 fiscal year, which runs from July 1, 2017 to June 30, 2018.
ITEM 1. | BUSINESS |
Overview
We are a leading provider of payment solutions, transaction processing services and financial technology across multiple industries and in a number of emerging and developed economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Our universal electronic payment system, or UEPS, and UEPS/EMV derivative discussed below, uses biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer. This offline capability means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages. Our latest version of the UEPS technology has been certified by the EuroPay, MasterCard and Visa global standard, or EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or automated teller machine, ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for banking, healthcare management, international money transfers, voting and identification.
We also provide secure financial technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial and value-added services to our cardholder base.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our biometrically enabled UEPS/EMV technology, to over ten million recipient cardholders across the entire country, process debit and credit card payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion services such as microloans, insurance, mobile transacting and prepaid utilities to our cardholder base.
In addition, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea, and we offer card processing, payment gateway and banking value-added services in that country. We have expanded our card issuing and acquiring capabilities through the acquisition of Transact24 in Hong Kong. Our Masterpayment subsidiary in Germany provides value added payment services and working capital finance to online retailers across Europe. Our XeoHealth service provides funders and providers of healthcare in United States with an on-line real-time management system for healthcare transactions.
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Our Net1 Solutions business unit is responsible for the worldwide technical development and commercialization of our array of web and mobile applications and payment technologies, such as Mobile Virtual Card, or MVC, Chip and GSM licensing and Virtual Top Up, or VTU, and has deployed solutions in many countries, including South Africa, the United Kingdom, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and Colombia.
All references to the Company, we, us, or our are references to Net 1 UEPS Technologies, Inc. and its consolidated subsidiaries, collectively, and all references to Net1 are to Net 1 UEPS Technologies, Inc. only, except as otherwise indicated or where the context indicates otherwise.
Market Opportunity
Services for the under-banked: According to the latest World Banks Global Findex Database, 62% of adults worldwide have a bank account. As a result, two billion adults around the world remain entirely excluded from the financial system. This situation arises when banking fees are either too high relative to an individuals income, a bank account provides little or no meaningful benefit or there is insufficient infrastructure to provide financial services economically in the individuals geographic location. We refer to these people as the unbanked and the under-banked. These individuals typically receive wages, welfare benefits, money transfers or loans in the form of cash, and conduct commercial transactions, including the purchase of food and clothing, in cash.
The use of cash, however, presents significant risks. In the case of recipient cardholders, they generally have no secure way of protecting their cash other than by converting it immediately into goods, carrying it with them or hiding it. In cases where an individual has access to a bank account, the typical deposit, withdrawal and account fees meaningfully reduce the money available to meet basic needs. For government agencies and employers, using cash to pay welfare benefits or wages results in significant expense due to the logistics of obtaining that cash, moving it to distribution points and protecting it from theft.
Our target under-banked customer base in most emerging economies, and particularly in sub-Saharan Africa, has limited access to formal financial services and therefore relies heavily on the unregulated informal sector for such services. By leveraging our smart card and mobile technologies, we are able to offer affordable, secure and reliable financial services such as transacting accounts, loans and insurance products to these consumers and alleviate some of the challenges they face in dealing with the informal sector.
With over 30 million cards issued in more than ten developing countries around the world, our track record and scale uniquely positions us to continue further geographical penetration of our technology in additional emerging countries.
Online transaction processing services: The continued global growth of retail credit and debit card transactions is reflected in the May 2017 Nilson Report, according to which worldwide annual general purpose card dollar volume increased 6.4% to $26 trillion in 2016, while transaction volume increased by 13.3% to 257 billion transactions and cards issued increased by 9.4% to 11.15 billion cards during the same period. General purpose cards include the major card network brands such as MasterCard, Visa, UnionPay and American Express. In South Africa, we operate the largest bank-independent transaction processing service through EasyPay, where we have developed a suite of value-added services such as bill payment, airtime top-up, gift card, money transfer and prepaid utility purchases that we offer as a complete solution to merchants and retailers. In South Korea, through KSNET, we are one of the top three VAN processors, and we provide card processing, banking value-added services and payment gateway functionality to more than 237,000 retailers. Transact24 and Masterpayment are established, growing processors with experienced management teams which offer a variety of value-added online transaction processing services. Our expertise in on-line transaction processing and value-added services provides us with the opportunity to participate globally in this rapidly growing market segment.
Mobile payments: The rapid growth of online commerce and the emergence of mobile devices as the preferred access channel for transacting online has created a global opportunity for the provision of secure payment services to online retailers and service providers. Our Net1 Solutions business unit is focused on providing secure payment solutions for all card-not-present transactions through the application of our MVC and other proprietary solutions.
Despite lacking access to formal financial services, large proportions of the under-banked customer segment own and utilize mobile phones. The World Banks research has confirmed the rising popularity of using mobile phones to transfer money and for banking that often does not require setting up an account at a brick-and-mortar bank. The World Bank has stated that mobile banking, which allows account holders to pay bills, make deposits or conduct other transactions via text messaging, has rapidly expanded in Sub-Saharan Africa, where traditional banking has been hampered by transportation and other infrastructure problems. A World Bank report states that 1% of adults globally use a mobile money account and nothing else, while in Sub-Saharan Africa 12% of adults (64 million adults) have mobile money accounts (compared to just 2% worldwide) and 45% of these people only have a mobile money account.
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Mobile phones are therefore increasingly viewed as a channel through which this underserved population can gain access to formal financial and other services. Today, most mobile payment solutions offered by various participants in the industry largely provide access to information and basic services, such as allowing consumers to check account balances or transfer funds between existing accounts with the financial institution, but they offer limited functionality and ability to use the mobile device as an actual payments and banking instrument. Our UEPS and MVC solutions are enabled to run on the SIM cards in or as applications on mobile phones and provide our users with secure payment and banking functionality.
Healthcare: Given the lack of broad-based healthcare services in many emerging economies, governments are increasingly focused on driving initiatives to provide affordable and accessible healthcare services to their populations. Similarly, countries such as the United States are embarking on expansive overhauls of their existing healthcare systems.
Through our XeoHealth service we utilize our real-time rules engine and claims processing technology to offer governments, funders and providers of healthcare a comprehensive solution that offers a completely automated healthcare rules adjudication and payment system, reducing both cost and time.
Our Core Proprietary Technologies
UEPS and UEPS/EMV
We developed our core UEPS technology to enable the affordable delivery of financial products and services to the worlds unbanked and under-banked populations. Our native UEPS technology is designed to provide the secure delivery of these products and services in the most under-developed or rural environments, even in those that have little or no communications infrastructure. Unlike a traditional credit or debit card where the operation of the account occurs on a centralized computer, each of our smart cards effectively operates as an individual bank account for all types of transactions. All transactions that take place through our system occur between two smart cards at the point of service, or POS, as all of the relevant information necessary to perform and record transactions reside on the smart cards.
The transfer of money or other information can take place without any communication with a centralized computer since all validation, creation of audit records, encryption, decryption and authorization take place on, or are generated between, the smart cards themselves. Importantly, the cards are protected through the use of biometric fingerprint identification, which is designed to ensure the security of funds and card holder information and is more secure than traditional PIN identification. Transactions are generally settled by merchants and other commercial participants in the system by sending transaction data to a mainframe computer on a batch basis. Settlements can be performed online or offline. The mainframe computer provides a central database of transactions, creating a complete audit trail that enables us to replace lost smart cards while preserving the notional account balance, and to identify fraud.
Our UEPS technology includes functionality that allows the following:
| Transparent and automatic recovery of transactions; | |
| Transaction cancellation; | |
| Refunds; | |
| Multiple audit trails; | |
| Offline loading and spending; | |
| Biometric identification; | |
| Continuous debit; | |
| Multiple wallets; | |
| Morphing of other common payment systems, such as EMV; | |
| Automatic credit; | |
| Automatic debit; | |
| Interest calculations; and | |
| Milking / batching of large transaction volumes in an off-line environment. |
Our UEPS technology incorporates the software, smart cards, payment terminals, back-end processing infrastructure, biometric systems and transaction security to provide a complete payment and transaction processing solution.
Within industry verticals, our UEPS technology is applied to electronic commerce transactions in the fields of social security, wage distribution, banking, medical and patient management, money transfers, voting and identification systems. Market sectors include government and non-government organizations, or NGOs, healthcare, telecoms, financial institutions, retailers, petroleum distributors and utilities.
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Our latest version of the UEPS technology is interoperable with the global EMV standard, allowing the cards to be used wherever EMV cards are accepted, while also providing all the additional functionality offered by UEPS. This UEPS/EMV functionality is especially relevant in areas where there is an established payment system and provides flexibility to our customers to be serviced at any POS, including point of sale devices and ATMs. Our UEPS/EMV solution therefore expands our addressable market to include developed economies with established payment networks. The UEPS/EMV technology removes the hurdle, often perceived in developed economies, of operating a proprietary or closed-loop system by providing a truly inter-operable payment solution.
Mobile Virtual Card
We developed MVC, an innovative mobile phone-based payment solution that enables secure purchases with no disruption to existing merchant infrastructures and provides significant incentives for all stakeholders.
MVC utilizes existing and traditional payment methods but enhances them by replacing or tokenizing plastic card data with one-time-use virtual card data, hence eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual card data replaces, digit-for-digit, the credit (or debit) card number, the expiration date and the card verification value with only the issuer bank identification number (first 6-digit) remaining constant.
MVC uses the mobile phone to generate virtual cards offline. The mobile phone is the most available, cost-effective, secure and portable platform for generating virtual cards for remote payments (online purchasing, money transfers, phone and catalogue orders).
Following a simple registration process, the virtual card application is activated over-the-air, enabling the phone to generate virtual card numbers completely off-line. MVCs are used like traditional plastic credit or debit cards, except that as soon as the transaction is authorized, the generated card number expires once the preset monetary amount has been utilized or after completion of the specific transaction that it was generated for. While MVC has been focused primarily on card-not-present transactions for internet payments in our initial deployments, we are constantly expanding the applicability of the software to incorporate new trends such as presentation through near field communication, or NFC, or Quick Response, or QR, Codes.
Consumers can easily generate a new card on their mobile phone to shop on the internet or to place a catalogue or telephone order. MVCs are completely secure and can also be sent in a single click to family, friends, and service providers. Once the authorization request reaches the issuing bank processor, our servers decrypt the virtual card data, authenticate the consumer and pass the transaction request to the card issuer for authorization. MVC can be offered as a prepaid solution or directly linked to a subscribers credit or debit card or other funding account. Subscribers can load prepaid virtual accounts with cash at participating locations, or electronically via their bank accounts, direct deposit or other electronic wallets.
The benefits of MVC include, for:
| Card issuers increased transactional revenues from existing accounts, driving more transactional revenues and elimination of fraudulent card use. | |
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Mobile network operators revenues from payments, reduced churn and opportunities for powerful co-branding schemes. | |
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Consumers convenience, peace of mind, ease of use and rewards. | |
| Merchants elimination of charge-backs and fraud at no extra cost . |
Our Strategy
We intend to provide the leading transacting system for the billions of unbanked and under-banked people in the world to engage in electronic transactions, to be the provider of choice for secure mobile payment and other card-not-present transactions and to provide our transaction processing, value-added services processing and healthcare processing services globally. To achieve these goals, we are pursuing the following strategies:
Build on our significant and established infrastructures We control significant components of the payment infrastructure in South Africa, South Korea, Botswana and Namibia and we believe that we are well-positioned to leverage our existing asset base to continue to gain market share and build upon the critical mass that we have developed.
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For example, in South Africa, we are one of the leading independent transaction processors, the national provider of social welfare payment distribution services to the countrys large unbanked and under-banked population, the largest third-party processor of retail merchant transactions and the leading processor of third-party payroll payments. We believe that our large cardholder base, specialized technology and payment infrastructure, together with our strong business relationships, position us at the epicenter of commerce in the country. Through our national distribution platform and relationships with a number of leading companies across multiple industries, we believe that we can provide many of the services consumed by our cardholders who would normally not have access to these services or would otherwise have to rely on the informal sector. We have already introduced several services to our cardholder and merchant base, such as low cost, high functionality bank accounts, microloans, life insurance, bill payment, prepaid mobile top-up and prepaid utility services. We have a network of mobile ATMs to provide services to our cardholders, and we have established a national fixed ATM and POS network. We aim to increase the adoption of our existing services by expanding our cardholder base and our transacting network, and we aim to increase our service offerings by developing new products and distribution networks and by forging partnerships with industry participants who share our vision and can accelerate the implementation of our business plan. Our core focus remains the development and provision of our technological expertise. We have established significant operational assets to ensure the rapid deployment of our technology. As these deployments mature, we may share or dispose of these operational assets if we believe this will result in higher efficiencies and synergistic benefits where we are able to provide technology to an expanded base of clients and operations.
Our latest product, EasyPay Everywhere, provides our target market with an affordable all-inclusive transactional bank account with access to financially inclusive services such as microloans, life insurance, remittances, value added services such as prepaid utilities and bill payments through their mobile phones and our national network of ATMs and POS devices.
We plan to follow a similar approach in the other markets where we have an established infrastructure, taking into account the specific requirements of the local legislation, the composition of the local payment system and the specific components that we own or control. In markets where we do not have an established infrastructure, we intended to collaborate with local partners to provide a similar end-to-end solution.
Leveraging our new payment technologies to gain access to developed and developing economies While our business has traditionally focused on marketing products and services to the worlds unbanked and under-banked population, we have developed and acquired proprietary technology, with a specific focus on mobile payments, that is particularly relevant to developed economies as well. Our MVC application for mobile telephones, for example, is designed to eliminate fraud associated with card-not-present credit card transactions effected by telephone or over the internet and are prevalent in developed economies such as the United States. We believe that mobile payments, mobile wallets and the related applications should be a critical component of a payment processors future strategy and we have dedicated a significant portion of our research and development and business development resources to ensure that we remain at the forefront of this rapidly evolving technological space. While some of our mobile solutions are more relevant in developed markets such as the United States and Europe, we are targeting our mobile payment solutions at developing economies, where mobile transacting is seen as the best solution to rapidly leapfrog the antiquated payment solutions typically available in these countries at minimal cost. We plan to expand our market share in the mobile solutions and card-not-present processing markets by pursuing partnerships or supply relationships with online merchants, virtual card issuers, payment services processors, mobile remittance providers and other online service providers.
Pursue strategic acquisition opportunities or partnerships to gain access to new markets or complementary product We will continue to pursue acquisition opportunities and partnerships that provide us with an entry point for our existing products into a new market, or provide us with technologies or solutions complementary to our current offerings. Our recent investment in MobiKwik, an Indian mobile wallet provider, for example, provides us with access to the large Indian mobile transacting and e-commerce market. Our acquisitions of Transact24 Limited, Masterpayment and our proposed investment in Bank Frick provide us with access to the leading global card issuers, acquirers and processors such as Visa, Mastercard, China UnionPay, Alipay, SWIFT and SEPA and enable us to provide small and medium e-commerce enterprises with a complete service offering, including bank accounts, card issuing and acquiring, processing and value-added products such as working capital financing. In addition, we expect to leverage our relationship with the International Finance Corporation, or IFC to pursue strategic and synergistic acquisition opportunities and partnerships in developing markets.
Our Business Units
Our company is organized into the following business units:
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Net1 Solutions
Our Net1 Solutions business unit is managed from Johannesburg, South Africa with business development support branches in the United Kingdom and India. This business unit is responsible for the technical development and commercialization of our array of web and mobile applications and payment technologies.
Net1 Solutions offers an array of products and services that cater for the needs of the global market and comprises of the following key business lines:
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MVC & Verification Our internationally patented MVC technology is a market leading innovation which addresses the needs of the modern mobile payment market. It is the easiest, most secure and most convenient way to pay for goods and services online directly from a mobile phone. Our MVC technology provides a completely secure, off-line payment solution for card-not-present transactions, such as payments made for internet purchases. The MVC technology runs as an application on any mobile phone and utilizes our patented cryptographic card generator to secure and tokenize any payment transaction. The advent of new technologies such as NFC or QR Codes also enables the utilization of our MVC technology for card present payments. |
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Third Party Payments Through FIHRST we are the largest provider of third party and payroll associated payments in South Africa, servicing over 2,050 employee groups that represent approximately 650,000 employees. Our market leading position is due to our ability to move informed money (the movement of money and its corresponding data to third party organizations). This allows us to provide one of the most comprehensive suites of financial services, ranging from garnishee orders to payment modules and collections. We also offer the PayPlus service, providing employees with access to prepaid airtime, electricity and other value added services, or VAS. |
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Prepaid Vending Our Prepaid Vending business line handles multichannel distribution of electronic products and services aimed at a variety of markets. Across Africa and abroad, our VTU solutions create a separate revenue stream for Mobile Network Operators, or MNOs, and other clients. The stability and scalability of our VTU offerings enables our customers to facilitate more than 100 million monthly transactions. |
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MNOs Solutions We provide specialized solutions for MNOs that boost average revenue per user, increase subscriber activity, and collect valuable profiling data. Our solutions range from Advance Airtime and Mobile Wallet technology to SMS Mega Promotions, tailor-made for each MNO with a focus to maximize subscriber activity, brand perception and profitability. |
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Chip & SIM Through our partnerships with MNOs as well as card and semiconductor manufacturers, we provide a strong lineup of feature rich chip and SIM solutions. All of these offerings include our wide range of GSM Masks and custom software that enables mobile telephony, transactions and on-chip VAS. We support the above chip and SIM developments with dedicated chip-card based commerce frameworks. These incorporate POS, terminal and interbank transaction switching and clearance aimed at national government, petroleum and retail industries. |
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Custom Development The Custom Development business line produces solutions that span across Web, Mobile, Server, POS and Desktop environments. These solutions have been developed by addressing the needs of various industries and now form an integral pillar of our product and service portfolio. We develop both client-facing and background services, with coverage on every relevant platform including Mobile (Android, iOS, Windows Phone 8 and J2ME) and Web (with full cross-browser compatibility). |
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Cryptography Our Cryptography business line focuses on security-orientated products which include our range of PIN encryption devices, card acceptance modules and Hardware Security Modules. These focus on financial, retail, telecommunications, utilities and petroleum sectors. In order to constantly enhance and improve our product offerings, special attention is placed on the development of security initiatives including Triple Data Encryption Algorithm, also known as TDES, EMV and Payment Card Industry, or PCI. We are a member of the STS Association, actively participating in developing new and improved standards that address the needs of the modern cryptographic market. |
This business unit has been allocated to our South African processing, International transaction processing, and Financial inclusion and applied technologies reporting segments.
KSNET
Our KSNET business unit is based in Seoul, South Korea, and is a national payment solutions provider. KSNET has one of the broadest product offerings in the South Korean payment solutions market, a base of approximately 237,000 merchants and an extensive direct and indirect sales network. KSNETs core operations comprise three project offerings, namely card VAN, payment gateway, or PG, and banking VAN. KSNET is able to realize significant synergies across these core operations because it is the only payment solutions provider that offers all three of these offerings in South Korea. Over 90% of KSNETs revenue comes from the provision of payment processing services to merchants and card issuers through its card VAN.
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KSNETs core product offerings are described in more detail below:
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Card VAN KSNETs card VAN offering manages credit and other non-cash alternative payment mechanisms for retail transaction processing for a wide range of merchants and every credit card issuer in South Korea. Non-cash alternative payment mechanisms for which KSNET provides processing services include all credit and debit cards and e-currency (K-cash and TMoney). KSNET also records cash transactions for the South Korean National Tax Service in the form of cash receipts. |
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PG KSNET offers PG services to the rapidly growing number of merchants that are moving online in South Korea. PG provides these merchants with a host of alternative payment solutions including the ability to accept credit and debit cards, gift and other prepaid cards, and bank account transfers. PG also provides virtual account capabilities. PG offers us an attractive growth opportunity as e-commerce transactions represent a growing component of payments, driven by increased wire-line and wireless broadband penetration, merchants moving online, and the enhanced security of online transactions driving consumer acceptance. We believe that KSNET can become the leading provider in the PG industry by leveraging its existing merchant base and entering into new markets earlier than competitors. |
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Banking VAN KSNETs banking VAN operations currently include account transaction processing services, payment and collections to banks, corporate firms, governmental bodies, and educational institutions. We distinguish card VAN from banking VAN because in the South Korean VAN market, banking VAN is recognized as a distinct service from card VAN. We are the only card VAN provider that also provides banking VAN services. Because the banking VAN business industry is at a nascent stage, the market is relatively small. |
This business unit has been allocated to our International transaction processing reporting segment.
Masterpayment
Our Masterpayment business unit is based in Munich, Germany, and is a specialist payment services processor. Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 1,000 registered merchants.
In collaboration with Bank Frick & Co. AG, or Bank Frick, a Liechtenstein-based bank, Masterpayment provides its e-commerce merchants with working capital optimization by providing a flexible form of financing, which employs a trading transaction instead of traditional bank credit. Masterpayments Finetrading product enables the seamless financing of a merchants inventory orders, resulting in accelerated payment settlement and the elimination of the requirement for a merchant to maintain rolling reserves or cash advances.
This business unit has been allocated to our International transaction processing reporting segment.
Transact24
Our Transact24 business unit is based in Hong Kong, China, and is a payment services provider.
Transact24s primary business activities include:
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Chinese debit card acquiring Transact24 has processing relationships with China UnionPay, Alipay and five other Chinese gateways; | |
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Credit card acquiring Transact24 has acquiring relationships with banks and processing institutions in the United Kingdom, Germany, Australia and Mauritius and has Payment Intermediary Services Licenses in Mauritius and an Electronic Money Institution License in the United Kingdom. Transact24 also offers a white-labeled credit card acquiring gateway to entities who wish to outsource the technical integration and operations of their acquiring gateways; |
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Automated clearing house, or ACH processing Transact24 provides ACH processing for Tribal and State-licensed lenders in the U.S.; and |
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Prepaid card issuing and processing Transact24 issues U.S. dollar-denominated Visa prepaid cards and Hong Kong dollar-denominated China UnionPay prepaid cards. |
This business unit has been allocated to our International transaction processing reporting segment.
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Cash Paymaster Services
Our CPS business unit is based in Johannesburg, South Africa, and deploys our UEPS/EMVSocial Grant Distribution technology to distribute social welfare grants on a monthly basis to over ten million recipient cardholders in South Africa. These social welfare grants are distributed on behalf of the South African Social Security Agency, or SASSA. During our 2017, 2016 and 2015 fiscal years, we derived approximately 22%, 21%, and 24% of our revenues respectively, from CPS social welfare grant distribution business.
CPS provides a secure and affordable transacting channel between social welfare grant recipient cardholders, beneficiaries, SASSA and formal businesses. CPS enrolls social welfare grant recipient cardholders and, as appropriate, the respective beneficiaries by issuing the recipient cardholder with a UEPS/EMV smart card that digitally stores their biometric fingerprint templates on the card, enabling them to access their social welfare grants securely at any time or place and providing them with a fully-fledged bank account.
The smart card is issued to the recipient cardholder on site and utilizes optical fingerprint sensor technology to identify and verify a recipient cardholder. The recipient cardholder simply inserts a smart card into the POS device and is prompted to present his fingerprint. If the fingerprint matches the one stored on the smart card, the smart card is loaded with the value created for that particular smart card and the card holder has access to all the UEPS/EMV functionality, including cash withdrawals, retail purchases and, upon application, financial inclusion services.
Our UEPS/EMV Social Grant Distribution technology provides numerous benefits to government agencies, recipient cardholders and beneficiaries. The system offers government a reliable service at a reasonable price. For recipient cardholders and, as appropriate, the beneficiaries, our smart card offers financial inclusion, convenience, security, affordability, flexibility and accessibility. They can avoid long waiting lines at payment locations and do not have to get to payment locations on scheduled payment dates to receive cash. They do not lose money if they lose their smart cards, since a lost smart card is replaceable and the biometric fingerprint or voice identification technology helps prevent fraud. Their personal security risks are reduced since they do not have to safeguard their cash. Recipient cardholders have access to affordable financial services, can save money on their smart cards and can perform money transfers to friends and relatives living in other provinces. Finally, recipient cardholders pay no transaction fees when they use our CPS infrastructure to load their smart cards, perform balance inquiries, purchase goods or effect monthly debit orders. For us, the system allows us to reduce our operating costs by reducing the amount of cash we have to transport.
This business unit has been allocated to our South African transaction processing and Financial inclusion and applied technologies reporting segments.
EasyPay
Our EasyPay business unit operates the largest bank-independent financial switch in South Africa and is based in Cape Town, South Africa. EasyPay focuses on the provision of high-volume, secure and convenient payment, prepayment and value-added services to the South African market. EasyPays infrastructure connects into all major South African banks and switches both debit and credit card EFT transactions for some of South Africas leading retailers and petroleum companies. It is a South African Reserve Bank, or SARB, approved third-party payment processor. In addition to its core transaction processing and switching operations, EasyPay provides a complete end-to-end reconciliation and settlement service to its customers. This service includes dynamic reconciliation as well as easy-to-use report and screen-query tools for down-to-store-level, management and control purposes.
The EasyPay suite of services includes:
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EFT EasyPay switches credit, debit and fleet card transactions for leading South African retailers and petroleum companies. |
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EasyPay bill payment EasyPay offers consumers a point-of-sale bill payment service which is integrated into a large number of national retailers, the internet, self service kiosks and mobile handsets. EasyPay processes monthly account payment transactions for a number of bill issuers including major local authorities, telephone companies, utilities, medical service providers, traffic departments, mail order companies, banks and insurance companies. |
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EasyPay prepaid electricity EasyPay enables local utility companies such as Eskom Holdings Limited and a growing number of local authorities on a national basis to sell prepaid electricity to their customers. |
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Prepaid airtime EasyPay vends airtime at retail POS terminals for all the South African mobile telephone network operators. |
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Electronic gift voucher EasyPay supports the electronic generation, issuance and redemption of paper or card-based gift vouchers. |
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EasyPay licenses EasyPay enables the issuance of new South African Broadcasting Corporation, or SABC, television licenses and the capturing of existing license details within retail environments via a web-based user interface. |
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Third party switching and processing support EasyPay switches transactions from retail POS systems to the relevant back-end systems. |
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Hosting services EasyPays infrastructure supports the hosting of payment or back-up servers and applications on behalf of third parties, including utility companies. |
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EasyPay Kiosk We have developed a biometrically enabled self service kiosk that allows our customers to access all the value-added services provided by EasyPay and to create and load their EasyPay virtual wallets with value. |
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EasyPay Web and Mobile This service enables EasyPay customers to access all the value-added services provided by EasyPay, such as bill payments and the purchase of prepaid airtime and utilities through a secure website that may be accessed through personal computers or through mobile handsets. |
EasyPay provides 24x7 monitoring and support services, reconciliation, automated clearing bureau settlement, reporting, full disaster recovery and redundancy services.
This business unit has been allocated to our South African transaction processing reporting segment.
Financial Services
We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are able to provide our UEPS/EMV cardholders with competitive transacting accounts, microfinance, life insurance and money transfer products based on our understanding of their risk profiles, demographics and lifestyle requirements. Our financial services offerings are designed on the principles of simplicity and cost-efficiency as they bring financial inclusion to our millions of cardholders who were previously unable to access any formal financial services. Our latest product, EasyPay Everywhere, provides our target market with an affordable all-inclusive transactional bank account with unfettered access to financial services such as microloans, life insurance, remittances, value added services such as prepaid utilities and bill payments through their mobile phones and our national network of ATMs and POS devices.
Our largest financial services offering is the provision of short-term microloans to our South African UEPS/EMV cardholders, where we provide the loans using our surplus cash reserves and earn revenue from the service fees charged on these loans. We believe our loans are the most affordable form of credit available to our target market as, unlike our competitors, we do not charge interest, initiation fees or credit life insurance premiums on our loans. Our Smart Life business unit owns a life insurance license and offers our customer base affordable insurance products applicable to this market segment, focusing on group life and funeral insurance policies.
This business unit has been allocated to our Financial inclusion and applied technologies reporting segment.
Applied Technology
Our Applied Technology business unit is managed from Johannesburg, South Africa, and is responsible for the deployment of our South African ATM and POS network and the sale of biometric and POS solutions to various South African banks, retailers and financial services providers.
Our ATM network is fully EMV-compliant and integrated into the South African national payment system. We deploy our ATMs in areas where our UEPS/EMV cardholders have limited access to the national payment system, or where the cost of accessing the national payment system through other service providers is prohibitive for our cardholders.
This business unit has been allocated to our South African transaction processing and Financial inclusion and applied technologies reporting segments.
XeoHealth
Our XeoHealth business unit operates in the U.S. from Frederick, Maryland, and offers our XeoRules real time adjudication, or RTS, solutions for the end-to-end electronic processing of medical claims information in the United States. XeoHealth has won a number of projects in the United States either as the primary contractor for the provision of our RTS solution to customers, or as a sub-contractor to parties contracted to provide an adjudication solution.
This business unit has been allocated to our International transaction processing reporting segment.
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Corporate
The Corporate unit provides global support services to our business units, joint ventures and investments for the following activities:
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Group executive Responsible for the overall company management, defining our global strategy, investor relations and corporate finance activities. |
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Finance and administration Provides company-wide support in the areas of accounting, treasury, human resources, administration, legal, secretarial, taxation, compliance and internal audit. |
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Group information technology Defines our overall IT strategy and the overall systems architecture and is responsible for the identification and management of the groups research and development activities. |
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Joint ventures and investments unit Provides governance support to our joint ventures and assists with the evaluation of new investment opportunities. |
Competition
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment systems and the providers of financial services, there are a number of other products that use smart card technology in connection with a funds transfer system. While it is impossible for us to estimate the total number of competitors in the global payments marketplace, we believe that the most competitive product in this marketplace is EMV, a system that is promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. The competitive advantage of our UEPS offering is that our technology can operate real-time, but in an off-line environment, using biometric identification instead of the standard PIN methodology employed by our competitors. We have enhanced our competitive advantage through the development of our latest version of the UEPS technology that has been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant recipient cardholders. We estimate that we process less than 1% of all global payment transactions in the international marketplace.
In South Africa, and specifically in the payment of salaries and wages and our affordable EasyPay Everywhere transactional account and our financial services offering, our competitors include the local banks, insurance companies, micro-lenders and other transaction processors. The South African banks and the South African Post Office, or SAPO, also offer low cost bank accounts that enable account holders to receive their salaries, wages or social grants through the formal banking payment networks.
The payment of social welfare grants in South Africa has historically been determined through a highly competitive tender process managed by SASSA. The participants in SASSAs tender processes have historically included the local banks, other payment processors, SAPO and mobile operators. Our current SASSA contract expires at the end of March 2018 and SASSA has indicated that it intends to internalize all material aspects related to grant payment and administration in collaboration with SAPO.
EasyPays competitors include BankservAfrica, UCS, eCentric and Transaction Junction. BankservAfrica is the largest transaction processor in South Africa which processes all transactions on behalf of the South African banks and processes more than 2,5 billion transactions valued at trillions of ZAR per annum.
In the South African ATM network market, we compete against the South African banks, ATM Solutions and Spark ATM Systems, who collectively have a market share in excess of 90%.
We have identified 13 major card VAN companies in South Korea, of which KSNET is one of the three largest. The other two large VAN companies are NICE Information & Telecommunication Inc. and Korea Information & Communications Company, Inc. Entities operating in the VAN industry in South Korea compete on pricing and customer service.
In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities in the mobile payments industry. While the industry is still rapidly evolving, a number of entities are establishing their presence in this space. Specifically identified entities include traditional payment networks such as Visa, MasterCard and American Express; commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google, Samsung and PayPal; mobile operators such as AT&T, Verizon, Vodafone, MTN and Bharti Airtel; as well as companies specifically focused on mobile payments such as M-Pesa and Square.
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Research and Development
During fiscal 2017, 2016 and 2015, we incurred research and development expenditures of $2.0 million, $2.3 million and $2.4 million, respectively. These expenditures consist primarily of the salaries of our software engineers and developers. Our research and development activities relate primarily to the continual revision and improvement of our core UEPS and UEPS/EMV software and its functionality as well as the design and development of our MVC concept and mobile payment applications. For example, we continually improve our security protocols and algorithms as well as develop new UEPS features that we believe will enhance the attractiveness of our product and service offerings. Our research and development efforts also focus on taking advantage of improvements in hardware platforms that are not proprietary to us but form part of our system.
Intellectual Property
Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a number of trademarks in various countries.
Financial Information about Geographical Areas and Operating Segments
Note 23 to our consolidated financial statements included in this annual report contains detailed financial information about our operating segments for fiscal 2017, 2016 and 2015. Revenues based on the geographic location from which the sale originated and geographic location where long-lived assets are held for the years ended June 30, are presented in the table below:
Revenue | Long-lived assets | |||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
$000 | $000 | $000 | $000 | $000 | $000 | |||||||||||||
South Africa | 434,124 | 422,022 | 461,425 | 74,370 | 69,213 | 72,467 | ||||||||||||
South Korea | 153,403 | 158,609 | 160,853 | 192,473 | 221,459 | 230,109 | ||||||||||||
Rest of world | 22,539 | 10,118 | 3,701 | 77,723 | 49,105 | 20,058 | ||||||||||||
Total | 610,066 | 590,749 | 625,979 | 344,566 | 339,777 | 322,634 |
Employees
Our number of employees allocated on a segmental basis as of the years ended June 30, are presented in the table below:
Number of employees | |||||||||
2017 | 2016 | 2015 | |||||||
Management | 236 | 241 | 217 | ||||||
South African transaction processing | 2,487 | 2,571 | 2,579 | ||||||
International transaction processing | 354 | 310 | 242 | ||||||
Financial inclusion and applied technologies (1) | 2,281 | 2,576 | 1,726 | ||||||
Total | 5,358 | 5,701 | 4,764 |
(1) Financial inclusion and applied technologies includes employees allocated to corporate/ eliminations activities.
On a functional basis, six of our employees were part of executive management, 156 were employed in sales and marketing, 257 were employed in finance and administration, 312 were employed in information technology and 4,627 were employed in operations.
As of June 30, 2017, approximately 56 of the 2,487 and three of the 2,281 employees we have in South Africa who were performing transaction-based and financial inclusion activities, respectively, were members of the South African Commercial Catering and Allied Workers Union and approximately 188 of the 247 employees we have in South Korea who perform international transaction-based activities were members of the KSNET Union. We believe that we have a good relationship with our employees and these unions.
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Corporate history
Net1 was incorporated in Florida in May 1997. In June 2004, Net1 acquired Net1 Applied Technology Holdings Limited, or Aplitec, a public company listed on the Johannesburg Stock Exchange, or JSE. In 2005, Net1 completed an initial public offering and listed on the Nasdaq Stock Market. In October 2008, Net1 listed on the JSE in a secondary listing, which enabled the former Aplitec shareholders (as well as South African residents generally) to hold Net1 common stock directly.
Available information
We maintain a website at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the SEC filings portion of our website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information contained on, or accessible through, our website is not incorporated into this Annual Report on Form 10-K.
Executive Officers of the Registrant
The table below presents our executive officers, their ages and their titles:
Name | Age | Title |
Herman G. Kotzé | 47 | Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director |
Philip S. Meyer | 60 | Managing Director of Transact24 Limited |
Phil-Hyun Oh | 58 | Chief Executive Officer and President, KSNET, Inc. |
Nanda Pillay | 46 | Managing Director: Southern Africa |
Nitin Soma | 50 | Chief Technology Officer |
Herman Kotzé has been our Chief Executive Officer since May 2017 and our Chief Financial Officer, Secretary and Treasurer since June 2004. From January 2000 until June 2004, he served on the board of Aplitec as Group Financial Director. Mr. Kotzé joined Aplitec in November 1998 as a strategic financial analyst. Prior to joining Aplitec, Mr. Kotzé was a business analyst at the Industrial Development Corporation of South Africa. Mr. Kotzé has a bachelor of commerce honors degree, a post graduate diploma in treasury management, a higher diploma in taxation, completed his articles at KPMG, and is a member of the South African Institute of Chartered Accountants.
Philip Meyer has been the Managing Director of Transact24 Limited since he founded the company in 2006. Mr. Meyer has worked in the payments industry for over 20 years. Prior to incorporating Transact24, he was employed by Naspers, a global media group, as its Chief Executive: Information Technology and New Media and was responsible for all existing and new technology and media for Naspers. Mr. Meyer is a qualified engineer with a masters in engineering (electronic) and has a postgraduate diploma in strategic management. Mr. Meyer is registered with the Engineering Counsel of South Africa, is a member of the South Africa Institute of Electrical Engineers and is also a member of the Digital, Information & Telecommunications Committee and Asia & Africa Committee, Hong Kong General Chamber of Commerce.
Phil-Hyun Oh has served as Chief Executive Officer and President of KSNET since 2007. He is the Chairman of the VAN Association in South Korea. Prior to that, he was the Managing Partner at Dasan Accounting Firm and was the Head of the Investment Banking Division at Daewoo Securities. Mr. Oh is responsible for the day to day operations of KSNET and as its Chief Executive Officer and President is instrumental in setting and implementing its strategy and objectives.
Nanda Pillay joined us in May 2000 and is responsible for our Southern African operations, including CPS, Financial Services, EasyPay, Net1 Solutions and SmartSwitch Botswana.
Nitin Soma has served as our Chief Technology Officer since June 2004. Mr. Soma joined Aplitec in 1997. He specializes in transaction switching and interbank settlements and designed the Stratus back-end system for Aplitec. Mr. Soma has over 20 years of experience in the development and design of smart card payment systems. Mr. Soma has a bachelor of science (computer science and applied mathematics) degree.
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ITEM 1A. | RISK FACTORS |
OUR OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON STOCK.
Risks Relating to Our Business
Our SASSA contract has been extended and now expires at the end of March 2018 following an order issued by the Constitutional Court on March 17, 2017. It is unclear to us whether SASSA will issue a new grants payment tender or whether it intends to take over the distribution of social grants when our contract expires. We derive a significant portion of our revenue from our SASSA contract, which we will lose if and when we no longer provide a service to SASSA.
We derive a significant portion of our revenues from our contract with SASSA for the payment of social grants. Our SASSA contract, which we were awarded through a competitive tender process in 2012, was scheduled to expire in March 2017. However, in March 2017, the Constitutional Court of South Africa, Constitutional Court, which retained oversight of SASSA as a result of litigation regarding the original award of the contract to us on 2012, held that SASSA and CPS have a constitutional obligation to continue to pay social welfare grants and ordered that the contract be extended for another year. Refer to Item 3Legal Proceedings for a summary of the Constitutional Courts order.
We will lose the SASSA revenues after March 2018 if we then no longer have a contract with SASSA, which would occur if SASSA follows a tender process and awards the tender to a new service provider or providers or performs the social grants distribution service itself. Unless we are able to replace most or all of these revenues from other sources, our results of operations, financial position, cash flows and future growth are likely to suffer materially.
It is possible that SASSA might request us to enter a transition agreement in order to phase out our services. The Constitutional Court reaffirmed in its March 2017 ruling that CPS is deemed to be an organ of state for the purposes of the contract between SASSA and CPS, and that CPS has constitutional obligations that go beyond its contractual obligations. It is not clear what these obligations may entail in respect of the current and any potential future government contract in South Africa. We cannot predict what the financial or other implications may be if we are required to provide our services without a valid contract, or during any transitional period required for the orderly transfer of our services to SASSA or to a new contractor.
Our South African business practices have come under intense scrutiny in the South African media, especially during the last several months. We have attempted to publicly refute what we believe to be misleading or factually incorrect statements that have damaged our reputation. However, our ability to operate effectively and efficiently in South Africa in the future will be adversely impacted if we are unable to communicate persuasively that our business practices comply with South African law and are fair to the customers who purchase our financial services products.
Our contract with SASSA was expected to expire on March 31, 2017, and by the end of February 2017, it became apparent that SASSA did not intend to bring the social welfare payment service in-house after the contract expiration. The risk of there being no payment service, or a limited service, to social welfare grant recipients in April 2017 and beyond, resulted in a public furor in South Africa in March 2017, despite SASSAs continued assurance that grants would be paid on time in April 2017. The South African public, media, non-governmental organizations and political parties were particularly angered by SASSAs failure to have a plan to perform the service itself and utilized a number of platforms, including social media, to express their dissatisfaction with the state of affairs. They specifically accused us of bearing responsibility for SASSAs inability to bring the payment service in-house. In addition, we were publicly accused of illegally providing our services and defrauding social welfare grant recipients. We have publicly denied these accusations and believe they have no merit.
Our reputation in South Africa has been tarnished as a result of these accusations. We have attempted to refute the accusations made against us and have appointed a public relations firm to assist us in communicating effectively to the public and our stakeholders that our business practices comply with South African law and are fair to the social welfare grant recipients who purchase the financial services products that we offer. However, it is difficult to quantify to what extent we have been successful in effectively repudiating these unsubstantiated allegations against us. If we are unable to communicate persuasively that our business practices comply with South African law and are fair to the customers who purchase our financial services products, our ability to operate effectively and efficiently in South Africa in the future will be adversely impacted, and our results of operations, financial position and cash flows would be adversely affected.
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SASSA continues to challenge our ability to conduct certain aspects of our financial services business in a commercial manner through its interpretation of recently adopted regulations under the Social Assistance Act. We are in litigation with SASSA over its interpretation of these regulations. If SASSA were to prevail in this legal proceeding, our business will suffer.
As described under Item 3Legal Proceedings Litigation Regarding Legality of Debit Orders under Social Assistance Act Regulations, the High Court of the Republic of South Africa Gauteng Division, Pretoria, or Pretoria High Court, has issued the declaratory order sought by us that the Social Assistance Act and Regulations do not restrict social grant recipients in the operation of their banks accounts. SASSA continues to challenge our ability to operate certain aspects of our financial services business in a commercial manner in the South African courts. The Black Sash has also served applications petitioning the South African Supreme Court of Appeal, or the Supreme Court, to grant them leave to appeal the Pretoria High Court order through either the Supreme Court or to a full bench of the Pretoria High Court.
If SASSA or the Black Sash were to prevail with their legal actions, our ability to operate our business, specifically our micro-lending and insurance activities in a commercially viable manner would be impaired, which would likely have a material adverse effect on our business and might harm our reputation. Regardless of the outcome, management will be required to devote further time and resources to these legal proceedings, which may impact their ability to focus their attention on our business.
We are, and in the future may be, subject to litigation in which private parties may seek to recover, on behalf of SASSA, amounts paid to us under our SASSA contract. If such litigation were to be successful and require us to repay substantial monies to SASSA, such repayment would adversely affect our results of operations, financial position and cash flows.
In April 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the High Court of South Africa, seeking an order from the Court to review and set aside the decision of SASSAs Chief Executive Officer to approve a payment to us of approximately ZAR 317 million including VAT, or approximately ZAR 277 million excluding VAT. Corruption Watch claims that there was no lawful basis for the decision to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African law. We are named as a respondent in this proceeding.
The payments being challenged by Corruption Watch represent amounts paid to us by SASSA for the costs we incurred in performing additional beneficiary registrations and gathering information beyond those that we were contractually required to perform under our SASSA contract. SASSA requested us to biometrically register all social grant beneficiaries (including all child beneficiaries), in addition to the grant recipients who were issued with the SASSA-branded UEPS/EMV smart cards. As a result, we performed approximately 11 million additional registrations that did not form part of its monthly service fee. These amounts were paid in full settlement of the claim we submitted to SASSA for these additional costs. We believe that Corruption Watchs claim is without merit and we are defending it vigorously. However, we cannot predict how the Court will rule on the matter.
In addition, the April 2014 Constitutional Court ruling ordering SASSA to re-run the tender process required us to file with the Court, after completion of our SASSA contract in March 2017, an audited statement of our expenses, income and net profit under the contract. We filed the required information with the Constitutional Court on May 30, 2017. The March 2017 Constitutional Court order contains a similar requirement that we file an audited statement of our expenses, income and net profit under our amended contract that expires in March 2018. It is conceivable that one or more third parties may in the future institute litigation challenging our right to retain a portion of the amounts we will have received from SASSA under our contract. We cannot predict whether any such litigation will be instituted, or if it is, whether it would be successful.
Any successful challenge to our right to receive and retain payments from SASSA that requires substantial repayments would adversely affect our results of operations, financial position and cash flows.
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We have disclosed competitively sensitive information as a result of the AllPay litigation, which could adversely affect our competitive position in the future.
In connection with the litigation challenging the award of the SASSA tender to us in fiscal 2012 through fiscal 2015, we included our entire 2011 SASSA tender submission in the court record, which court record is in the public domain. Our tender submission contains competitively sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information which could adversely affect our competitive position in any future similar tender submissions to the extent that such information continues to remain competitively sensitive.
In order to meet our obligations under our current SASSA contract, we are required to deposit government funds with financial institutions in South Africa before commencing the payment cycle and are exposed to counterparty risk.
In order to meet our obligations under our current SASSA contract, we are required to deposit government funds, which will ultimately be used to pay social welfare grants, with financial institutions in South Africa before commencing the payment cycle. If these financial institutions are unable to meet their commitments to us, in a timely manner or at all, we would be unable to discharge our obligations under our SASSA contract and could be subject to financial losses, penalties, loss of reputation and potentially, the cancellation of our contract. As we are unable to influence these financial institutions operations, including their internal information technology structures, capital structures, risk management, business continuity and disaster recovery programs, or their regulatory compliance systems, we are exposed to counterparty risk.
We may undertake acquisitions or make strategic investments that could increase our costs or liabilities or be disruptive to our business.
Acquisitions and strategic investments are an integral part of our long-term growth strategy as we seek to grow our business internationally and to deploy our technologies in new markets both inside and outside South Africa. However, we may not be able to locate suitable acquisition or investment candidates at prices that we consider appropriate. If we do identify an appropriate acquisition or investment candidate, we may not be able to successfully negotiate the terms of the transaction, finance it or, if the transaction occurs, integrate the new business into our existing business. These transactions may require debt financing or additional equity financing, resulting in additional leverage or dilution of ownership. For instance, in July 2017, we invested in Cell C utilizing a combination of existing cash reserves and external debt from South African banks refer also to Item 7Managements Discussion and Analysis of Financial Condition and Results of OperationsDevelopments During Fiscal 2017Strategic investments.
Acquisitions of businesses or other material operations and the integration of these acquisitions or their businesses will require significant attention from our senior management which may divert their attention from our day to day business. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting our acquisition candidates.
In addition, we may need to record write-downs from future impairments of goodwill or other intangible assets, which could reduce our future reported earnings. Finally, acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition.
We may not achieve the expected benefits from our recent Cell C and DNI investments.
We have recently invested more than $220 million in the aggregate to acquire a 15% interest in Cell C Proprietary Limited and a 45% interest in DNI-4PL Contracts Proprietary Limited, or DNI. We believe that there are potential synergies that we can derive from these transactions, including the ability to integrate our service offerings to certain of our customers with those of Cell C and DNI, which we would then expect to help expand the businesses of Cell C and DNI as well. However, we may not realize the benefits we expect to achieve from these investments. First, attempting to integrate these service offerings may be disruptive to us and we may not be able to integrate these offerings successfully. Even if we are able to achieve this integration, our customers may not use these services to the extent that we hope they will. Any such failure could adversely impact our own business as well as Cell Cs and DNIs, which could then reduce the value of our investments. Additionally, attempting to integrate Cell Cs and DNIs offerings with our own may adversely impact our other business and operational relationships. Our inability to achieve the expected synergies from the Cell C and DNI transactions may have a material adverse effect on our business, results of operations or financial condition. For example, our revenues and operating income may be adversely affected and we could be required to impair all, or a part of, our investment.
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We have a significant amount of indebtedness that requires us to comply with restrictive and financial covenants. If we are unable to comply with these covenants, we could default on this debt, which would have a material adverse effect on our business and financial condition.
We financed our recent investment in Cell C through South African bank borrowings of ZAR 1.25 billion ($95.7 million, translated at exchange rates applicable as of June 30, 2017). The loans are secured by intercompany cross-guarantees and a pledge by Net1 Applied Technologies South Africa Proprietary Limited, or Net1 SA, of its entire equity interests in Cell C and DNI. The terms of the lending arrangement contain customary covenants that require Net1 SA to maintain a specified total net leverage ratio and restrict the ability of Net1 SA, and certain of its subsidiaries to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels, engage in certain business combinations and engage in other corporate activities.
In addition, as of June 30, 2017, we had approximately KRW 18.6 billion ($16.2 million, translated at exchange rates applicable as of June 30, 2017) of outstanding indebtedness, which we incurred to finance our acquisition of KSNET in October 2010. These loans are secured by a pledge by Net1 Korea of its entire equity interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest in Net1 Korea. The terms of the loan facility require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict Net1 Koreas ability to make certain distributions with respect to its capital stock, prepay other debt, encumber its assets, incur additional indebtedness, or engage in certain business combinations.
Although these covenants only apply to certain of our South African subsidiaries and our South Korean subsidiaries, respectively, these security arrangements and covenants may reduce our operating flexibility or our ability to engage in other transactions that may be beneficial to us. If we are unable to comply with the covenants in South Africa or South Korea, we could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain waivers of default or to refinance the debt with another lender and as a result, our business and financial condition would suffer.
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked market segment, which could limit growth in our transaction-based activities segment.
Certain South African banks have also developed their own low-cost banking products targeted at the unbanked and under-banked market segment. According to the 2016 FinScope survey, which is an annual survey conducted by the FinMark Trust, a non-profit independent trust, 77% of South Africans are banked (58% if SASSA account holders are excluded). As the competition to bank the unbanked in South Africa intensifies, we may not be successful in marketing our low-cost EasyPay Everywhere product to our target population. Moreover, as our product offerings increase, gain market acceptance and pose a competitive threat in South Africa, especially our UEPS/EMV product with biometric verification and our financial services offerings, the banks and SAPO may seek governmental or other regulatory intervention if they view us as disrupting their transactional or other businesses.
Our microlending loan book exposes us to credit risk and our allowance for doubtful finance loans receivable may not be sufficient to absorb future write-offs.
All of these microfinance loans made are for a period of six months or less. We have created an allowance for doubtful finance loans receivable related to this book. Management has considered factors including the period of the finance loan outstanding, creditworthiness of the customers and the past payment history of the borrower when creating the allowance. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. However, additional allowances may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these finance loan receivables, including on-going evaluation of the creditworthiness of each customer.
Our Mastertrading working capital financing and supply chain solutions receivables expose us to credit risk and our allowance for doubtful working capital finance loans receivable may not be sufficient to absorb future write-offs.
We have created an allowance for doubtful working capital finance receivables related to our Mastertrading business. We have considered factors including the period of the working capital receivable outstanding, creditworthiness of the customers and the past payment history of the borrower when creating the allowance. A significant amount of judgment is required to assess the ultimate recoverability of these working capital finance receivables because this is a new offering and we continue to refine and improve our processes, including the maximum amount of exposure per customer that we are willing to accept and the on-going evaluation of the creditworthiness of each customer.
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A determination that requires a change in our allowance for doubtful working capital finance receivables, or a failure by one or more of our customers to pay a significant portion of outstanding working capital finance receivables, could have a negative impact on our business, operating results, cash flows and financial condition.
We have obtained short-term financing from Bank Frick to fund our Mastertrading working capital and supply chain solutions offering in Europe. We may need to utilize existing cash reserves to settle these short-term facilities if our working capital customers do not repay us under the terms of our agreements with them.
As of June 30, 2017, we had utilized CHF 15.9 million of our CHF 20 million short-term facility from Bank Frick to fund the growth of the majority of the European working capital receivables. The facility does not have a fixed term, however it may be terminated by either party with six months written notice at the end of a calendar month. Certain of our working capital finance agreements are for a period of up to nine months and if Bank Frick were to terminate its lending facility with six months notice, we may be required to utilize our existing cash reserves to settle a portion of the Bank Frick facility which could have an adverse impact on our business, operating results, cash flows and financial condition. We have also provided Bank Frick a corporate guarantee as security for this CHF 20 million facility as well as a EUR 40 million facility obtained from Bank Frick.
We may face competition from other companies that offer smart card technology, other innovative payment technologies and payment processing, which could result in loss of our existing business and adversely impact our ability to successfully market additional products and services.
Our primary competitors in the payment processing market include other independent processors, as well as financial institutions, independent sales organizations, and, potentially card networks. Many of our competitors are companies who are larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer better pricing terms or incentives to customers, which could result in a loss of our potential or current customers or could force us to lower our prices as well. Either of these actions could have a significant effect on our revenues and earnings.
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment systems and the providers of financial services and low cost bank accounts, there are a number of other products that use smart card technology in connection with a funds transfer system. During the past several years, smart card technology has become increasingly prevalent. We believe that the most competitive product in this marketplace is EMV, a system that is promoted by most of the major card companies such as Visa, MasterCard, JCB and American Express. Also, governments and financial institutions are, to an increasing extent, implementing general-purpose reloadable prepaid cards as a low-cost alternative to provide financial services to the unbanked population. Moreover, as the acceptance of using a mobile phone to facilitate financial services has increased exponentially, other companies have introduced such services to the marketplace successfully and customers may prefer those services to ours, based on technology, price or other factors.
A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could harm our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A recessionary economic environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce the level of transactions we process and the take-up of financial services we offer, which would, in turn, negatively impact our financial results. If financial institutions and retailers experience decreased demand for their products and services our hardware, software and related technology sales will reduce, resulting in lower revenue.
The loss of the services of certain of our executive officers would adversely affect our business.
Our future financial and operational performance depends, in large part, on the continued contributions of our senior management, in particular, Mr. Herman Kotzé, our Chief Executive and Chief Financial Officer. Many of our key responsibilities in South Africa are currently performed by Mr. Kotzé, as well as by Messrs. Nanda Pillay, our Managing Director: Southern Africa and Nitin Soma, our Senior Vice President of Information Technology. We are actively seeking to appoint a new Chief Financial Officer, and until this executive has been appointed there is a risk that Mr. Kotzé may become overburdened with his multiple executive responsibilities. The loss of the services of any of these executives would disrupt our development efforts or business relationships and our ability to continue to innovate and to meet customers needs, which could have a material adverse effect on our business and financial performance.
In addition, the success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh and the other senior members of the KSNET management team. Mr. Ohs current contract expired in June 2017, and has not been renewed and therefore he may terminate his employment at any time. We do not maintain any key person life insurance policies.
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We face a highly competitive employment market and may not be successful in attracting and retaining a sufficient number of skilled employees, particularly in the technical and sales areas and senior management.
Our future success depends on our ability to continue to develop new products and to market these products to our target users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require is high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors in South Africa have led, and continue to lead, to numerous qualified individuals leaving the country, thus depleting the availability of qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain highly qualified managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate capabilities and experience and effectively integrate these people into our business, it could negatively affect our product development and marketing activities.
System failures, including breaches in the security of our system, could harm our business.
We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers.
Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands. These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new applications and services. Finally, because our customers may use our products for critical transactions, any system failures could result in damage to our customers businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim could be time consuming and costly for us to address.
Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud in electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any significant security breaches affecting our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
The period between our initial contact with a potential customer and the sale of our UEPS products or services to that customer tends to be long and may be subject to delays which may have an impact on our revenues.
The period between our initial contact with a potential customer and the purchase of our UEPS products and services is often long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently accompany significant capital expenditures. A lengthy sales cycle may have an impact on the timing of our revenues, which may cause our quarterly operating results to fall below investor expectations. A customers decision to purchase our products and services is often discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles. To sell our products and services successfully we generally must educate our potential customers regarding the uses and benefits of our products and services, which can require the expenditure of significant time and resources; however, there can be no assurance that this significant expenditure of time and resources will result in actual sales of our products and services.
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Our proprietary rights may not adequately protect our technologies.
Our success depends in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending this intellectual property against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
We cannot predict the breadth of claims that may be allowed or enforced in our patents. For example, we might not have been the first to make the inventions covered by each of our patents and patent applications or to file patent applications and it is possible that none of our pending patent applications will result in issued patents. It is possible that others may independently develop similar or alternative technologies. Also, our issued patents may not provide a basis for commercially viable products, or may not provide us with any competitive advantages or may be challenged, invalidated or circumvented by third parties.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We have confidentiality agreements with employees, and consultants to protect our trade secrets and proprietary know-how. These agreements may be breached and or may not have adequate remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants or others may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed. If we are not able to defend the patent or trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing competing technologies.
We also rely on trademarks to establish a market identity for some of our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and might have to defend our registered trademark and pending trademark applications from challenge by third parties.
Defending our intellectual property rights or defending ourselves in infringement suits that may be brought against us is expensive and time-consuming and may not be successful.
Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result in substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights. Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs and devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer costly judgments and injunctions that could materially adversely affect our business, results of operations or financial condition.
Our strategy of partnering with companies outside South Africa may not be successful.
In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering arrangements with companies outside South Africa, such as the one we have co-established in Namibia and our non-controlling investments in Nigeria and with MobiKwik in India. The success of these endeavors is, however, subject to a number of factors over which we have little or no control, such as finding suitable partners with the appropriate financial, business and technical backing and continued governmental support for planned implementations. In some countries, finding suitable partners and obtaining the appropriate support from the government involved may take a number of years before we can commence implementation. Some of these partnering arrangements may take the form of joint ventures in which we receive a non-controlling interest. Non-controlling ownership carries with it numerous risks, including dependence on partners to provide knowledge of local market conditions and to facilitate the acquisition of any necessary licenses and permits, as well as the inability to control the joint venture vehicle and to direct its policies and strategies.
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Such a lack of control could result in the loss of all or part of our investment in such entities. In addition, our foreign partners may have different business methods and customs which may be unfamiliar to us and with which we disagree. Our joint venture partners may not be able to implement our business model in new areas as efficiently and quickly as we have been able to do in South Africa. Furthermore, limitations imposed on our South African subsidiaries by South African exchange control regulations, as well as limitations imposed on us by the Investment Company Act of 1940, may limit our ability to establish partnerships or entities in which we do not obtain a controlling interest.
We may have difficulty managing our growth.
We continue to experience growth, both in the scope of our operations and size of our organization. This growth is placing significant demands on our management. Continued growth would increase the challenges involved in implementing appropriate operational and financial systems, expanding our technical and sales and marketing infrastructure and capabilities, providing adequate training and supervision to maintain high quality standards, and preserving our culture and values. International growth, in particular, means that we must become familiar and comply with complex laws and regulations in other countries, especially laws relating to taxation.
Additionally, continued growth will place significant additional demands on our management and our financial and operational resources, and will require that we continue to develop and improve our operational, financial and other internal controls. If we cannot scale and manage our business appropriately, we will not experience our projected growth and our financial results may suffer.
We pre-fund certain merchant and customer payments in South Africa, South Korea and Botswana and a significant level of payment defaults by these merchants or customers would adversely affect us.
We pre-fund social welfare grants through the merchants who participate in our merchant acquiring system in the South African provinces where we operate. We also pre-fund the settlement of funds to certain customers in South Korea and pre-fund our customer that utilizes our UEPS system to pay old age grants in Botswana. These pre-funding obligations expose us to the risk of default by these merchants and customers. Although we have not experienced any material defaults by merchants or customers in the return of pre-funded amounts to us, we cannot guarantee that material defaults will not occur in the future. A material level of merchant or customer defaults could have a material adverse effect on us, our financial position and results of operations.
We may incur material losses in connection with our distribution of cash to recipient cardholders of social welfare grants in South Africa.
Many social welfare recipient cardholders use our services to access cash using their smart cards. We use armored vehicles and our own fixed ATM infrastructure to deliver large amounts of cash to rural areas across South Africa to enable these welfare recipient cardholders to receive this cash. In some cases, we also store the cash that will be delivered by the armored vehicles in depots overnight or over the weekend to facilitate delivery to these rural areas. We cannot insure against certain risks of loss or theft of cash from our delivery vehicles, ATMs or depots and we will therefore bear the full cost of certain uninsured losses or theft in connection with the cash handling process, and such losses could materially and adversely affect our financial condition, cash flows and results of operations. We have not incurred any material losses resulting from cash distribution in recent years, but there is no assurance that we will not incur material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
We obtain our smart cards, ATMs, POS devices and the other hardware we use in our business from a limited number of suppliers, and do not manufacture this equipment ourselves. We generally do not have long-term agreements with our manufacturers or component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of parts or products when we need them, or if they increase their prices, we may not be able to find alternative sources in a timely manner and could be faced with a critical shortage. This could harm our ability to implement new systems and cause our revenues to decline. Even if we are able to secure alternative sources in a timely manner, our costs could increase. A supply interruption or an increase in demand beyond current suppliers capabilities could harm our ability to distribute our equipment and thus, to acquire a new source of customers who use our UEPS technology. Any interruption in the supply of the hardware necessary to operate our technology, or our inability to obtain substitute equipment at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
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Shipments of our electronic payment systems may be delayed by factors outside of our control, which can harm our reputation and our relationships with our customers.
The shipment of payment systems requires us or our manufacturers, distributors or other agents to obtain customs or other government certifications and approvals and, on occasion, to submit to physical inspection of our systems in transit. Failure to satisfy these requirements, and the very process of trying to satisfy them, can lead to lengthy delays in the delivery of our solutions to our direct or indirect customers. Delays and unreliable delivery by us may harm our reputation and our relationships with our customers.
Our Smart Life business exposes us to risks typically experienced by life assurance companies.
Smart Life is a life insurance company and exposes us to risks typically experienced by life assurance companies. Some of these risks include the extent to which we are able to continue to reinsure our risks at acceptable costs, reinsurer counterparty risk, maintaining regulatory capital adequacy, solvency and liquidity requirements, our ability to price our insurance products appropriately, the risk that actual claims experience may exceed our estimates, the ability to recover policy premiums from our customers and the competitiveness of the South African insurance market. If we are unable to maintain our desired level of reinsurance at prices that we consider acceptable, we would have to either accept an increase in our exposure risk or reduce our insurance writings. If our reinsurers are unable to meet their commitments to us in a timely manner, or at all, we may be unable to discharge our obligations under our insurance contracts. As such, we are exposed to counterparty, including credit, risk of these reinsurers. Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business. Using the wrong assumptions to price our insurance products could materially and adversely affect our financial position, results of operations and cash flows.
If our actual claims experience is higher than our estimates, our financial position, results of operations and cash flows could be adversely affected. Finally, the South African insurance industry is highly competitive. Many of our competitors are well-established, represented nationally and market similar products and we may not be able to effectively penetrate the South African insurance market.
Risks Relating to Operating in South Africa and Other Foreign Markets
If we do not achieve applicable broad-based black economic empowerment objectives in our South African businesses, we risk losing our government and private contracts. In addition, it is possible that we may be required to increase black shareholding of our company in a manner that could dilute your ownership.
The legislative framework for the promotion of broad-based black economic empowerment, or BEE, in South Africa has been established through the Broad-Based Black Economic Empowerment Act, No. 53 of 2003, as amended in 2013, and amended BEE codes of good practice, or BEE Codes, the sector-specific codes of good practice, or Sector Codes, and sector-specific transformation charters, or Transformation Charters, published pursuant thereto. Sector Codes are sector-specific codes of good practice that are aligned with the BEE Codes and share the same status as the BEE Codes which were initially published by the South African government in February 2007. Sector Codes are fully binding between and among businesses operating in an industry. Achievement of BEE objectives is measured by a scorecard which establishes a weighting for the various components of BEE. Scorecards are independently reviewed by accredited BEE verification agencies which issue a certificate that presents an entitys BEE Recognition Level, or BEE status.
The BEE Codes were reviewed by the South African Department of Trade and Industry, or dti, and a new set of BEE Codes were promulgated in October 2013. The new BEE Codes came into effect on May 1, 2015, and have different requirements and emphasis to the old codes of good practice. Furthermore, on May 15, 2015, the dti issued a Notice of Clarification which further extended the transitional period for the alignment of Sector Codes with the new BEE Codes. The dti stated in its notice that it would consider repealing any Sector Codes that are not aligned to a date yet to be announced.
Certain of our South African businesses are subject to either the Information and Communications Technology Sector Code, or ICT Sector Code, or the Financial Services Sector Code. The ICT Sector Code has been amended and aligned with the new BEE Codes, and a new ICT Sector Code was promulgated on November 7, 2016. In November 2012, the South African government promulgated the Financial Services Code. The Financial Services Code is in the process of being amended to align it with the BEE Codes and the amendments have not yet been finalized.
Some of our businesses will have to adhere to these amended Sector Codes, and in the case of the Financial Sector Codes, only once the amendment is gazetted. Compliance with the requirements of the amended ICT Sector Codes and the amended Financial Sector Codes, may negatively affect our future BEE status.
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We have taken a number of actions as a company to increase empowerment of black South Africans. However, it is possible that these actions may not be sufficient to enable us to achieve applicable BEE objectives. In that event, in order to avoid risking the loss of our government and private contracts, we may have to seek to comply through other means, including by selling or placing additional shares of Net1 or of our South African subsidiaries to black South Africans. Such sales of shares could have a dilutive impact of your ownership interest, which could cause the market price of our stock to decline.
We expect that our BEE status will be important for us to remain competitive in the South African marketplace and we continually seek ways to improve our BEE status, especially the equity component of our BEE status. For instance, in April 2014, we implemented a BEE transaction pursuant to which we issued 4.4 million shares of our common stock to our BEE partners for ZAR 60.00 per share, which represented a 25% discount to the market price of our shares at the time that we negotiated the transaction. We entered into this transaction to improve the equity component of our BEE status. We provided funding to the BEE partners in order for them to buy these shares from us. In June 2014, and in accordance with the terms of agreements, we repurchased approximately 2.4 million of these shares of our common stock in order for the BEE partners to repay the loans we provided to them. Furthermore, in August 2014, we entered into a Subscription and Sale of Shares Agreement with Business Venture Investments No 1567 Proprietary Limited (RF), or BVI, one of our BEE partners, in preparation for any new potential SASSA tender. Pursuant to the agreement, we repurchased BVIs remaining shares of Net1 common stock and BVI subscribed for new ordinary shares of CPS, representing approximately 12.5% of CPS ordinary shares outstanding after the subscription.
It is possible that we may find it necessary to issue additional shares to improve our BEE status. If we enter into further BEE transactions that involve the issuance of equity, we cannot predict what the dilutive effect of such a transaction would be on your ownership or how it would affect the market price of our stock.
Fluctuations in the value of the South African rand have had, and will continue to have, a significant impact on our reported results of operations, which may make it difficult to evaluate our business performance between reporting periods and may also adversely affect our stock price.
The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results are reported in U.S. dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the ZAR against the U.S. dollar, and to a lesser extent, the South Korean won against the U.S. dollar, would negatively impact our reported revenue and net income, while a strengthening of the ZAR and the South Korean won would have the opposite effect. Depreciation in the ZAR may negatively impact the prices at which our stock trades. The U.S. dollar/ZAR exchange rate has historically been volatile and we expect this volatility to continue. We provide detailed information about historical exchange rates in Item 7Managements Discussion and Analysis of Financial Condition and Results of OperationsCurrency Exchange Rate Information.
Due to the significant fluctuation in the value of the ZAR and its impact on our reported results, you may find it difficult to compare our results of operations between financial reporting periods even though we provide supplemental information about our results of operations determined on a ZAR basis. This difficulty may increase as we expand our business internationally and record additional revenue and expenses in the euro and other currencies. It may also have a negative impact on our stock price.
We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations, other than economic hedging relating to our inventory purchases which are settled in U.S. dollars or euros. We have used forward contracts in order to hedge our economic exposure to the ZAR/U.S. dollar and ZAR/euro exchange rate fluctuations from these foreign currency transactions. We cannot guarantee that we will enter into hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency fluctuations.
South Africas high levels of poverty, unemployment and crime may increase our costs and impair our ability to maintain a qualified workforce.
While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and unemployment, relative to peer countries in Africa and other emerging economies, and there are significant differences in the level of economic and social development among its people, with large parts of the population, particularly in the rural areas, having limited access to adequate education, healthcare, housing and other basic services, including water and electricity. In addition, South Africa has a high prevalence of HIV/AIDS and tuberculosis. Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of citizens under previous governments may increase our costs and reduce our profitability, all of which could negatively affect our business. These problems may prompt emigration of skilled workers, hinder investment into South Africa and impede economic growth. As a result, we may have difficulties attracting and retaining qualified employees.
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We may not be able to effectively and efficiently manage the electricity supply disruptions in South Africa which could adversely affect our results of operations, financial position, cash flows and future growth.
Our businesses in South Africa are dependent on electricity generated and supplied by the state-owned utility, Eskom, in order to operate. In recent years, Eskom has been unable to generate and supply the amount of electricity required by South Africans, and the entire country experienced significant and largely unpredictable electricity supply disruptions. Eskom has implemented a number of short- and long-term mitigation plans to correct these issues and the number of supply disruptions has decreased since calendar 2016.
As part of our business continuity programs, we have installed back-up diesel generators in order for us to continue to operate our core data processing facilities in Cape Town and Johannesburg in the event of intermittent disruptions to our electricity supply. We have to perform regular monitoring and maintenance of these generators as well as sourcing and managing diesel fuel levels. We may also be required to replace these generators on a more frequent basis due to the additional burden placed on them.
Our results of operations, financial position, cash flows and future growth could be adversely affected if Eskom is unable to commission new electricity-generating power stations in accordance with its plans, or at all, or if we are unable to effectively and efficiently test, maintain, source fuel for and replace our generators.
The economy of South Africa is exposed to high inflation and interest rates which could increase our operating costs and thereby reduce our profitability.
The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies. High rates of inflation could increase our South African-based costs and decrease our operating margins. Although higher interest rates would increase the amount of income we earn on our cash balances, they would also adversely affect our ability to obtain additional cost-effective debt financing in South Africa.
South African exchange control regulations could hinder our ability to make foreign investments and obtain foreign-denominated financing.
South Africas exchange control regulations restrict the export of capital from South Africa, the Republic of Namibia and the Kingdoms of Lesotho and Swaziland, known collectively as the Common Monetary Area, without the prior approval of SARB. While the South African government has relaxed exchange controls in recent years, it is difficult to predict whether or how it will further relax or abolish exchange control measures in the foreseeable future.
Although Net1 is a U.S. corporation and is not itself subject to South African exchange control regulations, these regulations do restrict the ability of our South African subsidiaries to raise and deploy capital outside the Common Monetary Area, to borrow money in currencies other than the South African rand and to hold foreign currency. Exchange control restrictions may also affect the ability of these subsidiaries to pay dividends to Net1 unless the affected subsidiary can show that any payment of such dividend will not place it in an over-borrowed position. As of June 30, 2017, approximately 56% of our cash and cash equivalents were held by our South African subsidiaries. Exchange control regulations could make it difficult for our South African subsidiaries to: (i) export capital from South Africa; (ii) hold foreign currency or incur indebtedness denominated in foreign currencies without the approval of SARB; (iii) acquire an interest in a foreign venture without the approval of SARB and first having complied with the investment criteria of SARB; or (iv) repatriate to South Africa profits of foreign operations. These regulations could also limit our ability to utilize profits of one foreign business to finance operations of a different foreign business.
Under current exchange control regulations, SARB approval would be required for any acquisition of our company which would involve payment to our South African shareholders of any consideration other than South African rand. This restriction could limit our management in its ability to consider strategic options and thus, our shareholders may not be able to realize the premium over the current trading price of our shares.
Most of South Africas major industries are unionized, and the majority of employees belong to trade unions. We face the risk of disruption from labor disputes and new South African labor laws.
Trade unions have had a significant impact on the collective bargaining process as well as on social and political reform in South Africa in general. Although only approximately 1% percent of our South African workforce is unionized and we have not experienced any labor disruptions in recent years, such labor disruptions may occur in the future. In addition, developments in South African labor laws may increase our costs or alter our relationship with our employees and trade unions, which may have an adverse effect on us, our financial condition and our operations.
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Operating in South Africa and other emerging markets subjects us to greater risks than those we would face if we operated in more developed markets.
Emerging markets such as South Africa, as well as some of the other markets into which we have recently begun to expand, including African countries outside South Africa, South America, South and Southeast Asia and Central and Eastern Europe, are subject to greater risks than more developed markets.
While we focus our business primarily on emerging markets because that is where we perceive to be the greatest opportunities to market our products and services successfully, the political, economic and market conditions in many of these markets present risks that could make it more difficult to operate our business successfully.
Some of these risks include:
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political and economic instability, including higher rates of inflation and currency fluctuations; |
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high levels of corruption, including bribery of public officials; |
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loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection; |
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a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property and contractual rights; |
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logistical, utilities (including electricity and water supply) and communications challenges; |
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potential adverse changes in laws and regulatory practices, including import and export license requirements and restrictions, tariffs, legal structures and tax laws; |
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difficulties in staffing and managing operations and ensuring the safety of our employees; |
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restrictions on the right to convert or repatriate currency or export assets; |
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greater risk of uncollectible accounts and longer collection cycles; |
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indigenization and empowerment programs; |
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exposure to liability under the U.K. Bribery Act; and |
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exposure to liability under U.S. securities and foreign trade laws, including the Foreign Corrupt Practices Act, or FCPA, and regulations established by the U.S. Department of Treasurys Office of Foreign Assets Control, or OFAC. |
Many of these countries and regions are in various stages of developing institutions and political, legal and regulatory systems that are characteristic of democracies. However, institutions in these countries and regions may not yet be as firmly established as they are in democracies in the developed world. Many of these countries and regions are also in the process of transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies that can affect our investments in these countries and regions. Moreover, the procedural safeguards of the new legal and regulatory regimes in these countries and regions are still being developed and, therefore, existing laws and regulations may be applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries and regions face uncertainty as to the security of their investments. Any unexpected changes in the political or economic conditions in these or neighboring countries or others in the region may have a material adverse effect on the international investments that we have made or may make in the future, which may in turn have a material adverse effect on our business, operating results, cash flows and financial condition.
Our KSNET operations may be adversely affected by tension in the Korean peninsula.
Our KSNET operations contributed approximately 25% and 13% of our revenue and operating income, respectively, for our 2017 fiscal year. There has been recent tension on the Korean peninsula and a concern about potential acts of military aggression or cyber-attacks. Because KSNET is a transaction processor, its operations are dependent on continuing high levels of consumer activity and the availability of data communication infrastructure. Acts of military aggression in the Korean peninsula, other hostile acts or economic weakness that reduces spending by South Korean consumers is likely to materially and adversely impact our KSNET operations as well as our business, operating results, cash flows and financial condition. If this were to occur, we might be unable to comply with the debt covenants contained in our Korean debt facility, which could result in default and acceleration of our indebtedness. Furthermore, we might not be able to obtain waivers of default or to refinance the debt with another lender and, as a result, our business and financial condition would suffer.
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Risks Relating to Government Regulation
The South African National Credit Regulator has applied to cancel the registration of our subsidiary, Moneyline Financial Services (Pty) Ltd, as a credit provider. If the registration is cancelled, we will not be able to provide UEPS-based loans to our customers, which would harm our business.
Moneyline provides microloans to our UEPS/EMV cardholders. Moneyline is a registered credit provider under the South African National Credit Act, or NCA, and is required to comply with the NCA in the operation of its lending business. In September 2014, the South African National Credit Regulator, or NCR, applied to the National Consumer Tribunal to cancel Moneylines registration, based on an investigation concluded by the NCR.
The NCR has alleged, among other things, that Moneyline contravened the NCA by including child support grants and foster child grants in the affordability assessments performed by Moneyline prior to granting credit to these borrowers, and that the procedures followed and documentation maintained by Moneyline are not in accordance with the NCA. We believe that Moneyline has conducted its business in compliance with NCA and we are opposing the NCRs application. However, if the NCRs application is successful, Moneyline would be prohibited from operating its microlending business, which could have a material adverse effect on our results of operations and cash flows.
We are required to comply with certain U.S. laws and regulations, including economic and trade sanctions, which could adversely impact our future growth.
We are subject to U.S. and other trade controls, economic sanctions and similar laws and regulations, including those in the jurisdictions where we operate. Our failure to comply with these laws and regulations could subject us to civil, criminal and administrative penalties and harm our reputation.
Doing business on a worldwide basis requires us to comply with the laws and regulations of various foreign jurisdictions. These laws and regulations place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject to U.S. and foreign trade control laws and regulations, including various export controls and economic sanctions programs, such as those administered by OFAC, as well as European sanctions. We monitor compliance in accordance with the 10 principles as set out in the United Nations Global Compact Principles, the Organisation for Economic Co-operation and Development recommendations relating to corruption, and the International Labor Organization Protocol in terms of certain of the items to be monitored. As a result of doing business in foreign countries and with foreign partners, we are exposed to a heightened risk of violating trade control laws as well as sanctions regulations.
Economic sanctions programs restrict our business dealings with certain sanctioned countries, persons and entities. In addition, because we act through dealers and distributors, we face the risk that our dealers, distributors and customers might further distribute our products to a sanctioned person or entity, or an ultimate end-user in a sanctioned country, which might subject us to an investigation concerning compliance with OFAC or other sanctions regulations.
Violations of trade control laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international trade control laws and regulations, including trade controls and sanctions programs administered by OFAC, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition. Our continued international expansion, including in developing countries, and our development of new partnerships and joint venture relationships worldwide, could increase the risk of OFAC violations in the future.
We are required to comply with anti-corruption laws and regulations, including the FCPA and U.K. Bribery Act, in the jurisdictions in which we operate our business, which could adversely impact our future growth.
The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business, or securing any improper business advantage. It also requires us to keep books and records that accurately and fairly reflect our transactions. As part of our business, we may deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA.
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In addition, we have to comply with the U.K. Bribery Act, or the U.K. Bribery Act, which includes provisions that extend beyond bribery of foreign public officials and also apply to transactions with individuals not employed by a government. The provisions of the U.K. Bribery Act are also more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Some of the international locations in which we operate, lack a developed legal system and have higher than normal levels of corruption.
Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners comply with the FCPA could subject us to substantial penalties. In addition, the requirement that we comply with the FCPA could put us at a competitive disadvantage with companies that are not required to comply with the FCPA or could otherwise harm our business. For example, in many emerging markets, there may be significant levels of official corruption, and thus, bribery of public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such as paying bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly even result in unlawful, selective or arbitrary action being taken against us by foreign officials.
Our current and potential competitors may use U.S. laws and regulations, including the FCPA, to disrupt our business operations and harm our reputation in the territories in which we operate or in which we intend to expand into. For instance, as we have previously reported, in November 2012, the U.S. Department of Justice commenced an investigation into whether we violated the FCPA and other U.S. federal criminal laws by engaging in a scheme to make corrupt payments to officials of the South Africa government in connection with securing our 2012 SASSA contract and whether we violated federal securities laws in connection with statements made by us in our SEC filings regarding this contract. The investigations commenced as a result of reports made to the relevant U.S. authorities by a losing bidder to the 2012 SASSA contract. While these investigations have all been concluded with no adverse findings against us, during the course of the investigations, managements time was diverted from other matters relating to our business and we suffered harm to our business reputation. Furthermore, in fiscal 2013, the FSB suspended Smart Lifes insurance license. Our management has to spend a disproportionate amount of time explaining the circumstances surrounding, and the result of the investigations, when engaging new business partners, shareholders or regulators.
Violations of anti-corruption laws and regulations are punishable by civil penalties, including fines, as well as criminal fines and imprisonment. We have developed policies and procedures as part of a company-wide compliance program that is designed to assist our compliance with applicable U.S. and international anti-corruption laws and regulations, and provide regular training to our employees to comply with these laws and regulations. However, there can be no assurance that all of our employees, consultants, partners, agents or other associated persons will not take actions in violation of our policies and these laws and regulations, or that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, or provide a defense to any alleged violation. In particular, we may be held liable for the actions that our local, strategic or joint venture partners take inside or outside of the United States, even though our partners may not be subject to these laws. Such a violation, even if our policies prohibit it, could materially and adversely affect our reputation, business, results of operations and financial condition.
Since less developed countries present some of the best opportunities for us to expand our business internationally, restrictions against entering into transactions with those foreign countries, as well as with certain entities and individuals in those countries, can adversely affect our ability to grow our business.
Changes in current South African government regulations relating to social welfare grants could adversely affect our revenues and cash flows.
We derive a substantial portion of our current business from the distribution of social welfare grants in South Africa and the provision of financial services to social grant recipients. Because social welfare eligibility and grant amounts are regulated by the South African government, any changes to or reinterpretations of the government regulations relating to social welfare may result in the non-renewal or reduction of grants for certain individuals, or a determination that currently eligible social welfare grant recipient cardholders are no longer eligible. If any of these changes were to occur, the number of grants we distribute could decrease which could result in a reduction of our revenue and cash flows.
We do not have a South African banking license and, therefore, we provide our social welfare grant distribution and EasyPay Everywhere solution through an arrangement with a third-party bank, which limits our control over this business and the economic benefit we derive from it. If this arrangement were to terminate, we would not be able to operate our social welfare grant distribution and EasyPay Everywhere business without alternate means of access to a banking license.
The South African retail banking market is highly regulated. Under current law and regulations, our South African social welfare grant distribution and EasyPay Everywhere business activities requires us to be registered as a bank in South Africa or to have access to an existing banking license.
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We are not currently so registered, but we have an agreement with Grindrod Bank that enables us to implement our social welfare grant distribution and EasyPay Everywhere solution in compliance with the relevant laws and regulations. If the agreement were to be terminated, we would not be able to operate these services unless we were able to obtain access to a banking license through alternate means. We are also dependent on Grindrod Bank to defend us against attacks from the other South African banks who may regard the rapid market acceptance of our UEPS/EMV product with biometric verification as disruptive to their funds transfer or other businesses and may seek governmental or other regulatory intervention. Furthermore, we have to comply with the strict anti-money laundering and customer identification regulations of the SARB when we open new bank accounts for our customers and when they transact. Failure to effectively implement and monitor these regulations may result in significant fines or prosecution of Grindrod Bank and ourselves.
In addition, the South African Financial Advisory and Intermediary Services Act, 2002, requires persons who act as intermediaries between financial product suppliers and consumers in South Africa to register as financial service providers. Smart Life was granted an Authorized Financial Service Provider, or FSP, license on June 9, 2015, and Moneyline Financial Services (Pty) Ltd and Net1 Mobile Solutions (Pty) Ltd were each granted FSP licenses on July 11, 2017. If our FSP licenses are cancelled, we may be stopped from continuing our financial services businesses in South Africa.
Our payment processing businesses are subject to substantial governmental regulation and may be adversely affected by liability under, or any future inability to comply with, existing or future regulations or requirements.
Our payment processing activities are subject to extensive regulation. Compliance with the requirements under these various regulatory regimes may cause us to incur significant additional costs and failure to comply with such requirements could result in the shutdown of the non-complying facility, the imposition of liens, fines and/or civil or criminal liability.
We may be subject to regulations regarding privacy, data use and/or security which could adversely affect our business.
We are subject to regulations in a number of the countries in which we operate relating to the collection, use, retention, security and transfer of personally identifiable information about the people who use our products and services, in particular, Know Your Customer, personal financial and health information. New laws in this area have been passed by several jurisdictions, and other jurisdictions are considering imposing additional restrictions. The interpretation and application of user data protection laws are in a state of flux. These laws may be interpreted and applied inconsistently from country to country and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect us. In addition, as noted above, we are subject to the possibility of security breaches, which themselves may result in a violation of these laws.
Risks Relating to our Common Stock
Our stock price has been and may continue to be volatile.
Our stock price has experienced recent significant volatility. During the 2017 fiscal year, our stock price ranged from a low of $8.37 to a high of $13.53. We expect that the trading price of our common stock may continue to be volatile as a result of a number of factors, including, but not limited to the following:
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any adverse developments in litigation or regulatory actions in which we are involved; |
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fluctuations in currency exchange rates, particularly the U.S. dollar/ZAR exchange rate; |
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announcement of additional BEE transactions, especially one involving the issuance or potential issuance of equity securities or dilution or sale of our existing business in South Africa; |
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quarterly variations in our operating results, especially if our operating results fall below the expectations of securities analysts and investors; |
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announcements of acquisitions, disposals or impairments of intangible assets; |
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the timing of or delays in the commencement, implementation or completion of investments or major projects; |
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large purchases or sales of our common stock; |
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general conditions in the markets in which we operate; and |
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economic and financial conditions. |
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The put right we have agreed to grant to the IFC Investors on the occurrence of certain triggering events may have adverse impacts on us.
In May 2016, we issued an aggregate of 9,984,311 shares of our common stock to the IFC Investors. We granted to the IFC Investors certain rights, including the right to require us to repurchase any shares we have sold to the IFC Investors upon the occurrence of specified triggering events, which we refer to as a put right. Events triggering the put right relate to (1) us being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that we (a) engaged in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions; or (c) failed to operate our business in compliance with anti-money laundering or anti-terrorism laws; or (2) we reject a bona fide offer to acquire all of our outstanding shares at a time when we have in place or implement a shareholder rights plan, or adopt a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put price per share will be the higher of the price per share paid to us by the IFC Investors and the volume-weighted average price per share prevailing for the 60 trading days preceding the triggering event, except that with respect a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. If a put triggering event occurs, it could adversely impact our liquidity and capital resources. In addition, the existence of the put right could also affect whether or on what terms a third party might in the future offer to purchase our company. Our response to any such offer could also be complicated, delayed or otherwise influenced by the existence of the put right.
A majority of our common stock is beneficially owned by a small number of shareholders. The interests of these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership of our outstanding common stock because approximately 47% of our outstanding common stock is owned by three shareholders. Based on their most recent SEC filings disclosing ownership of our shares, IFC Investors, Allan Gray Proprietary Limited, and International Value Advisers, LLC, or IVA, beneficially owned approximately 18%, 16% and 13% of our outstanding common stock, respectively.
The interests of the IFC Investors, Allan Gray and IVA, may be different from or conflict with the interests of our other shareholders. As a result of the ownership by the IFC Investors, Allan Gray and IVA, they will be able, if they act together, to significantly influence our management and affairs and all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control of our company, thus depriving shareholders of a premium for their shares, or facilitating a change of control that other shareholders may oppose.
We may seek to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock.
We may require additional financing to fund future operations, including expansion in current and new markets, programming development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies, or to fund acquisitions. Because of the exposure to market risks associated with economies in emerging markets, we may not be able to obtain financing on favorable terms or at all.
If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and voting power of shares of common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.
We may have difficulty raising necessary capital to fund operations or acquisitions as a result of market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies, to expand into new markets and to make acquisitions, all of which may be dependent upon our ability to obtain financing through debt and equity or other means.
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Issuances of significant amounts of stock in the future could potentially dilute your equity ownership and adversely affect the price of our common stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could sell additional shares to raise capital to fund our operations or to acquire other businesses, issue shares in a BEE transaction, issue additional shares under our stock incentive plan or declare a stock dividend. Our board may authorize the issuance of additional shares of common stock without notice to, or further action by, our shareholders, unless shareholder approval is required by law or the rules of the NASDAQ Stock Market. The issuance of additional shares could dilute the equity ownership of our current shareholders. In addition, additional shares that we issue would likely be freely tradable which could adversely affect the trading price of our common stock.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material adverse effect on our business and stock price.
Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report, among other things, control deficiencies that constitute a material weakness or changes in internal control that materially affect, or are reasonably likely to materially affect, internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
The requirement to evaluate and report on our internal controls also applies to companies that we acquire. Some of these companies may not be required to comply with Sarbanes prior to the time we acquire them. The integration of these acquired companies into our internal control over financial reporting could require significant time and resources from our management and other personnel and may increase our compliance costs. If we fail to successfully integrate the operations of these acquired companies into our internal control over financial reporting, our internal control over financial reporting may not be effective.
While we continue to dedicate resources and management time to ensuring that we have effective controls over financial reporting, failure to achieve and maintain an effective internal control environment could have a material adverse effect on the markets perception of our business and our stock price.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions based upon U.S. laws, including the federal securities laws or other foreign laws, against us or certain of our directors and officers and experts.
While Net1 is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South Africa and substantially all of the companys assets are located outside the United States. In addition, the majority of Net1s directors and all its officers reside outside of the United States and the majority of our experts, including our independent registered public accountants, are based in South Africa.
As a result, even though you could effect service of legal process upon Net1, as a Florida corporation, in the United States, you may not be able to collect any judgment obtained against Net1 in the United States, including any judgment based on the civil liability provisions of the U.S. federal securities laws, because substantially all of our assets are located outside the United States. Moreover, it may not be possible for you to effect service of legal process upon the majority of our directors and officers or upon our experts within the United States or elsewhere outside South Africa and any judgment obtained against any of our foreign directors, officers and experts in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by a South African court.
South Africa is not a party to any treaties regarding the enforcement of foreign commercial judgments, as opposed to foreign arbitral awards. Accordingly, a foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which may be enforced by South African courts provided that:
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the court which pronounced the judgment had international jurisdiction and competence to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts; |
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the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it); |
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the judgment has not lapsed; |
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the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in South Africa, including observance of the rules of natural justice which require that no award is enforceable unless the defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal; |
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the judgment was not obtained by improper or fraudulent means; |
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the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive damages; and |
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the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of 1978 (as amended), of the Republic of South Africa. |
It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered damages as a result of a diminution in the value of their shares based on various actions by the corporation and its management. Although the award of punitive damages is generally unknown to the South African legal system, that does not mean that such awards are necessarily contrary to public policy.
Whether a judgment was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign court. Further, if a foreign judgment is enforced by a South African court, it will be payable in South African currency. Also, under South Africas exchange control laws, the approval of SARB is required before a defendant resident in South Africa may pay money to a non-resident plaintiff in satisfaction of a foreign judgment enforced by a court in South Africa.
It is doubtful whether an original action based on United States federal securities laws may be brought before South African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside South Africa must be authenticated for the purpose of use in South African courts.
In reaching the foregoing conclusions, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
We lease our corporate headquarters facility which consists of approximately 93,000 square feet in Johannesburg, South Africa. We also lease properties throughout South Africa, including a 12,088 square foot manufacturing facility in Lazer Park, 149 financial services branches and 78 depot facilities. We also lease additional office space in Johannesburg, Cape Town and Durban, South Africa; Guildford and London, United Kingdom; Seoul, South Korea; Munich, Germany; Hong Kong and Zhuhai, China; Mumbai, India; Black River, Mauritius and Frederick, Maryland. These leases expire at various dates through 2020. We own land and buildings in Ahnsung, Kyung-gi, South Korea, that is used for the storage of business documents. We believe that we have adequate facilities for our current business operations.
ITEM 3. | LEGAL PROCEEDINGS |
Constitutional Court order regarding extension of contract with SASSA for 12 months
On March 17, 2017, the Constitutional Court delivered its order regarding the continued payment of social grants upon the expiration of the contract between our subsidiary, CPS, and SASSA on March 31, 2017. The Constitutional Court ordered that SASSA and CPS are under a constitutional obligation to ensure payment of social welfare grants from April 1, 2017 and ordered CPS and SASSA to ensure payment of grants, for a period of 12 months, under the expiring contracts terms and conditions, augmented by certain additional terms and conditions. These included amendments to (i) adequately safeguard personal data obtained during the payment process and ensure that it remains private and may not be used for any purpose other than the payment of grants, and (ii) preclude anyone from inviting beneficiaries to opt-in to the sharing of confidential information for the marketing of goods and services. The Constitutional Court also ordered that CPS may request National Treasury to investigate and make a recommendation regarding the price charged by CPS in the extension contract and stated that National Treasury must file a report with the Constitutional Court stating its findings in this regard.
The Constitutional Court also included a public accountability provision in its March 2017 order that impact CPS directly. These provisions are similar to those included in its April 2014 order, and require that CPS provide the Constitutional Court with an audited statement of expenses incurred, income received and net profit earned under the 12 month extension contract ending March 31, 2018. SASSA is also required to obtain an independent audit of the audited information provided by CPS. Furthermore, the Constitutional Court has instructed SASSA to send this audited information to National Treasury for its approval prior to submission to the Constitutional Court.
The Constitutional Court included additional public accountability provisions that impact the Minister of Social Development and SASSA. These provisions require the Minister and SASSA to file reports on affidavit with the Constitutional Court every three months, commencing on June 19, 2017, setting out how they plan to ensure the payment of social grants after the end of the 12-month contract extension period, what steps they have taken in that regard, what further steps they will take, and when they will take each future step, so as to ensure that the payment of all social grants is made when they fall due after the expiry of the 12-month period. The reports filed by the Minister and SASSA must include, but is not limited to, the applicable time-frames for the various deliverables which form part of the plan, whether the time-frames have been complied with, and if not, why that is the case and what will be done to remedy the situation. The Minister and SASSA are also required to immediately report to the Constitutional Court and explain the reason for and consequences of any material changes to the circumstances included in the reports previously submitted to the Constitutional Court.
The Constitutional Court also ordered SASSA to ensure that any new payment method (i) adequately safeguards personal data obtained during the payment process and ensures that it remains private and may not be used for any purpose other than the payment of grants; and (ii) precludes a contracting party from inviting beneficiaries to opt-in to the sharing of confidential information for the marketing of goods and services.
The Constitutional Court order also invited parties involved in the Constitutional Court proceedings to provide the name and consent of independent legal practitioners and technical experts, together with the Auditor-General, to oversee the implementation of the payment of social welfare grants during the period to March 31, 2018, as well as oversee SASSAs conduct to appoint a new service provider from April 1, 2018, or to perform the grant distribution service in-house. The Constitutional Court appointed a panel of ten such experts on June 6, 2017.
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Litigation Regarding Legality of Debit Orders under Social Assistance Act Regulations
On June 3, 2016, we filed for a declaratory order with the High Court of the Republic of South Africa Gauteng Division, Pretoria, or Pretoria High Court, to provide certainty to us, as well as other industry stakeholders, on the interpretation of the Social Assistance Act and recent Regulations promulgated in terms thereof, or the Regulations. The Regulations limit direct deductions from social grants paid to beneficiaries. We interpret the meaning of the word deductions to be specific to the practice of deducting amounts, historically limited to life insurance premiums from grants, before the grants are paid to social welfare beneficiaries bank accounts, and are of the opinion that the legislature did not intend to curtail the right of beneficiaries to transact freely after the money is deposited into their bank accounts.
We brought the application for a declaratory order because SASSA seeks to lend a broader interpretation to the meaning of the term deductions to incorporate any debit orders, EFT debits, purchase transactions, or fund transfers that are effected after the transfer of social grants to beneficiaries bank accounts. If SASSAs interpretation were to prevail, debit transactions could no longer be used as a method for beneficiaries to make payments for financial services such as insurance premiums, loan repayments, electricity and other purchases, money transfers or any other electronic payments. We believe that forcing beneficiaries to pay for these products or services in cash would be a major setback to the national objective of financial inclusiveness, introduce financial and security risks for beneficiaries and result in significant price increases for these products and services.
We further believe that SASSAs interpretation of the Social Assistance Act and the Regulations is erroneous for a number of reasons including, but not limited to, our belief that such an interpretation violates beneficiaries constitutional rights by limiting their fundamental right to enter into contracts and that such interpretation impermissibly encroaches on the jurisdiction and powers of the SARB and the Payments Association of South Africa, which regulate the national payment system. SASSA's interpretation effectively prohibits the social welfare recipient community from enjoying the benefits of a convenient, low-cost, reliable and ubiquitous payment system that enables the recipients to procure financial services at highly competitive rates.
We were joined in our application by several other industry participants, and the SARB also filed a responding affidavit.
On June 15, 2016, SASSA brought criminal charges against us and Grindrod Bank for contravening the Social Assistance Act, alleging that we and Grindrod Bank failed to act in accordance with SASSAs instructions by processing debit orders against social welfare beneficiaries bank accounts after the Regulations came into effect.
On June 28, 2016, the Pretoria High Court scheduled a hearing on our application for a declaratory order for October 17 and 18, 2016. In its order, the Pretoria High Court prohibited SASSA from making any representations to the South African Police Services and the National Prosecuting Authority regarding the criminal charges brought against us and Grindrod Bank pending the determination of the dispute, including the determination of any appeals. In addition, the order prevented SASSA from issuing further demands to us and Grindrod Bank to stop the processing of debit transactions against SASSA bank accounts pending the determination of the dispute, including the determination of any appeals.
On August 8, 2016, we were informed that the NPA had reached a no prosecution decision on the criminal charges filed by SASSA.
The matter was heard on October 17 and 18, 2016 and on May 9, 2017, the Pretoria High Court issued the declaratory order sought by us that the Social Assistance Act and Regulations do not restrict social grant recipients in the operation of their banks accounts. The order clarifies that recipients may continue to initiate debit order instructions with any service provider, including our subsidiaries, against their bank accounts for the payment of goods and services. SASSA, its Chief Executive Officer and the Minister of Social Development were ordered to pay the costs of the application. The Pretoria High Court also refused the Black Sash Trusts, or Black Sash, application to intervene in the matter. In support of its application, the Black Sash made several allegations of illegal deductions which we denied in our answering affidavits.
On May 17, 2017, the NPA reaffirmed its no prosecution decision reached in August 2016 on the criminal charges brought by SASSA against us and Grindrod Bank. In addition, the NPA notified us that no further action will be taken and that we can consider the case closed.
On June 20, 2017, the Pretoria High Court refused the applicants, including the Minister of Social Development, SASSA and Black Sash, application for leave to appeal the Pretoria High Courts May 9, 2017, declaratory order. SASSA, its Chief Executive Officer and the Minister of Social Development were ordered to pay the costs of the application for the leave to appeal.
On July 19, 2017, each of SASSA and the Black Sash served applications petitioning the South African Supreme Court of Appeal, or the Supreme Court, to grant them leave to appeal to either the Supreme Court or to a full bench of the Pretoria High Court.
We cannot predict whether the Supreme Court will grant SASSA and/or the Black Sash leave to appeal this matter.
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Challenge to Payment by SASSA of Additional Implementation Costs
In March 2015, Corruption Watch, a South African non-profit civil society organization, commenced a legal proceeding in the High Court of South Africa seeking an order by the Court to review and set aside the decision of SASSAs Chief Executive Officer to approve the payment to us of ZAR 317 million (approximately ZAR 277 million, excluding VAT) and directing us to repay the aforesaid amount. Corruption Watch claims that there was no lawful basis for the decision to make the payment to us, and that the decision was unreasonable and irrational and did not comply with South African legislation. We are named as a respondent in this legal proceeding.
As we previously disclosed, in June 2014, we received approximately ZAR 277 million, excluding VAT, from SASSA, related to the recovery of additional implementation costs we incurred during the beneficiary re-registration process in fiscal 2012 and 2013. After the award of the tender, SASSA requested that we biometrically register all social grant beneficiaries (including child grant beneficiaries) and collect additional information for each child grant recipient. We agreed to SASSAs request, and as a result we performed approximately 11 million additional registrations beyond those that we tendered to register for the quoted service fee. Accordingly, we claimed a cost recovery from SASSA, supported by a factual findings certificate from an independent auditing firm. SASSA agreed to pay us the ZAR 277 million as full settlement of the additional costs we incurred.
Corruption Watch applied for a hearing date and it has been set down for hearing during the week commencing November 6, 2017.
We believe that Corruption Watchs claim is without merit, and we are defending it vigorously. However, we cannot predict how the Court will rule on the matter.
NCR application for the cancelation of Moneylines registration as a credit provider
In September 2014, the NCR applied to the South African National Consumer Tribunal, or Tribunal, to cancel the registration of our subsidiary, Moneyline, for breach of the NCA based on an investigation concluded by it. Pursuant to the investigation, the NCA also issued two Compliance Notices one to CPS and one to Moneyline. The Compliance Notice issued to Moneyline accused it of having access into the Grindrod Bank Accounts of social grant beneficiaries which enables them (sic) to see the spending patterns of beneficiaries and deposit loan amounts into such accounts. The Compliance Notice issued to CPS accused it of providing information about social grant beneficiaries to Moneyline in breach of section 68(1) of the NCA. The Compliance Notices demanded that both CPS and Moneyline take the appropriate steps to address the alleged non-compliance with the NCA and to report in writing to the NCR, along with an independent audit report, that they were no longer non-compliant as alleged by the Compliance Notices.
We objected to the Compliance Notices and the Tribunal set both Compliance Notices aside.
Regarding the NCRs application to cancel the registration of Moneyline, we raised a number of procedural points in defense, which, if we are successful, will be dispositive of the application. Argument on these points was heard on November 27, 2015, before three tribunal members. Two ruled against us and one upheld our points. We are appealing the majority ruling to the High Court. A hearing date has been allocated and the appeal will be heard on December 6, 2017. If we are successful, it will dispose of the application. If we do not prevail, then the NCRs application will be set down before the Consumer Tribunal for argument on the main issues raised by the NCR, as dealt with above. We cannot predict the outcome of this litigation.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market information
Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol UEPS and on the JSE in South Africa under the symbol NT1. The Nasdaq is our principal market for the trading of our common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by Nasdaq.
Period | High | Low | |||||
Quarter ended September 30, 2015 | $21.48 | $16.10 | |||||
Quarter ended December 31, 2015 | $18.37 | $12.98 | |||||
Quarter ended March 31, 2016 | $13.56 | $8.44 | |||||
Quarter ended June 30, 2016 | $12.35 | $8.72 | |||||
Quarter ended September 30, 2016 | $11.30 | $8.37 | |||||
Quarter ended December 31, 2016 | $12.26 | $8.57 | |||||
Quarter ended March 31, 2017 | $13.53 | $11.33 | |||||
Quarter ended June 30, 2017 | $12.23 | $9.19 |
Our transfer agent in the United States is Computershare Shareowner Services LLC, 480 Washington Blvd, Jersey City, New Jersey, 07310. According to the records of our transfer agent, as of August 16, 2017, there were 15 shareholders of record of our common stock. A substantially greater number of holders of our common stock are street name or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions. Our transfer agent in South Africa is Link Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, South Africa.
Dividends
We have not paid any dividends on our shares of common stock during our last two fiscal years and presently intend to retain future earnings to finance the expansion of the business. We do not anticipate paying any cash dividends in the foreseeable future. The future dividend policy will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors.
Issuer purchases of equity securities
On February 3, 2016, our board of directors approved the replenishment of our existing share repurchase authorization to repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. On June 29, 2016, we adopted a Rule 10b5-1 plan for the purpose of repurchasing approximately $50 million of our common stock. The plan was established in connection with the $100 million share repurchase authorization. The plan expired at the end of August 2016.
On May 24, 2017, in connection with the retirement of our co-founder, former chief executive officer and former member of our board of directors, Mr. S.C.P. Belamant, we repurchased from him a total of 1,269,751 shares of our common stock, which included the repurchase of shares issued upon the exercise of his 252,286 stock options.
The table below presents our common stock purchased during fiscal 2017 per quarter:
Period |
Total number
of shares purchased |
Average price
paid per share (US dollars) |
|||||
First | 3,137,609 | 10.07 | |||||
Second | - | - | |||||
Third | - | - | |||||
Fourth | 1,269,751 | 10.80 | |||||
Total fiscal 2017 | 4,407,360 | 10.28 |
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Share performance graph
The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2012, in each of our common stock, the companies in the S&P 500 Index, and the companies in the NASDAQ Industrial Index.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected historical consolidated financial data should be read together with Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 8Financial Statements and Supplementary Data. The following selected historical financial data as of June 30, 2017 and 2016, and for the three years ended June 30, 2017 have been derived from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2015, 2014 and 2013 and for the years ended June 30, 2014 and 2013, have been derived from our consolidated financial statements, which are not included herein. The selected historical financial data as of each date and for each period presented have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected in any future period.
Consolidated Statements of Operations Data
(in
thousands, except per share data)
Year Ended June 30 | |||||||||||||||
2017 | 2016 | 2015 | 2014 (1) | 2013 (1) | |||||||||||
Revenue | $ | 610,066 | $ | 590,749 | $ | 625,979 | $ | 581,656 | $ | 452,147 | |||||
Cost of goods sold, IT processing, servicing and support | 292,383 | 290,101 | 297,856 | 260,232 | 196,834 | ||||||||||
Selling, general and administrative(2) | 179,262 | 145,886 | 158,919 | 168,072 | 191,552 | ||||||||||
Equity instruments granted pursuant to BEE transactions (3) | - | - | - | 11,268 | - | ||||||||||
Depreciation and amortization | 41,378 | 40,394 | 40,685 | 40,286 | 40,599 | ||||||||||
Operating income | 97,043 | 114,368 | 128,519 | 101,798 | 23,162 | ||||||||||
Interest income | 20,897 | 15,292 | 16,355 | 14,817 | 12,083 | ||||||||||
Interest expense | 3,484 | 3,423 | 4,456 | 7,473 | 7,966 | ||||||||||
Income before income taxes | 114,456 | 126,237 | 140,418 | 109,142 | 27,279 | ||||||||||
Income tax expense | 42,472 | 42,080 | 44,136 | 39,379 | 14,656 | ||||||||||
Net income attributable to Net1 | 72,954 | 82,454 | 94,735 | 70,111 | 12,977 | ||||||||||
Income from continuing operations per share: | |||||||||||||||
Basic | $ | 1.34 | $ | 1.72 | $ | 2.03 | $ | 1.51 | $ | 0.28 | |||||
Diluted | $ | 1.33 | $ | 1.71 | $ | 2.02 | $ | 1.50 | $ | 0.28 |
(1)
Includes revenue and implementation costs
related to our SASSA contract from April 2012. In addition, 2014 includes
recovery of $26.6 million of implementation costs from SASSA.
(2)
Includes a separation payment of $8.0 million paid to
our former chief executive officer in 2017.
(3)
Includes a
non-cash charge of approximately $11.3 million in 2014 related to common stock
issued in a BEE transaction.
Additional Operating Data:
(in thousands, except
percentages)
Year ended June 30, | |||||||||||||||
2017 (1) | 2016 (1) | 2015 (1) | 2014 (1) | 2013 (1) | |||||||||||
Cash flows provided by operating activities | $ | 97,161 | $ | 116,552 | $ | 135,258 | $ | 37,145 | $ | 55,917 | |||||
Cash flows used in investing activities | $ | 114,071 | $ | 5,756 | $ | 80,783 | $ | 9,237 | $ | 457,875 | |||||
Cash flows provided by (used in) financing activities | $ | 40,469 | $ | 13,645 | $ | 16,784 | $ | (25,781 | ) | $ | 399,657 | ||||
Operating income margin (2) | 16% | 19% | 21% | 18% | 5% |
(1)
Cash flows used in investing
activities include movements in settlement assets and cash flows provided by
(used in) financing activities include movement in settlement liabilities.
(2)
Fiscal 2017 operating income margin was 18%
before the separation payment of $8.0 million paid to our former chief executive
officer.
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Consolidated Balance Sheet Data:
(in thousands)
As of June 30, | |||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
Cash and cash equivalents | $ | 258,457 | $ | 223,644 | $ | 117,583 | $ | 58,672 | $ | 53,665 | |||||
Total current assets before settlement assets | 465,735 | 386,998 | 301,874 | 259,591 | 169,059 | ||||||||||
Goodwill | 188,833 | 179,478 | 166,437 | 186,576 | 175,806 | ||||||||||
Intangible assets | 38,764 | 48,556 | 47,124 | 68,514 | 77,257 | ||||||||||
Total assets | 1,450,756 | 1,263,500 | 1,316,956 | 1,363,375 | 1,302,662 | ||||||||||
Total current liabilities before settlement obligations | 80,859 | 65,486 | 82,198 | 81,823 | 76,859 | ||||||||||
Total long-term debt | 7,501 | 43,134 | 50,762 | 62,388 | 66,632 | ||||||||||
Total equity | $ | 708,007 | $ | 603,220 | $ | 478,785 | $ | 441,748 | $ | 339,969 |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with Item 6Selected Financial Data and Item 8Financial Statements and Supplementary Data. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A Risk Factors and Forward Looking Statements.
Overview
We are a leading provider of payment solutions, transaction processing services and financial technology across multiple industries and in a number of emerging and developed economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Our UEPS, and UEPS/EMV derivative discussed below, uses biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer. This offline capability means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages. Our latest version of the UEPS technology has been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The UEPS/EMV technology has been deployed on an extensive scale in South Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for banking, healthcare management, international money transfers, voting and identification.
We also provide secure financial technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony, integrated circuit card (chip/smart card) technologies, and the design and provision of financial and value-added services to our cardholder base.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our UEPS/EMV technology, to over ten million recipient cardholders across the entire country, process debit and credit card payment transactions on behalf of a wide range of retailers through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils in South Africa, and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments in South Africa through our FIHRST service. We provide financial inclusion services such as microloans, insurance, mobile transacting and prepaid utilities to our cardholder base.
In addition, through KSNET, we are one of the top three value-added network, or VAN, processors in South Korea, and we offer card processing, payment gateway and banking value-added services in that country. We also offer issuing and acquiring capabilities through Transact24 in Hong Kong. Our Masterpayment subsidiary in Germany provides value added payment services to online retailers across Europe. Our XeoHealth service provides funders and providers of healthcare in United States with an on-line real-time management system for healthcare transactions.
Our Net1 Solutions business unit is responsible for the worldwide technical development and commercialization of our array of web and mobile applications and payment technologies, such as MVC, Chip and GSM licensing and VTU, and has deployed solutions in many countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the Philippines, India and Colombia.
Sources of Revenue
We generate our revenues by charging transaction fees to government agencies, merchants, financial service providers, utility providers, bill issuers, employers, healthcare providers and cardholders; by providing loans and insurance products and by selling hardware, licensing software and providing related technology services.
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We have structured our business and our business development efforts around four related but separate approaches to deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related technology to a customer. The revenue and costs associated with this approach are reflected in our Financial inclusion and applied technologies segment.
We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of the South African government on a fixed fee basis, but charge a fee on an ad valorem basis for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to supply those services and products directly where the business case is compelling. For instance, we provide short-term loans to our smart card holders. This is an example of the third approach that we have taken. Here we can act as the principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our Financial inclusion and applied technologies segment.
In South Africa, we also generate fees from debit and credit card transaction processing, the provision of value-added services such as bill payments, mobile top-up and prepaid utility sales, and from providing a payroll transaction management service. The revenue and costs associated with these services are reflected in our South African transaction processing and Financial inclusion and applied technologies segments.
Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 237,000 merchants and to card issuers in South Korea through our value-added-network. Through Masterpayment and Transact24 we generate fee revenue through the provision of payment service provider and card issuing and acquiring services in primarily Germany, China and the U.S. Furthermore, in the U.S., we earn transaction fees from our customers utilizing our XeoRules online real-time management system for healthcare transactions. We also generate fees from our customers who utilize our VCPay technology to generate a unique, one-time use prepaid virtual card number to securely purchase goods and services or perform bill payments in any card-not-present environment. The revenue and costs at of all of these businesses are reflected in our International transaction processing segment.
Finally, we have business partnerships or joint ventures to introduce our financial technology solutions to markets such as Namibia, One Credit in Nigeria, and MobiKwik in India. In these situations, we take an equity position in the business while also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively engaged in the management of the new business. In most instances, the joint venture or partnership has a license to use our proprietary technologies in the specific territory, including the back-end system. We also own 26% of Finbond Group Limited, or Finbond, a South African public company that has a mutual banking license in South Africa and owns certain state lenders in the U.S. We account for our equity investments using the equity method.
We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the implementation of our technology.
Developments during Fiscal 2017
SASSA contract extended to March 31, 2018
Our contract signed in February 2012 with SASSA was scheduled to expire on March 31, 2017. At a Parliamentary briefing session on February 1, 2017, SASSA informed the meeting that it would not be ready to assume the payment function on April 1, 2017. SASSA expressed its intention to approach the Constitutional Court to obtain permission to extend our contract. On February 9, 2017, we received a letter from SASSA that essentially was an invitation to meet to discuss an interim arrangement to continue with the payment of social welfare grants after March 31, 2017, for a limited period. The parties agreed to meet in the first week of March 2017.
On February 28, 2017, a South African non-profit organization initiated a court process for the Constitutional Court of South Africa to hear a matter that was described as in the public interest and in the interest of all grant beneficiaries. The applicant sought reinstatement of the oversight role of the Constitutional Court for the payment of social grants to ensure compliance by SASSA with its constitutional obligations to provide social assistance in a lawful manner that is in line with constitutional rights and values. In early March 2017, other entities joined these proceedings. We did not oppose the applications made.
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In early March 2017, we met with SASSA to discuss the interim arrangement referred to above. The parties agreed on draft terms following these discussions. These draft terms were subject to approval by National Treasury or the Constitutional Court.
The Constitutional Court heard the matter referred to above on March 15, 2017, and issued its order on March 17, 2017. The impact of the Constitutional Courts order on us is summarized under Item 3Legal Proceedings. The order effectively extends the expiring contract and the suspension of the declaration of invalidity to March 31, 2018, under the expiring contracts terms and conditions, augmented by certain additional terms and conditions as described under Item 3Legal Proceedings.
On March 31, 2017, we signed an addendum to the expiring contract with SASSA which extends the contract to March 31, 2018, under the expiring contracts terms and conditions and includes the specific terms as ordered by the Constitutional Court.
The Constitutional Court also ordered the Minister and SASSA to file reports with the Constitutional Court every three months, commencing on June 19, 2017, setting out how they plan to ensure the payment of social grants after the end of the 12-month contract extension period, what steps they have taken in that regard, what further steps they will take, and when they will take each future step, so as to ensure that the payment of all social grants is made when they fall due after the expiry of the 12-month period. The reports filed by the Minister and SASSA must include, but is not limited to, the applicable time-frames for the various deliverables which form part of the plan, whether the time-frames have been complied with, and if not, why that is the case and what will be done to remedy the situation. The Minister and SASSA are also required to immediately report to the Constitutional Court and explain the reason for and consequences of any material changes to the circumstances included in the reports previously submitted to the Constitutional Court.
The Constitutional Court order also invited parties involved in the Constitutional Court proceedings to provide the name and consent of independent legal practitioners and technical experts, together with the Auditor-General, to oversee the implementation of the payment of social welfare grants during the period to March 31, 2018, as well as oversee SASSAs conduct to appoint a new service provider from April 1, 2018, or to perform the grant distribution service in-house. The Constitutional Court appointed a panel of ten such nominated experts on June 6, 2017. It is our understanding that the expert panel is obtaining information from a number of sources. Accordingly, we have received a request for information from the expert panel and have provided a comprehensive response.
Progress of financial inclusion initiatives in South Africa
In June 2015, we began the rollout of EPE, our business-to-consumer, or B2C, offering in South Africa. At July 31, 2017, we had more than 2.0 million active EPE accounts, compared to 1.95 million at April 28, 2017. EPE is a fully transactional, low cost account created to serve the needs of South Africas unbanked and under-banked population, most of whom are social grant recipients. The EPE account offers customers a comprehensive suite of financial and various financial inclusion services, such as prepaid products, in an economical, convenient and secure solution. EPE provides account holders with a UEPS-EMV debit MasterCard, mobile and internet banking services, ATM and POS services, as well as loans, insurance and other financial products and value-added services. However, SASSA and a nonprofit organization continue to challenge the ability of beneficiaries to freely transact with the grants that they receive as described under Item 3Legal Proceedings.
In order for us to address the sizeable opportunity for EPE and related financial inclusion services in South Africa, in fiscal 2016, we started to expand our brick-and-mortar financial services branch infrastructure, which supplements our nationwide distribution, with a UEPS/EMV-enabled ATM network, and hired a dedicated sales force. At July 31, 2017, we had 149 branches (July 31, 2016: 140), 980 ATMs (July 31, 2016: 904), and 1,822 (July 31, 2016: 2,200) dedicated employees. We reduced our employee headcount throughout fiscal 2017 as a result of the slowdown of the branch expansion during the year and the stabilization and improvement in the efficiency of the branch operations. However, the reduction in employee headcount during the fiscal year did not result in a lower overall employment charge in 2017 relative to 2016 because, on average, we had more employees during fiscal 2017 compared with fiscal 2016 in addition to higher rates per employee due to annual salary increases.
During the 13 months since July 1, 2016 we sold approximately 250,000 new policies related to our simple, low-cost life insurance products, in addition to the free basic life insurance policy provided with every EPE account opened.
We experienced higher year-over-year growth in the demand for our loans, which are among the most affordable available to our customers. Tougher economic conditions in South Africa, aggravated by rising food prices as a result of widespread drought conditions and a weakening currency, has had an impact on the number of clients who qualify for our loan products.
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The graph below presents the growth of the number of EPE cards and Smart Life policies:
Separation agreement with former chief executive officer
In May 2017, we entered into a Separation and Release of Claims Agreement, or Separation Agreement, with one of co-founders, chief executive officer and director, Mr. Serge C.P. Belamant. The Separation Agreement provided for certain payments to Mr. S.C.P. Belamant, including an aggregate $8.0 million severance and cooperative resignation payment and the repurchase for 1,269,751 shares of our common stock (including the repurchase of 252,286 shares underlying Mr. S.C.P. Belamants in-the-money stock options) for an aggregate repurchase of $13.7 million. We also entered into a Consulting Agreement with Mr. S.C.P. Belamant, under which he would provide consulting services to us for a period of up to two years following his departure. On July 31, 2017, we provided Mr. S.C.P. Belamant a written termination notice. We will not be making any termination payments to Mr. S.C.P. Belamant beyond the 90-day notice period.
Strategic investments
Investments in Cell C Proprietary Limited and DNI-4PL Contracts Proprietary Limited
On August 2, 2017, we purchased 15% of Cell C, for an aggregate purchase price of ZAR 2.0 billion ($153.3 million translated at exchange rates applicable as of June 30, 2017) in cash. Cell C is one of the three major licensed mobile operators in South Africa with over 15 million active subscribers. We funded the transaction through a combination of cash and credit facilities described in Note 14 to our consolidated financial statements.
On July 27, 2017, we purchased a 45% interest in DNI for ZAR 945 million ($72.4 million translated at exchange rates applicable as of June 30, 2017) in cash. DNI is the leading distributor of mobile subscriber starter packs for Cell C, while also distributing prepaid airtime through its extensive network of field operatives and agents. We have agreed to pay to DNI an additional amount of up to ZAR 360 million, in cash, subject to its achievement of an agreed profit before tax, as defined in the agreements, target between July 1, 2017 and June 30, 2019. All amounts were translated at exchange rates applicable as of June 30, 2017. We have a two-year option to purchase an additional 10% interest in DNI.
The investments in Cell C and DNI are consistent with our approach of leveraging our significant and established infrastructures, and pursuing strategic acquisition opportunities or partnerships to gain access to new markets or complementary products. We identified the need to offer customers a truly bespoke, affordable and comprehensive package that will go beyond basic telephony. An integrated mobile-based digital product will therefore likely differentiate the offerings of all the relevant stakeholders in this transaction including Net1. The Cell C and DNI investments allow us to address the needs of the broader South African population by owning the value chain including the network, payment, product, distribution and hardware.
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MobiKwik
Pursuant to a subscription agreement with One MobiKwik Systems Private Limited, or MobiKwik, in India, we agreed to make an equity investment of up to $40.0 million in MobiKwik over a 24 month period. MobiKwik is India's largest independent mobile payments network, with over 55 million users and 1.5 million merchants. We made an initial $15.0 million investment in August 2016 and a further $10.6 million investment in June 2017. As of June 30, 2017, we owned approximately 13.5% of MobiKwik. In August 2017, MobiKwik raised additional funding through the issuance of additional shares to a new shareholder at a 90% premium to our investments and our percentage ownership was diluted to 12.0%.
In addition, through a technology agreement, our Virtual Card technology will be integrated across all MobiKwik wallets in order to provide ubiquity across all merchants in India. As part of our continued strategic relationship a number of our other products, including our digital banking platform, are expected to be deployed by MobiKwik over the next year.
Bank Frick
On January 12, 2017, we entered into a share purchase agreement with the Kuno Frick Family Foundation, or Frick Foundation, to acquire a 30% interest in Bank Frick & Co AG, a fully licensed bank based in Balzers, Liechtenstein, from the Frick Foundation for approximately CHF 39.8 million ($41.5 million translated at exchange rates applicable as of June 30, 2017). The completion of the investment is subject to approval from the Financial Market Authority Liechtenstein. Following the successful completion of this investment, we will have a two-year option to acquire an additional 35% interest in Bank Frick.
Bank Frick provides a complete suite of banking services, with one of its key strategic pillars being the provision of payment services and funding of financial technology opportunities. Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a branch in London. Together with Bank Frick, we have jointly identified several funding opportunities, including for our working capital finance, card issuing and acquiring and transaction processing activities. The pending investment in Bank Frick has the potential to provide us with a stable, long term and strategic relationship with a fully licensed bank. Together with Bank Frick, we have agreed that approximately $30 million of the Bank Fricks free equity will be utilized as seed capital for a fund dedicated to our future activities.
Finbond
On October 7, 2016, we provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange rates applicable on the date of the loan) to Finbond in order for Finbond to partially finance its expansion strategy in the United States. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate, or LIBOR, in effect from time to time plus a margin of 12.00%. The LIBOR rate was 1.21% on June 30, 2017. The loan was initially repayable in full at the earlier of Finbond concluding a rights offer or February 28, 2017, but the agreement was subsequently amended to extend the date to August 31, 2017. If Finbond does not settle the amount outstanding on August 31, 2017, we may elect to convert our loan to Finbond shares at an agreed conversion price or to continue to earn interest until such time as the loan is settled in full. We expect the parties to agree to extend the expiration date of the agreement to a period not exceeding 12 months from August 31, 2017. We provided an irrevocable undertaking to participate in the rights offering and convert the ZAR 139.2 million loan to Finbond shares as part of this process.
Mastertrading - working capital financing and supply chain solutions
During fiscal 2017, we commenced with the expansion of our working capital financing and supply chain solutions, an alternate trade finance offering, under the Mastertrading brand in a number of European countries and the U.S. Through this offering, we support the liquidity and working capital position of our customers as we act as an “interim trader”. Customer identified goods are bought and paid for by us and re-sold to our customers with delivery scheduled for an agreed future date. Our customers pay us an agreed fixed trade margin based on the number of days between the date that we pay for the goods and the date that they pay us for the goods. Generally, customers pay us the trade margin at the end of the transaction, however, depending on the terms of the particular agreement, the trade margin may also be due on a monthly basis. We believe that our customers benefit from this offering through improved supplier relations, better terms (e.g. discounts) and improved liquidity situation since the goods are bought back from the interim trade just in time before the sale to the end customer.
In Europe, we provide our solution to a number of clients in the manufacturing, property development and wholesale sectors. The interim trades in Europe have a duration ranging from two weeks to nine months and, as of June 30, 2017, we expect approximately $17.0 million (€14.9 million) to be repaid on a revolving base.
In the U.S., we provide our offering to customers in the petroleum industry, and in certain instances we provide the working capital financing directly to our customer. Trades in the U.S. have a duration ranging from between 12 to 24 weeks and as of June 30, 2017, we expect approximately $12.2 million to be repaid on a revolving base through November 2017. We have been informed that one of our U.S. customer’s clients breached their contractual obligations on a particular transaction which resulted in a cash loss to our customer of approximately $3.7 million. As a result, our customer has not repaid the full amount due to us and still owes us $3.8 million, including interest, related to this specific transaction. Our customer has commenced recovery procedures, including formal legal proceedings, against its client. Notwithstanding these actions pursued by our customer, we have created an allowance for credit losses of $3.8 million for the full amount due to us as we cannot predict whether the legal proceedings initiated by our customer to recover the amounts due from its client will be successful.
We have utilized a facility from Bank Frick to fund the growth of the majority of the European working capital receivables and utilized existing cash reserves to grow our U.S. working capital book.
Changes in Executive Leadership and Board of Directors
In April 2017, our board of directors determined to split our chairman and chief executive officer roles in recognition of the growing practice of U.S. public companies, as well as the customary practice of South African public companies, for the chairman to be an independent director. Mr. C.S. Seabrooke was appointed as chairman of our board in April 2017.
In June 2017, Mr. Alfred T. Mockett joined our board as an independent non-employee director. Mr. Mockett also serves on our nominating and corporate governance, audit and remuneration committees. The IFC Investors has advised us that it regards Mr. Mockett as the independent director nominated by the IFC Investors to our board of directors by virtue of the policy agreement we signed with the IFC Investors.
In June 2017, Mr. Herman G. Kotzé became our chief executive officer, replacing Mr. S.C.P. Belamant, who retired as chief executive officer. Mr. Kotzé has been our chief financial officer, secretary and treasurer since 2004, and will retain these positions until a suitable candidate is identified and engaged to perform these functions.
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Closure of DOJ investigation related to 2012 SASSA contract
In July 2017, we were advised that the U.S. Department of Justice had closed its investigation concerning possible violations of the FCPA. The investigation commenced in November 2012, following the award of the SASSA national contract to us in January 2012.
The closing of the DOJ investigation follows the United States Securities and Exchange Commission closing their investigation in June 2015, the dismissal of a shareholder class action law suit by the U.S. Southern District in September 2015, and the South African Police Services Directorate for Priority Crime Investigation, the Hawks, closing their investigation in November 2015.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires managements judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our operations and financial condition.
Business Combinations and the Recoverability of Goodwill
A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques, including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities that form part of the reporting unit.
The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units, we consider the earnings before interest, taxation, depreciation and amortization, or EBITDA, and the EBITDA multiples applicable to peer and industry comparables of the reporting units. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during fiscal 2017 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units were not at risk of potential impairment.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed acquisitions during fiscal 2017 and 2016 where we identified and recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives.
The valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary.
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Deferred Taxation
We estimate our tax liability through the calculations done for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet. Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in future periods. In the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded.
This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2017 and 2016, respectively, we recorded a net increase of $0.1 million and $16.3 million to our valuation allowance, and in fiscal 2015, we recorded a net decrease of $2.6 million to our valuation allowance.
Stock-based Compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based compensation charges under current accounting standards. These standards require all share-based compensation to employees to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods and also requires an estimation of forfeitures when calculating compensation expense.
We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and directors and recognize compensation cost on a straight line basis. Option-pricing models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on historic employee behavior under similar compensation plans. The fair value of stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was $2.0 million, $3.6 million and $3.2 million for fiscal 2017, 2016 and 2015, respectively.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts receivable related to our Financial inclusion and applied technologies and International transaction-based activities segments with respect to sales or rental of hardware, support and maintenance services provided; or sale of licenses to customers; or the provision of transaction processing services to our customers; or our working capital financing and supply chain solutions provided.
Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on managements estimate of the recoverability of the amounts outstanding.
Management considers factors including period outstanding, creditworthiness of the customers, past payment history and the results of discussions by our credit department with the customer. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these receivables, including on-going evaluation of the creditworthiness of each customer.
Microlending
We maintain an allowance for doubtful finance loans receivable related to our Financial inclusion and applied technologies segment with respect to microlending 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 microlending loans and related service fees if a borrower is in arrears with repayments for more than three months or dies.
Management considers factors including the period of the microlending loan outstanding, creditworthiness of the customers and the past payment history and trends of its established microlending 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.
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Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of June 30, 2017
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of June 30, 2017, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows:
Table 1 | Year ended June 30, | ||||||||
2017 | 2016 | 2015 | |||||||
ZAR : $ average exchange rate | 13.6147 | 14.5062 | 11.4494 | ||||||
Highest ZAR : $ rate during period | 14.8114 | 16.8231 | 12.5779 | ||||||
Lowest ZAR : $ rate during period | 12.4379 | 12.1965 | 10.5128 | ||||||
Rate at end of period | 13.0535 | 14.7838 | 12.2854 | ||||||
KRW : $ average exchange rate | 1,141 | 1,173 | 1,078 | ||||||
Highest KRW : $ rate during period | 1,210 | 1,245 | 1,139 | ||||||
Lowest KRW : $ rate during period | 1,092 | 1,122 | 1,009 | ||||||
Rate at end of period | 1,144 | 1,153 | 1,128 |
ZAR: US $ Exchange Rates
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KRW: US $ Exchange Rates
Translation Exchange Rates
We are required to translate our results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the average rates used to translate this data for the years ended June 30, 2017, 2016 and 2015, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table:
Year ended | |||||||||
Table 2 | June 30, | ||||||||
2017 | 2016 | 2015 | |||||||
Income and expense items: $1 = ZAR | 13.6182 | 14.3842 | 11.4275 | ||||||
Income and expense items: $1 = KRW | 1,146 | 1,172 | 1,073 | ||||||
Balance sheet items: $1 = ZAR | 13.0535 | 14.7838 | 12.2854 | ||||||
Balance sheet items: $1 = KRW | 1,144 | 1,153 | 1,128 |
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited consolidated financial statements which are prepared in accordance with U.S. GAAP. We analyze our results of operations both in U.S. dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the U.S. dollar and ZAR on our reported results and because we use the U.S. dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.
Our operating segment revenue presented in Results of operations by operating segment represents total revenue per operating segment before intercompany eliminations. A reconciliation between total operating segment revenue and revenue presented in our consolidated financial statements is included in Note 23 to those statements.
Fiscal 2017 includes Masterpayment Financial Services Limited, or Malta FS, from November 1, 2016 and Pros Software from October 1, 2016. Fiscal 2016 includes the results of Transact24 from the January 1, 2016 and Masterpayment from April 1, 2016. Refer also to Note 3 to the consolidated financial statements.
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Fiscal 2017 Compared to Fiscal 2016
The following factors had an influence on our results of operations during fiscal 2017 as compared with the same period in the prior year:
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Favorable impact from the weakening of the U.S. dollar against ZAR: The U.S. dollar depreciated by 5% against the ZAR during fiscal 2017, which positively impacted our reported results; |
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Separation costs related to former chief executive officer: We paid our former chief executive officer $8 million in cash related to his separation from our company in fiscal 2017. In addition, the vesting of 200,000 shares of restricted stock granted to him in August 2016 was accelerated which resulted in an additional stock-based compensation charge of approximately $1.6 million during fiscal 2017; |
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Growth in lending and insurance businesses: We continued to achieve volume growth and operating efficiencies in our lending and insurance businesses during fiscal 2017, which has resulted in an improved contribution to our financial inclusion revenue and operating income; |
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Ongoing contributions from EasyPay Everywhere: EPE revenue and operating income growth was driven primarily by ongoing EPE adoption as we further expanded our customer base utilizing our ATM infrastructure; |
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Masterpayment expansion costs and $3.8 million allowance for credit losses: Masterpayment has incurred additional employment costs as it grows its staff complement to execute its expansion plan into new markets. We have provided an allowance for credit losses of $3.8 million related to an amount due from one customer; |
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Regulatory changes in South Korea governing fees on card transactions: Regulations governing the fees that may be charged on card transactions have adversely impacted our revenues and operating income in South Korea, partially offset by transaction volume growth; |
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Lower prepaid sales resulting from improved security features to our Manje products: The introduction of our new biometric-linking feature was implemented in the first quarter of fiscal 2017 and adversely impacted the number of transacting users purchasing prepaid products through our mobile channel; |
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Higher transaction-related costs in fiscal 2017: We incurred $3.3 million in transaction-related costs due to various acquisition and investment initiatives pursued during fiscal 2017; and |
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Higher tax impact of dividends from South African subsidiary in fiscal 2016 compared with 2017: Our income tax expense for fiscal 2016 includes approximately $6.2 million related to the tax impact, including withholding taxes, resulting from distributions from our South African subsidiary. There were fewer distributions from our South African subsidiary during fiscal 2017, and our tax expense includes approximately $1.5 million related to the tax impact, including withholding taxes, resulting from these distributions. |
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
In United States Dollars | |||||||||
Table 3 | (U.S. GAAP) | ||||||||
Year ended June 30, | |||||||||
2017 | 2016 | % | |||||||
$ 000 | $ 000 | change | |||||||
Revenue | 610,066 | 590,749 | 3% | ||||||
Cost of goods sold, IT processing, servicing and support | 292,383 | 290,101 | 1% | ||||||
Selling, general and administration | 179,262 | 145,886 | 23% | ||||||
Depreciation and amortization | 41,378 | 40,394 | 2% | ||||||
Operating income | 97,043 | 114,368 | (15% | ) | |||||
Interest income | 20,897 | 15,292 | 37% | ||||||
Interest expense | 3,484 | 3,423 | 2% | ||||||
Income before income tax expense | 114,456 | 126,237 | (9% | ) | |||||
Income tax expense | 42,472 | 42,080 | 1% | ||||||
Net income before earnings from equity-accounted investments | 71,984 | 84,157 | (14% | ) | |||||
Earnings from equity-accounted investments | 2,664 | 639 | 317% | ||||||
Net income | 74,648 | 84,796 | (12% | ) | |||||
Less net income attributable to non-controlling interest | 1,694 | 2,342 | (28% | ) | |||||
Net income attributable to us | 72,954 | 82,454 | (12% | ) |
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In South African Rand | |||||||||
Table 4 | (U.S. GAAP) | ||||||||
Year ended June 30, | |||||||||
2017 | 2016 | ||||||||
ZAR | ZAR | % | |||||||
000 | 000 | change | |||||||
Revenue | 8,308,001 | 8,497,452 | (2% | ) | |||||
Cost of goods sold, IT processing, servicing and support | 3,981,730 | 4,172,870 | (5% | ) | |||||
Selling, general and administration | 2,441,226 | 2,098,453 | 16% | ||||||
Depreciation and amortization | 563,493 | 581,036 | (3% | ) | |||||
Operating income | 1,321,552 | 1,645,093 | (20% | ) | |||||
Interest income | 284,580 | 219,963 | 29% | ||||||
Interest expense | 47,446 | 49,237 | (4% | ) | |||||
Income before income tax expense | 1,558,686 | 1,815,819 | (14% | ) | |||||
Income tax expense | 578,392 | 605,287 | (4% | ) | |||||
Net income before earnings from equity-accounted investments | 980,294 | 1,210,532 | (19% | ) | |||||
Earnings from equity-accounted investments | 36,279 | 9,192 | 295% | ||||||
Net income | 1,016,573 | 1,219,724 | (17% | ) | |||||
Less net income attributable to non-controlling interest | 23,069 | 33,688 | (32% | ) | |||||
Net income attributable to us | 993,504 | 1,186,036 | (16% | ) |
In ZAR, the decrease in revenue was primarily due to lower prepaid airtime sales, fewer ad hoc terminal sales, and a lower contribution from KSNET due to regulatory changes in South Korea, which was partially offset by more fees generated from our EPE and ATM offerings, improved lending and insurance activities, the inclusion of Masterpayments businesses, and an increase in the number of SASSA UEPS/EMV beneficiaries paid.
In ZAR, the decrease in cost of goods sold, IT processing, servicing and support was primarily due to fewer prepaid airtime and ad hoc terminal sales, which was partially offset by higher expenses incurred due to increased usage of the South African National Payment System by beneficiaries, expenses incurred to operate our EPE and ATM offerings, and the inclusion of Masterpayments businesses.
In ZAR, our selling, general and administration expense increased primarily due to a higher employee costs resulting from our EPE roll-out in fiscal 2016, the impact of October 2016 annual salary increases for our South African and UK-based employees, an $8.0 million separation payment to our former chief executive officer, an allowance for credit losses related to a specific customer of $3.8 million, as well as increases in goods and services purchased from third parties. Our fiscal 2016 selling, general and administration expense includes a $1.9 million gain on re-measurement of the previously held interest related to the T24 acquisition and a gain of ZAR 30 million ($2.2 million) resulting from the change in accounting for Finbond due to the appointment of our representative to Finbonds board of directors.
Our operating income margin for fiscal 2017 and 2016 was 16% and 19%, respectively, and our fiscal 2017 margin was 18% excluding the $8.0 million separation payment to our former chief executive officer. We discuss the components of operating income margin under Results of operations by operating segment. The decrease is primarily attributable to the separation payment to our former chief executive officer and higher cost of goods sold, IT processing, servicing and support referred to above, and partially offset by a decrease in depreciation expenses.
In ZAR, depreciation and amortization decreased primarily due to lower overall amortization of intangible assets that are fully amortized and tangible assets that are fully depreciated. These decreases were partially offset by an increase in acquisition-related intangible asset amortization resulting from recent transactions, including Masterpayment and Pros Software.
In ZAR, interest on surplus cash increased to $20.9 million (ZAR 284.6 million) from $15.3 million (ZAR 220.0 million), due primarily to the interest received from our loan to Finbond and higher average daily ZAR cash balances and ZAR interest rates, partially offset by the lower interest earned on the U.S. dollar cash reserves that we converted from ZAR through distributions from our South African subsidiary.
In ZAR, interest expense decreased to $3.5 million (ZAR 47.4 million) from $3.4 million (ZAR 49.2 million), due to a lower average long-term debt balance on our South Korean debt and a lower interest rate, offset by a $1.2 million (ZAR 16.0 million) guarantee fee that was expensed related to the financing for the Blue Label Telecoms Limited investment that was ultimately not pursued.
Fiscal 2017 tax expense was $42.5 million (ZAR 578.4 million) compared to $42.1 million (ZAR 605.3 million) in fiscal 2016. Our effective tax rate for the fiscal 2017, was 37.1% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact attributable to distributions from our South African subsidiary. Our effective tax rate for the fiscal 2016, was 33.3% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of approximately $6.2 million attributable to distributions from our South African subsidiary.
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Earnings from equity-accounted investments for fiscal 2017 have increased primarily due to the inclusion of our portion of Finbonds net income. Finbond is listed on the Johannesburg Stock Exchange and reports its six-month results during our first half and its annual results during our fourth quarter.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 5 | In United States Dollars (U.S. GAAP) | ||||||||||||||
Year ended June 30, | |||||||||||||||
2017 | % of | 2016 | % of | % | |||||||||||
Operating Segment | $ 000 | total | $000 | total | change | ||||||||||
Revenue: | |||||||||||||||
South African transaction processing | 249,144 | 41% | 212,574 | 36% | 17% | ||||||||||
International transaction processing | 176,729 | 29% | 169,807 | 29% | 4% | ||||||||||
Financial inclusion and applied technologies | 235,901 | 39% | 249,403 | 42% | (5% | ) | |||||||||
Subtotal: Operating segments | 661,774 | 109% | 631,784 | 107% | 5% | ||||||||||
Intersegment eliminations | (51,708 | ) | (9% | ) | (41,035 | ) | (7% | ) | 26% | ||||||
Consolidated revenue | 610,066 | 100% | 590,749 | 100% | 3% | ||||||||||
Operating income (loss): | |||||||||||||||
South African transaction processing | 59,309 | 61% | 51,386 | 45% | 15% | ||||||||||
International transaction processing | 13,705 | 14% | 23,389 | 20% | (41% | ) | |||||||||
Financial inclusion and applied technologies | 57,785 | 60% | 54,999 | 48% | 5% | ||||||||||
Subtotal: Operating segments | 130,799 | 135% | 129,774 | 113% | 1% | ||||||||||
Corporate/Eliminations | (33,756 | ) | (35% | ) | (15,406 | ) | (13% | ) | 119% | ||||||
Consolidated operating income | 97,043 | 100% | 114,368 | 100% | (15% | ) |
Table 6 | In South African Rand (U.S. GAAP) | ||||||||||||||
Year ended June 30, | |||||||||||||||
2017 | 2016 | ||||||||||||||
ZAR | % of | ZAR | % of | % | |||||||||||
Operating Segment | $ 000 | total | $ 000 | total | change | ||||||||||
Revenue: | |||||||||||||||
South African transaction processing | 3,392,893 | 41% | 3,057,707 | 36% | 11% | ||||||||||
International transaction processing | 2,406,731 | 29% | 2,442,538 | 29% | (1% | ) | |||||||||
Financial inclusion and applied technologies | 3,212,547 | 39% | 3,587,463 | 42% | (10% | ) | |||||||||
Subtotal: Operating segments | 9,012,171 | 109% | 9,087,708 | 107% | (1% | ) | |||||||||
Intersegment eliminations | (704,170 | ) | (9% | ) | (590,256 | ) | (7% | ) | 19% | ||||||
Consolidated revenue | 8,308,001 | 100% | 8,497,452 | 100% | (2% | ) | |||||||||
Operating income (loss): | |||||||||||||||
South African transaction processing | 807,682 | 61% | 739,147 | 45% | 9% | ||||||||||
International transaction processing | 186,637 | 14% | 336,432 | 20% | (45% | ) | |||||||||
Financial inclusion and applied technologies | 786,928 | 60% | 791,117 | 48% | (1% | ) | |||||||||
Subtotal: Operating segments | 1,781,247 | 135% | 1,866,696 | 113% | (5% | ) | |||||||||
Corporate/Eliminations | (459,696 | ) | (35% | ) | (221,603 | ) | (13% | ) | 107% | ||||||
Consolidated operating income | 1,321,551 | 100% | 1,645,093 | 100% | (20% | ) |
South African transaction processing
In ZAR, the increase in revenue and operating income from our South African transaction processing segment was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, increased inter-segment transaction processing activities, and a modest increase in the number of social welfare grants distributed.
Operating income margin in our South African transaction processing segment for each of fiscal 2017 and 2016 was 24%. Our fiscal 2017 margin includes higher EPE revenue as a result of increased ATM transactions, an increase in inter-segment transaction processing activities, an increase in the number of beneficiaries paid in fiscal 2017 and a modest increase in the margin of transaction fees generated from cardholders using the South African National Payment System, which was partially offset by annual salary increases granted to our South African employees.
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International transaction-based activities
In calendar 2016, South Korean regulators introduced specific regulations governing the fees that may be charged on card transactions, as is the case in most other developed economies. These regulations have a direct impact on card issuers in South Korea and, consistent with global practices, card issuers have renegotiated their fees with South Korean VAN companies, including KSNET, which has had an adverse impact on KSNETs financial performance.
Revenue from our International transaction processing segment increased during fiscal 2017, primarily due to the inclusion of T24 and Masterpayment; however, this growth was partially offset by a lower contribution from KSNET due to the regulatory changes. Operating income from our International transaction processing segment during fiscal 2017 was lower due to a decrease in revenue at KSNET; losses incurred by Masterpayment as it grows its staff complement to execute its expansion plan into new markets and an allowance for credit losses related to a specific customer of $3.8 million; and ongoing ZAZOO start-up costs in the UK and India, which was partially offset by a positive contribution by T24. Operating income and margin for fiscal 2017 was also positively impacted by a refund of approximately $0.8 million that had been paid several years ago in connection with industry-wide litigation that has now been finalized.
Operating income margin in our International transaction processing segment for fiscal 2017 and 2016, was 8% and 14%, respectively.
Financial inclusion and applied technologies
In ZAR, revenue and operating income from our Financial inclusion and applied technologies segment decreased primarily due to the introduction of our new biometric linking feature for prepaid airtime and other value added services, which adversely impacted sales, as well as fewer ad hoc terminal sales, partially offset by increased volumes in our lending and insurance businesses, an increase in inter-segment revenues and higher card sales.
Operating income margin from our Financial inclusion and applied technologies segment was 24% and 22%, during fiscal 2017 and 2016, respectively, and has increased primarily due to improved revenues from our lending and insurance businesses and an increase in inter-segment revenues and fewer low margin prepaid product sales, offset by fewer ad hoc terminal sales and annual salary increases granted to our South African employees.
Corporate/ Eliminations
Our corporate expenses generally include acquisition-related intangible asset amortization; expenses incurred related to acquisitions and investments pursued; expenditure related to compliance with Sarbanes; non-employee directors fees; employee and executive bonuses; stock-based compensation; legal fees; audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.
During fiscal 2017, our corporate expenses have increased primarily due to the separation payment made to our former chief executive officer, higher transaction-related expenditures and amortization costs and modest increases in U.S. dollar denominated goods and services purchased from third parties and directors fees. These increases were partially offset by lower stock-based compensation charges; lower provision for incentives, including no cash incentive award for fiscal 2017 for the chief executive officer and chief financial officer; and the impact of the stronger U.S. dollar on goods and services procured in other currencies, primarily the ZAR. Our fiscal 2016 corporate expenses include the fair value gain on re-measurement of the previously held interest related to the T24 acquisition and the gain resulting from the change in accounting for Finbond.
Fiscal 2016 Compared to Fiscal 2015
The following factors had an influence on our results of operations during fiscal 2016 as compared with the same period in the prior year:
|
Unfavorable impact from the strengthening of the U.S. dollar against primary functional currencies: The U.S. dollar appreciated by 26% against the ZAR and 9% against the KRW during fiscal 2016, which negatively impacted our reported results; | |
|
Continued growth in airtime revenue and transaction fees: We continued to grow our financial inclusion services offerings during fiscal 2016, which has resulted in higher revenues and operating income, primarily from more sales of low-margin prepaid airtime and an increase in transaction fees; | |
|
Launch of EPE and Smart Life: During fiscal 2016 we launched our EPE and Smart Life offerings and expanded our ATM network, which contributed to an increase in revenue in ZAR, as well as an associated increase in establishment costs for our branch network; |
51
|
Increased contribution by KSNET: Our results were positively impacted by growth in our Korean operations; and |
|
|
Tax impact of dividends from South African subsidiary: Our income tax expense includes approximately $6.2 million related to the tax impact, including withholding taxes, resulting from distributions from our South African subsidiary which helped reduce the impact of a weakened ZAR on our reported cash balances. The conversion of a significant portion of our ZAR cash reserves to USD negatively impacted our interest income due to the material difference between ZAR and USD deposit rates. |
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with U.S. GAAP.
The following tables show the changes in the items comprising our statements of operations, both in U.S. dollars and in ZAR:
In United States Dollars | |||||||||
Table 7 | (U.S. GAAP) | ||||||||
Year ended June 30, | |||||||||
2016 | 2015 | % | |||||||
$ 000 | $ 000 | change | |||||||
Revenue | 590,749 | 625,979 | (6% | ) | |||||
Cost of goods sold, IT processing, servicing and support | 290,101 | 297,856 | (3% | ) | |||||
Selling, general and administration | 145,886 | 158,919 | (8% | ) | |||||
Depreciation and amortization | 40,394 | 40,685 | (1% | ) | |||||
Operating income | 114,368 | 128,519 | (11% | ) | |||||
Interest income | 15,292 | 16,355 | (6% | ) | |||||
Interest expense | 3,423 | 4,456 | (23% | ) | |||||
Income before income tax expense | 126,237 | 140,418 | (10% | ) | |||||
Income tax expense | 42,080 | 44,136 | (5% | ) | |||||
Net income before earnings from equity-accounted investments | 84,157 | 96,282 | (13% | ) | |||||
Earnings from equity-accounted investments | 639 | 452 | 41% | ||||||
Net income | 84,796 | 96,734 | (12% | ) | |||||
Less net income attributable to non-controlling interest | 2,342 | 1,999 | 17% | ||||||
Net income attributable to us | 82,454 | 94,735 | (13% | ) |
In South African Rand | |||||||||
Table 8 | (U.S. GAAP) | ||||||||
Year ended June 30, | |||||||||
2016 | 2015 | ||||||||
ZAR | ZAR | % | |||||||
$000 | $000 | change | |||||||
Revenue | 8,497,452 | 7,153,375 | 19% | ||||||
Cost of goods sold, IT processing, servicing and support | 4,172,870 | 3,403,749 | 23% | ||||||
Selling, general and administration | 2,098,453 | 1,816,047 | 16% | ||||||
Depreciation and amortization | 581,036 | 464,928 | 25% | ||||||
Operating income | 1,645,093 | 1,468,651 | 12% | ||||||
Interest income | 219,963 | 186,897 | 18% | ||||||
Interest expense | 49,237 | 50,921 | (3% | ) | |||||
Income before income tax expense | 1,815,819 | 1,604,627 | 13% | ||||||
Income tax expense | 605,287 | 504,364 | 20% | ||||||
Net income before earnings from equity-accounted investments | 1,210,532 | 1,100,263 | 10% | ||||||
Earnings from equity-accounted investments | 9,192 | 5,165 | 78% | ||||||
Net income | 1,219,724 | 1,105,428 | 10% | ||||||
Less net income attributable to non-controlling interest | 33,688 | 22,844 | 47% | ||||||
Net income attributable to us | 1,186,036 | 1,082,584 | 10% |
In ZAR, the increase in revenue was primarily due to higher prepaid airtime sales, more low-margin transaction fees generated from cardholders using the South African National Payment System, more fees generated from our new EPE and ATM offerings, an increase in the number of SASSA UEPS/ EMV beneficiaries paid, a higher contribution from KSNET and more ad hoc terminal sales, partially offset by lower UEPS-loans fees.
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In ZAR, 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, expenses incurred to roll-out our new EPE and ATM offerings and expanding our branch network, and more prepaid airtime sold.
In ZAR, our selling, general and administration expense increased due to a higher staff complement resulting from our EPE roll-out, as well as increases in goods and services purchased from third parties, offset by a $1.9 million fair value gain resulting from the acquisition of Transact24 and a gain of ZAR 30 million ($2.2 million) resulting from the change in accounting for Finbond due to the appointment of our representative to Finbonds board of directors.
Our operating income margin for fiscal 2016 and 2015 was 19% and 21%, respectively. We discuss the components of operating income margin under Results of operations by operating segment. The decrease is primarily attributable to the higher cost of goods sold, IT processing, servicing and support referred to above and an increase in depreciation expenses.
In ZAR, depreciation and amortization increased primarily as a result of an increase in depreciation related to more terminals used to provide transaction processing in Korea, the roll-out of EPE ATMs and an increase in acquisition-related intangible asset amortization resulting from the Transact24 and Masterpayment transactions, all partially offset by lower overall amortization of intangible assets that are now fully amortized.
In ZAR, interest on surplus cash increased to $15.3 million (ZAR 220.0 million) from $16.4 million (ZAR 186.9 million), due primarily to higher average daily ZAR cash balances and ZAR interest rates, partially offset by the lower interest earned on the USD cash reserves that we converted from ZAR through distributions from our South African subsidiary.
Interest expense decreased to $3.4 million (ZAR 49.2 million) from $4.5 million (ZAR 50.9 million), due to a lower average long-term debt balance on our South Korean debt and a lower interest rate.
Fiscal 2016 tax expense was $42.1 million (ZAR 605.3 million) compared to $44.1 million (ZAR 504.4 million) in fiscal 2015. Our effective tax rate for the fiscal 2016, was 33.3% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal fees) and the tax impact, including withholding taxes, of approximately $6.2 million attributable to distributions from our South African subsidiary. Our effective tax rate for fiscal 2015, was 31.4% and was higher than the South African statutory rate as a result of non-deductible expenses (including consulting and legal).
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 9 | In United States Dollars (U.S. GAAP) | ||||||||||||||
Year ended June 30, | |||||||||||||||
2016 | % of | 2015 | % of | % | |||||||||||
Operating Segment | $ 000 | total | $ 000 | total | change | ||||||||||
Revenue: | |||||||||||||||
South African transaction processing | 212,574 | 36% | 236,452 | 38% | (10% | ) | |||||||||
International transaction processing | 169,807 | 29% | 164,554 | 26% | 3% | ||||||||||
Financial inclusion and applied technologies | 249,403 | 42% | 272,600 | 44% | (9% | ) | |||||||||
Subtotal: Operating segments | 631,784 | 107% | 673,606 | 108% | (6% | ) | |||||||||
Intersegment eliminations | (41,035 | ) | (7% | ) | (47,627 | ) | (8% | ) | (14% | ) | |||||
Consolidated revenue |
590,749 | 100% | 625,979 | 100% | (6% | ) | |||||||||
Operating income (loss): | |||||||||||||||
South African transaction processing | 51,386 | 45% | 51,008 | 40% | 1% | ||||||||||
International transaction processing | 23,389 | 20% | 26,805 | 21% | (13% | ) | |||||||||
Financial inclusion and applied technologies | 54,999 | 48% | 72,725 | 57% | (24% | ) | |||||||||
Subtotal: Operating segments | 129,774 | 113% | 150,538 | 118% | (14% | ) | |||||||||
Corporate/Eliminations | (15,406 | ) | (13% | ) | (22,019 | ) | (18% | ) | (30% | ) | |||||
Consolidated operating income | 114,368 | 100% | 128,519 | 100% | (11% | ) |
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Table 10 | In South African Rand (U.S. GAAP) | ||||||||||||||
Year ended June 30, | |||||||||||||||
2016 | 2015 | ||||||||||||||
ZAR | % of | ZAR | % of | % | |||||||||||
Operating Segment | $ 000 | total | $ 000 | total | change | ||||||||||
Revenue: | |||||||||||||||
South African transaction processing | 3,057,707 | 36% | 2,702,055 | 38% | 13% | ||||||||||
International transaction processing | 2,442,538 | 29% | 1,880,441 | 26% | 30% | ||||||||||
Financial inclusion and applied technologies | 3,587,463 | 42% | 3,115,137 | 44% | 15% | ||||||||||
Subtotal: Operating segments | 9,087,708 | 107% | 7,697,633 | 108% | 18% | ||||||||||
Intersegment eliminations | (590,256 | ) | (7% | ) | (544,258 | ) | (8% | ) | 8% | ||||||
Consolidated revenue |
8,497,452 | 100% | 7,153,375 | 100% | 19% | ||||||||||
Operating income (loss): | |||||||||||||||
South African transaction processing | 739,147 | 45% | 582,894 | 40% | 27% | ||||||||||
International transaction processing | 336,432 | 20% | 306,314 | 21% | 10% | ||||||||||
Financial inclusion and applied technologies | 791,117 | 48% | 831,065 | 57% | (5% | ) | |||||||||
Subtotal: Operating segments | 1,866,696 | 113% | 1,720,273 | 118% | 9% | ||||||||||
Corporate/Eliminations | (221,603 | ) | (13% | ) | (251,622 | ) | (18% | ) | (12% | ) | |||||
Consolidated operating income | 1,645,093 | 100% | 1,468,651 | 100% | 12% |
South African transaction processing
In ZAR, the increase in segment revenue and operating income was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, more low-margin transaction fees generated from card holders using the South African National Payment System, increased inter-segment transaction processing activities, and a modest increase in the number of social welfare grants distributed.
Operating income margin in our South African transaction processing segment for fiscal 2016 and 2015 was 24% and 22%, respectively, and has increased primarily due a modest increase in the margin on transaction fees generated from cardholders using the South African National Payment System and to an increase in the number of beneficiaries paid in fiscal 2016.
International transaction-based activities
Revenue from our International transaction processing segment increased primarily due to higher transaction volume at KSNET during fiscal 2016 and the inclusion of the contribution from Transact24 and Masterpayment. Operating income during fiscal 2016 was lower due to an increase in depreciation expense and ongoing ZAZOO start-up costs in the United Kingdom and India, but was partially offset by an increase in revenue contribution from KSNET and a positive contribution from Transact24, Masterpayment and XeoHealth.
Operating income and operating income margin in our International transaction processing segment for fiscal 2015, were positively impacted by a refund of approximately $1.7 million that had been paid several years ago in connection with industry-wide litigation. Operating income margin for fiscal 2016 and 2015, was 14% and 16%, respectively.
Financial inclusion and applied technologies
In ZAR, revenue and operating income from our Financial inclusion and applied technologies segment increased primarily due to higher prepaid airtime and other value-added services sales, more ad hoc terminal and card sales and, in ZAR, an increase in inter-segment revenues, offset by lower lending service fees. Operating income for fiscal 2016, was adversely impacted by establishment costs for Smart Life and expansion of our branch network.
Operating income margin from our Financial inclusion and applied technologies segment was 22% and 27%, during fiscal 2016 and 2015, respectively, and has decreased primarily due to the sale of more low-margin prepaid airtime and establishment costs for Smart Life and expansion of our branch network.
Corporate/ Eliminations
In USD, our corporate expenses have decreased primarily due to the impact of the stronger USD on goods and services procured in other currencies, primarily the ZAR, lower amortization costs, lower executive cash incentive awards, the fair value gain resulting from the acquisition of Transact24 and the gain resulting from the change in accounting for Finbond, partially offset by modest increases in USD denominated goods and services purchased from third parties and directors fees.
54
Liquidity and Capital Resources
At June 30, 2017, our cash balances were $258.5 million, which comprised U.S. dollar-denominated balances of $60.0 million, ZAR-denominated balances of ZAR 1.8 billion ($141.5 million), KRW-denominated balances of KRW 55.0 billion ($48.1 million) and other currency deposits, primarily euro, of $8.9 million. The increase in our cash balances from June 30, 2016, was primarily due to the sale of 5 million shares of our common stock and expansion of most of our core businesses, which was partially offset by the repurchase of shares of our common stock; unscheduled voluntary repayments of our Korean debt; payment of taxes; the investment in MobiKwik, Malta FS and Pros Software; a loan to Finbond and capital expenditures.
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 U.S. dollar denominated money market accounts. 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 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. For instance, in July 2017, we obtained loan facilities from South African banks to fund a portion of our investment in Cell C and a portion of our working capital requirements. Refer to Note 14 to our consolidated financial statements for the year ended June 30, 2017, for additional information related to these loan facilities.
We have a short-term South African credit facility with Nedbank of ZAR 400 million ($30.6 million), which consists of (i) a primary amount of up to ZAR 200 million, which is immediately available, and (ii) a secondary amount of up to ZAR 200 million, which is not immediately available. The primary amounts comprise an overdraft facility of up to ZAR 50 million and indirect and derivative facilities of up to ZAR 150 million, which include letters of guarantee, letters of credit and forward exchange contracts. On December 9, 2016, Nedbank agreed to temporarily increase the overdraft facility by the secondary amount of ZAR 200 million to ZAR 250 million.
As of June 30, 2017, we had used none of the overdraft and ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017) of the indirect and derivative facilities to obtain foreign exchange contracts and to support guarantees issued by Nedbank to various third parties on our behalf. Refer to Note 12 to the consolidated financial statements for more information about the terms of this facility.
We obtained EUR 40.0 million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft facilities from Bank Frick. As of June 30, 2017, we had utilized approximately CHF 15.9 million ($16.6 million) of the CHF 20 million facility and had not utilized any of the EUR 40 million facility. As of June 30, 2017, the interest rate on each of these facilities was 5.00%. We have assigned all claims against amounts due from Masterpayment customers, which have been financed from the CHF 20 million facility, plus all secondary rights and preferential rights as collateral for this facility to Bank Frick. Our Masterpayment subsidiary was required to open a primary business account with Bank Frick, and this account has been pledged to Bank Frick as collateral for the EUR 40 million facility. The initial term of the EUR 40 million facility ends on December 31, 2019, but it will automatically be extended for one year if it is not terminated with 12 months written notice. The CHF 20 million facility does not have a fixed term; however, it may be terminated by either party with six months written notice at the end of a calendar month.
As of June 30, 2017, we had outstanding long-term debt of KRW 18.6 billion (approximately $16.2 million translated at exchange rates applicable as of June 30, 2017) under credit facilities with a group of South Korean banks. The loans bear interest at the South Korean CD rate in effect from time to time (1.41% as of June 30, 2017) plus a margin of 3.10% for one of the term loan facilities and the revolver and a margin of 2.90% for the other term loan facility. We made a scheduled repayment of KRW 10 billion ($8.8 million) on April 29, 2017. Scheduled remaining repayments of the term loans and loan under the revolving credit facility are as follows: April 2018 (KRW 10 billion) and October 2018 (KRW 8.6 billion plus all outstanding loans under our revolving credit facility).
On July 29, 2016, we prepaid KRW 20 billion ($17.8 million) of the Facility A loan and KRW 10 billion ($8.9 million) of our Facility C revolving credit facility; both prepayments were translated at exchange rates applicable as of the payment date. Refer to Note 14 to the consolidated financial statements for more information about the terms of this facility.
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We have a unique cash flow cycle due to the funding mechanism under our SASSA contact and our pre-funding of certain merchants. We generally receive the grant funds 48 hours prior to the provision of the service in a trust account and any interest we earn on these amounts is for the benefit of SASSA. We are required to initiate payments before the start of the pay cycle month in order to have cash, merchant and interbank funds available when the payment cycle commences and this process requires that we have access to the grant funds to be paid. These funds are recorded as settlement assets and liabilities. Historically, we opened the pay cycle at certain participating merchants a few days before the payment of grants at pay sites, however, currently we do not commence the payment cycle at participating merchants before the start of the pay cycle month.
We use our funds to pre-fund certain merchants for grants paid through our merchant acquiring system on our behalf a day or two before the pay cycle opens. We typically reimburse merchants that are not pre-funded within 48 hours after they distribute the grants to the social welfare recipient cardholders.
In addition, as a transaction processor, we receive cash from:
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customers on whose behalf we processes off-payroll payments that we will disburse to customer employees, payroll- related payees and other payees designated by the customer; and |
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||
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credit card companies (as well as other types of payment services) which have business relationships with merchants selling goods and services via the internet in South Korea and through Transact24 that are our customers and on whose behalf we process the transactions between various parties and settle the funds from the credit card companies to our merchant customers. |
These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.
Cash flows from operating activities
In ZAR, cash flows from operating activities for fiscal 2017 decreased to $97.2 million (ZAR 1.3 billion) from $116.6 million (ZAR 1.7 billion) for fiscal 2016. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, the decrease relates primarily to the growth of Masterpayments working capital finance offering and the separation payment made to our former chief executive officer, offset by an increase in cash from operating activities resulted from improved trading activity during fiscal 2017. During fiscal 2017, we paid interest of $1.5 million under our South Korean debt facility.
In ZAR, cash flows from operating activities for fiscal 2016 increased to $116.6 million (ZAR 1.7 billion) from $135.3 million (ZAR 1.5 billion) for fiscal 2015. Excluding the impact of interest received, interest paid under our Korean debt and taxes presented in the table below, the increase in cash from operating activities resulted from improved trading activity during fiscal 2016. During fiscal 2016, we paid interest of $3.3 million under our South Korean debt facility.
During fiscal 2017, we made a first provisional tax payment of $18.2 million (ZAR 252.0 million) and a second provisional tax payment of $17.2 million (ZAR 221.7 million) related to our 2017 tax year in South Africa. We paid dividend withholding taxes of $1.5 million (ZAR 21.3 million). We also paid taxes totaling $8.1 million in other tax jurisdictions, primarily South Korea.
During fiscal 2016, we made a first provisional tax payment of $16.0 million (ZAR 239.9 million) and a second provisional tax payment of $13.7 million (ZAR 207.3 million) related to our 2016 tax year in South Africa. We paid dividend withholding taxes of $4.2 million (ZAR 60.0 million). We also paid taxes totaling $5.0 million in other tax jurisdictions, primarily South Korea.
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Taxes paid during fiscal 2017, 2016 and 2015 were as follows:
Table 11 | Year ended June 30, | |||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
$ | $ | $ | ZAR | ZAR | ZAR | |||||||||||||
000 | 000 | 000 | 000 | 000 | 000 | |||||||||||||
First provisional payments | 18,192 | 15,956 | 18,910 | 251,968 | 239,939 | 217,241 | ||||||||||||
Second provisional payments | 17,197 | 13,733 | 16,234 | 221,734 | 207,329 | 199,779 | ||||||||||||
Taxation paid related to prior years | 1,624 | 3,436 | 2,408 | 22,365 | 46,840 | 26,395 | ||||||||||||
Taxation refunds received | (1,414 | ) | (176 | ) | (468 | ) | (19,481 | ) | (2,402 | ) | (5,396 | ) | ||||||
Dividend withholding taxation | 1,471 | 4,183 | 737 | 21,300 | 60,000 | 8,702 | ||||||||||||
Total South African |
37,070 | 37,132 | 37,821 | 497,886 | 551,706 | 446,721 | ||||||||||||
Foreign, primarily South Korea | 8,095 | 4,991 | 7,638 | 109,800 | 74,844 | 86,857 | ||||||||||||
Total tax paid |
45,165 | 42,123 | 45,459 | 607,686 | 626,550 | 533,578 |
We expect to pay additional second provisional payments in South Africa of approximately $1.9 million (ZAR 25.2 million translated at exchange rates applicable as of June 30, 2017) related to our 2017 tax year in the first quarter of fiscal 2018.
Cash flows from investing activities
Cash used in investing activities for fiscal 2017 includes capital expenditure of $11.2 million (ZAR 152.5 million), primarily for the acquisition of payment processing terminals in Korea. Our Korean capital expenditures have declined due to regulatory changes in South Korea, which now prohibit the provision of payment equipment to the majority of merchants.
Cash used in investing activities for fiscal 2016 includes capital expenditure of $35.8 million (ZAR 514.9 million), primarily for the acquisition of payment processing terminals in Korea and the rollout of ATMs in South Africa.
Cash used in investing activities for fiscal 2015 includes capital expenditure of $36.4 million (ZAR 416.4 million), primarily for the acquisition of payment processing terminals in Korea and the rollout of ATMs in South Africa.
During fiscal 2017, we paid approximately $25.8 million for an approximate 13.5% interest in MobiKwik; provided a $10.0 million loan to Finbond; provided a $2.0 million loan to KZ One and paid approximately $2.9 million and $1.7 million, respectively, net of cash received, to acquire 100% of each of Malta FS and Pros Softwares ordinary shares.
During fiscal 2016, we paid approximately $14.8 million and $1.7 million, respectively, net of cash received, to acquire 60% of Masterpayment and approximately 56% of Transact24s ordinary shares. We also exercised our rights under the Finbond rights offer and paid approximately $8.9 million (ZAR 136.1 million) to acquire an additional 40,733,723 shares of common stock of Finbond.
During fiscal 2015, we paid $13.2 million for non-controlling interests in businesses based in Nigeria and Hong Kong.
Cash flows from financing activities
During fiscal 2017, we sold 5 million shares of our common stock for $45.0 million and received approximately $2.9 million from the exercise of stock options. We also paid approximately $45.3 million to repurchase 4,407,360 shares of our common stock and also paid $0.5 million, on July 1, 2016, related to settlement of amounts outstanding related to the repurchases at the end of June 2016. We also made a $28.5 million unscheduled repayment of our Korean debt, made a scheduled $7.4 million Korean debt repayment, utilized approximately $0.8 million of our Korean borrowings to pay quarterly interest due and utilized approximately $16.2 million of our CHF facilities. In addition, we paid a guarantee fee of $1.1 million related to the guarantee issued by RMB and paid a dividend of approximately $2.1 million to certain of our non-controlling interests.
During fiscal 2016, we received approximately $107.7 million from the issue of 9,984,311 shares of our common stock and approximately $3.8 million from the exercise of stock options. We made scheduled Korean long-term debt repayments of approximately $8.7 million, and utilized approximately $2.1 million of our Korean borrowings to pay quarterly interest due. We also acquired 2,426,704 shares of our common stock and paid approximately $26.6 million during fiscal 2016 and the remaining $0.5 million on July 1, 2016, related to these repurchases and, in June 2016, paid approximately $11.2 million for all of the shares of Masterpayment that we did not already own.
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During fiscal 2015, we made a scheduled Korean debt repayment of $14.1 million, repurchased BVIs remaining 1,837,432 shares of Net1 common stock for approximately $9.2 million, received $1.4 million from BVI for 12.5% of CPS issued and outstanding ordinary shares and paid a dividend of $1.0 million to certain of our non-controlling interests. We also utilized approximately $3.8 million of our Korean borrowings to pay quarterly interest due and received approximately $2.0 million from the exercise of stock options.
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2017:
Table 13 | Payments due by Period, as of June 30, 2017 ( in $ 000s) | ||||||||||||||
Less | More | ||||||||||||||
than 1 | 1-3 | 3-5 | than 5 | ||||||||||||
Total | year | years | years | years | |||||||||||
Acquisition of Cell C (A) | 153,216 | 153,216 | - | - | - | ||||||||||
Acquisition of DNI (B) | 72,395 | 72,395 | - | - | - | ||||||||||
Acquisition of Bank Frick (C) | 41,512 | 41,512 | - | - | - | ||||||||||
Long-term debt obligations (D) | 17,140 | 9,527 | 7,613 | - | - | ||||||||||
Short-term credit facilities | 16,579 | 16,579 | |||||||||||||
Operating lease obligations | 7,794 | 5,276 | 1,977 | 541 | - | ||||||||||
Purchase obligations | 2,278 | 2,278 | - | - | - | ||||||||||
Capital commitments | 84 | 84 | - | - | - | ||||||||||
Other long-term obligations (E)(F) | 2,795 | - | - | - | 2,795 | ||||||||||
Total | 313,793 | 300,867 | 9,590 | 541 | 2,795 |
(A) |
In August 2017, we acquired 15% of the issued share capital of Cell C for ZAR 2 billion utilizing a combination of our existing cash reserves and a lending facility obtained in July 2017, refer also Item 7Management Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. |
(B) |
In July 2017, we acquired 45% of the issued share capital of DNI for ZAR 945 million utilizing our existing cash reserves. |
(C) |
We have agreed to purchase 30% of Bank Frick for an aggregate purchase price of approximately CHF 39.8 million, refer also Note 10 to our consolidated financial statements. |
(D) |
Includes $16.2 million of long-term debt and interest payable at the rate applicable on June 30, 2017, under our Korean debt facility. |
(E) |
Includes policyholder liabilities of 2.2 million related to our insurance business. |
(F) |
We have excluded a $66.6 million guarantee to Bank Frick to secure the short-term facilities provides to Masterpayment and cross-guarantees in the aggregate amount of $10.0 million issued as of June 30, 2017, 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. We have also excluded contractual commitments to invest approximately $15 million in MobiKwik, subject to the achievement of certain contractual conditions. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years ended June 30, 2017, 2016 and 2015 were as follows:
Table 12 | Year ended June 30, | |||||||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
$ | $ | $ | ZAR | ZAR | ZAR | |||||||||||||
Operating Segment | 000 | 000 | 000 | 000 | 000 | 000 | ||||||||||||
South African transaction processing | 2,473 | 5,101 | 7,008 | 33,669 | 73,374 | 80,084 | ||||||||||||
International transaction processing | 7,745 | 28,029 | 28,205 | 105,446 | 403,174 | 322,312 | ||||||||||||
Financial inclusion and applied technologies | 977 | 2,667 | 1,223 | 13,302 | 38,363 | 13,976 | ||||||||||||
Consolidated total | 11,195 | 35,797 | 36,436 | 152,417 | 514,911 | 416,372 |
Our capital expenditures for fiscal 2017, 2016 and 2015, are discussed under Liquidity and Capital ResourcesCash flows from investing activities.
58
All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had outstanding capital commitments as of June 30, 2017, of $0.1 million related mainly to computer equipment required to maintain and expand operations. We expect to fund these expenditures through internally-generated funds. In addition to these capital expenditures, we expect that capital spending for fiscal 2018 will also relate to expanding our operations in South Korea and South Africa.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We seek to reduce our exposure to currencies other than the South African rand, or ZAR, through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, we use financial instruments to economically hedge our exposure to exchange rate and interest rate fluctuations arising from our operations. We are also exposed to equity price and liquidity risks as well as credit risks.
Currency Exchange Risk
We are subject to currency exchange risk because we purchase inventories that we are required to settle in other currencies, primarily the euro and U.S. dollar. We have used forward contracts to limit our exposure in these transactions to fluctuations in exchange rates between the ZAR, on the one hand, and the U.S. dollar and the euro, on the other hand. As of June 30, 2017 and 2016, our outstanding foreign exchange contracts were as follows:
As of June 30, 2017
None.
As of June 30, 2016
Fair market | |||||||||
Notional amount | Strike price | value price | Maturity | ||||||
EUR 573,765.00 | ZAR 15.9587 | ZAR 16.3393 | July 20, 2016 | ||||||
EUR 554,494.50 | ZAR 16.0643 | ZAR 16.4564 | August 19, 2016 | ||||||
EUR 465,711.00 | ZAR 16.1798 | ZAR 16.582 | September 20, 2016 | ||||||
EUR 393,675.00 | ZAR 16.2911 | ZAR 16.7017 | October 20, 2016 | ||||||
EUR 302,368.50 | ZAR 16.4085 | ZAR 16.8301 | November 21, 2016 |
Translation Risk
Translation risk relates to the risk that our results of operations will vary significantly as the U.S. dollar is our reporting currency, but we earn most of our revenues and incur most of our expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside our control, there can be no assurance that future fluctuations will not adversely affect our results of operations and financial condition.
Interest Rate Risk
As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. In addition, outstanding indebtedness under our long-term South Korean debt facilities bear interest at the South Korean CD rate plus 3.10%. As interest rates, and specifically the South Korean CD rate, are outside our control, there can be no assurance that future increases in interest rates, specifically the South Korean CD rate, will not adversely affect our results of operations and financial condition. As of June 30, 2017, the South Korean CD rate was 1.41%.
59
The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of June 30, 2017, as a result of a change in the South Korean CD rate. The effects of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the South Korean CD rate as of June 30, 2017, is shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.
As of June 30, 2017 | |||||||||
Table 14 | Estimated | ||||||||
annual | |||||||||
expected | |||||||||
Annual | Hypothetical | interest charge | |||||||
expected | change in | after change in | |||||||
interest | South | South Korean | |||||||
charge | Korean CD | CD rate | |||||||
($ 000) | rate | ($ 000) | |||||||
Interest on debt facility | 732 | 1% | 895 | ||||||
(1% | ) | 570 |
We generally maintain limited investment in cash equivalents and have occasionally invested in marketable securities. The interest earned on our bank balances and short term cash investments is dependent on the prevailing interest rates in the jurisdictions where our cash reserves are invested.
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties. We maintain credit risk policies with regard to our counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterpartys financial condition, credit rating, and other credit criteria and risk mitigation tools as our management deems appropriate.
With respect to credit risk on financial instruments, we maintain a policy of entering into such transactions only with South African and European financial institutions that have a credit rating of BB+ or better, as determined by credit rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Microlending credit risk
We are exposed to credit risk in our microlending activities, which provides unsecured short-term loans to qualifying customers. We manage this risk by performing an affordability test for each prospective customer and assign a creditworthiness score, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity Price and Liquidity Risk
Equity price risk relates to the risk of loss that we would incur as a result of the volatility in the exchange-traded price of equity securities that we hold and the risk that we may not be able to liquidate these securities. We have invested in approximately 26% of the issued share capital of Finbond which are exchange-traded equity securities and from April 1, 2016, accounted for using the equity method. The fair value of these securities as of June 30, 2017, represented approximately 1% of our total assets, including these securities. We expect to hold these securities for an extended period of time and we are not concerned with short-term equity price volatility with respect to these securities provided that the underlying business, economic and management characteristics of the company remain sound.
The market price of these securities may fluctuate for a variety of reasons, consequently, the amount we may obtain in a subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that we would incur as a result of the lack of liquidity on the exchange on which these securities are listed. We may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all. We monitor these investments for impairment and make appropriate reductions in carrying value when an impairment is deemed to be other-than-temporary.
60
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements, together with the report of our independent registered public accounting firm, appear on pages F-1 through F-61 of this Annual Report on Form 10-K.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of our officers and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Inherent Limitations in Internal Control over Financial Reporting
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Managements Report on Internal Control Over Financial Reporting
Management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2017. Deloitte & Touche (South Africa), our independent registered public accounting firm, has issued an audit report on our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS
Technologies, Inc.
Johannesburg, South Africa
We have audited the internal control over financial reporting of Net 1 UEPS Technologies, Inc. and subsidiaries (the Company) as of June 30, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2017 of the Company and our report dated August 24, 2017, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
August 24, 2017
National Executive: *LL Bam Chief Executive Officer *TMM Jordan
Deputy Chief Executive Officer
*MJ Jarvis Chief Operating Officer *AF Mackie
Audit & Assurance *N Sing Risk Advisory *NB Kader Tax TP Pillay
Consulting S Gwala BPS *K Black Clients & Industries *JK Mazzocco Talent
& Transformation MG Dicks Risk Independence & Legal *TJ Brown Chairman
of the Board
A full list of partners and directors is available on request | *Partner and Registered Auditor |
62
ITEM 9B. | OTHER INFORMATION |
None.
- Remainder of this page left blank -
63
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information about our executive officers is set out in Part I, Item 1 under the caption Executive Officers and Significant Employees of the Registrant. The other information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our 2017 annual meeting of shareholders entitled Board of Directors and Corporate Governance and Additional Information.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our 2017 annual meeting of shareholders entitled Executive Compensation, Board of Directors and Corporate GovernanceCompensation of Directors and Remuneration Committee Interlocks and Insider Participation.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our 2017 annual meeting of shareholders entitled Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our 2017 annual meeting of shareholders entitled Certain Relationships and Related Transactions and Board of Directors and Corporate Governance.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our 2017 annual meeting of shareholders entitled Audit and Non-Audit Fees.
64
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
a) |
The following documents are filed as part of this report |
1. |
Financial Statements |
The following financial statements are included on pages F-1 through F-61.
2. |
Financial Statement Schedules |
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
(b) |
Exhibits |
|
Incorporated by Reference Herein | |||||||||
Exhibit |
|
Included | ||||||||
No. |
Description of Exhibit |
Herewith | Form | Exhibit | Filing Date | |||||
|
||||||||||
3.1 |
Amended and Restated Articles of Incorporation |
8-K | 3.1 | December 1, 2008 | ||||||
|
||||||||||
3.2 |
Amended and Restated By-Laws of Net 1 UEPS Technologies, Inc. |
8-K | 3.2 | November 5, 2009 | ||||||
|
||||||||||
4.1 |
Form of common stock certificate |
S-1 | 4.1 | June 20, 2005 | ||||||
|
||||||||||
10.1* |
Form of Restricted Stock Agreement |
10-K | 10.13 | August 23, 2012 | ||||||
|
||||||||||
10.2* |
Form of Stock Option Agreement |
10-K | 10.14 | August 23, 2012 | ||||||
|
||||||||||
10.3* |
Form of Restricted Stock Agreement (non- employee directors) |
10-K | 10.15 | August 23, 2012 | ||||||
|
||||||||||
10.4* |
Form of Indemnification Agreement |
10-K | 10.32 | August 25, 2016 | ||||||
|
||||||||||
10.5* | X | |||||||||
|
||||||||||
10.6* |
Amended and Restated 2015 Stock Incentive Plan of Net 1 UEPS Technologies, Inc. |
14A | A | September 25, 2015 | ||||||
|
||||||||||
10.7* |
Service Agreement between KSNET, Inc. and Phil- Hyun Oh dated June 30, 2014 |
8-K | 10.1 | July 2, 2014 | ||||||
|
||||||||||
10.8* |
Service Agreement between Net1 Applied Technologies Korea and Phil-Hyun Oh dated June 30, 2014 |
8-K | 10.2 | July 2, 2014 | ||||||
|
||||||||||
10.9* |
Separation and Release of Claims Agreement, dated May 24, 2017, by and between the Company and Serge C.P. Belamant |
8-K | 10.59 | May 31, 2017 | ||||||
|
||||||||||
10.10 |
Distribution Agreement, dated July 1, 2002, between Net 1 UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty) Limited |
S-4 | 10.1 | February 3, 2004 | ||||||
|
||||||||||
10.11 |
Patent and Technology Agreement, dated June 19, 2000, by and between Net 1 Holdings S.a.r.1. and Net 1 UEPS Technologies, Inc. |
S-4 | 10.2 | February 3, 2004 | ||||||
|
||||||||||
10.12 |
Technology License Agreement between Net 1 Investment Holdings (Proprietary) Limited and Visa International Service Association |
S-1 | 10.12 | May 26, 2005 |
65
10.13 |
Product License Agreement between Net 1 Holdings S.a.r.1. and Net 1 Operations S.a.r.1. |
S-4/A | 10.8 | April 21, 2004 | ||||||
|
||||||||||
10.14 |
Non Exclusive UEPS License Agreement between Net 1 Investment Holdings (Proprietary) Limited and SIA Netcards |
S-4/A | 10.10 | April 21, 2004 | ||||||
|
||||||||||
10.15 |
Assignment of Copyright and License of Patents and Trade Marks between MetroLink (Proprietary) Limited and Net 1 Products (Proprietary) Limited |
S-1 | 10.18 | May 26, 2005 | ||||||
|
||||||||||
10.16 |
Agreement between Nedcor Bank Limited and Net 1 Products (Proprietary) Limited |
S-1/A | 10.16 | July 19, 2005 | ||||||
|
||||||||||
10.17 |
Patent and Technology Agreement by and among Net 1 Investment Holdings (Proprietary) Limited, Net 1 Applied Technology Holding Limited and Nedcor Bank Limited |
S-1 | 10.19 | May 26, 2005 | ||||||
|
||||||||||
10.18 |
Patent and Technology Agreement by and among Net 1 Holdings S.a.r.1., Net 1 Applied Technology Holdings Limited and Nedcor Bank Limited |
S-1/A | 10.19 | July 19, 2005 | ||||||
|
||||||||||
10.19 |
Agreement by and among Nedbank Limited, Net 1 UEPS Technologies, Inc., and Net 1 Applied Technologies South Africa Limited |
S-1/A | 10.20 | July 19, 2005 | ||||||
|
||||||||||
10.20 |
Contract for the Payment of Social Grants dated February 3, 2012 between CPS and SASSA |
8-K | 99.1 | February 6, 2012 | ||||||
|
||||||||||
10.21 |
Service Level Agreement dated February 3, 2012 between CPS and SASSA |
8-K | 99.2 | February 6, 2012 | ||||||
|
||||||||||
10.22 |
Addendum dated March 31, 2017, to the Contract and related Service Level Agreement for the Payment of Social Grants dated February 3, 2012 between South African Social Security Agency and Cash Paymaster Services (Pty) Ltd. |
8-K | 10.59 | March 31, 2017 | ||||||
|
||||||||||
10.23 |
Agreement of Lease, Memorandum of an agreement entered into by and between Buzz Trading 199 (Pty) Ltd and Net 1 Applied Technologies South Africa (Pty) Ltd dated May 7, 2013 |
10-Q | 10.25 | May 9, 2013 | ||||||
|
||||||||||
10.24 |
Addendum to the Lease Agreement made and entered into by and between Buzz Trading 199 (Pty) Ltd and Net 1 Applied Technologies South Africa (Pty) Ltd dated November 18, 2016 |
10-Q | 10-60 | May 4, 2017 | ||||||
|
||||||||||
10.25 |
KRW 85,000,000,000 Senior Facilities Agreement dated October 28, 2013, between Net 1 Applied Technologies Korea, as borrower, Hana Bank, as agent and security agent, financial institutions listed therein as original lenders and Hana Daetoo Securities Co., Ltd., as mandated lead arranger. |
8-K | 10.24 | October 31, 2013 | ||||||
|
||||||||||
10.26 |
Relationship Agreement dated December 10, 2013 between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Business Venture Investments No 1567 (Proprietary) Limited (RF) and Mosomo Investment Holdings (Proprietary) Limited. |
8-K | 10.25 | December 10, 2013 | ||||||
|
||||||||||
10.27 |
Relationship Agreement dated December 10, 2013 between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Born Free Investments 272 (Pty) Ltd and Mazwi Yako. |
8-K | 10.26 | December 10, 2013 |
66
10.28 |
Facility Letter between Nedbank Limited and Net1 Applied Technologies South Africa Limited and certain of its subsidiaries dated as of December 13, 2013 and First Addendum thereto dated as of December 18, 2013 |
8-K | 10.27 | December 19, 2013 | ||||||
10.29 |
Letter from Nedbank Limited to Net1 Applied Technologies South Africa Proprietary Limited and certain of its subsidiaries, dated December 7, 2016 |
8-K | 10.50 | December 9, 2016 | ||||||
10.30 |
Addendum dated January 31, 2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Business Venture Investments No 1567 (Proprietary) Limited (RF) and Mosomo Investment Holdings (Proprietary) Limited. |
10-Q | 10.28 | February 6, 2014 | ||||||
10.31 |
Addendum dated January 31, 2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Born Free Investments 272 (Pty) Ltd and Mazwi Yako. |
10-Q | 10.29 | February 6, 2014 | ||||||
10.32 |
Second Addendum dated March 14, 2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Business Venture Investments No 1567 (Proprietary) Limited (RF) and Mosomo Investment Holdings (Proprietary) Limited. |
8-K | 10.30 | March 18, 2014 | ||||||
10.33 |
Second Addendum dated March 14, 2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Born Free Investments 272 (Pty) Ltd and Mazwi Yako. |
8-K | 10.31 | March 18, 2014 | ||||||
10.34 |
Subscription and Sale of Shares Agreement dated August 27, 2014, between Net 1 UEPS Technologies, Inc., Net 1 Applied Technologies South Africa (Proprietary) Limited, Business Venture Investments No 1567 (Proprietary) Limited (RF), Mosomo Investment Holdings (Proprietary) Limited and Cash Paymaster Services (Proprietary) Ltd |
10-Q | 10.29 | November 6, 2014 | ||||||
10.35 |
Subscription Agreement, dated April 11, 2016, among the Company and the IFC Investors |
8-K | 10.31 | April 12, 2016 | ||||||
10.36 |
Policy Agreement, dated April 11, 2016, among the Company and the IFC Investors |
8-K | 10.32 | April 12, 2016 | ||||||
10.37 |
Subscription Agreement, dated October 4, 2016, between Net1 Applied Technologies South Africa Proprietary Limited and Blue Label Telecoms Limited |
8-K | 10.33 | October 6, 2016 | ||||||
10.38 |
Stock Purchase Agreement, dated October 6, 2016, between Net 1 UEPS Technologies, Inc. and N2 Partners Ltd. |
8-K | 10.34 | October 6, 2016 | ||||||
10.39 |
Stock Purchase Agreement, dated October 6, 2016, between Net 1 UEPS Technologies, Inc. and Draper Gain Investments Ltd. |
8-K | 10.35 | October 6, 2016 | ||||||
10.40 |
First Addendum to Subscription Agreement, dated October 20, 2016, between Net1 Applied Technologies South Africa (Pty) Ltd and Blue Label Telecoms Limited |
8-K | 10.36 | October 25, 2016 |
67
10.41 |
Common Terms Agreement, dated October 20, 2016, among Net1 Applied Technologies South Africa Proprietary Limited, Net 1 UEPS Technologies, Inc. and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.37 | October 25, 2016 | ||||||
|
||||||||||
10.42 |
Senior Facility A Agreement, dated October 20, 2016, between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.38 | October 25, 2016 | ||||||
|
||||||||||
10.43 |
Senior Facility B Agreement, dated October 20, 2016. between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.39 | October 25, 2016 | ||||||
|
||||||||||
10.44 |
Senior Facility C Agreement, dated October 20, 2016, between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.40 | October 25, 2016 | ||||||
|
||||||||||
10.45 |
Subordination Agreement, dated October 20, 2016, among Net1 Applied Technologies South Africa Proprietary Limited, Net1 UEPS Technologies, Inc., the persons listed in Schedule 1 thereto, the persons listed in Schedule 2 thereto, the persons listed in Schedule 3 thereto and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.41 | October 25, 2016 | ||||||
|
||||||||||
10.46 |
Security Cession & Pledge, dated October 20, 2016, given by Net1 Applied Technologies South Africa Proprietary Limited in favor of FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division), and each of the other secured creditors set forth therein. |
8-K | 10.42 | October 25, 2016 | ||||||
|
||||||||||
10.47 |
Amendment No. 1 to Stock Purchase Agreement, dated November 3, 2016, between Net 1 UEPS Technologies, Inc. and N2 Partners Ltd. |
8-K | 10.43 | November 4, 2016 | ||||||
|
||||||||||
10.48 |
Amendment No. 1 to Stock Purchase Agreement, dated November 3, 2016, between Net 1 UEPS Technologies, Inc. and Draper Gain Investments Ltd. |
8-K | 10.44 | November 4, 2016 | ||||||
|
||||||||||
10.49 |
Amended and Restated Subscription Agreement, dated November 16, 2016, between Net1 Applied Technologies South Africa Proprietary Limited and Blue Label Telecoms Limited |
8-K | 10.45 | November 18, 2016 | ||||||
|
||||||||||
10.50 |
Amendment Letter from FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) to Net1 Applied Technologies South Africa Proprietary Limited, dated November 15, 2016 |
8-K | 10.46 | November 18, 2016 | ||||||
|
||||||||||
10.51 |
Bank Guarantee issued by FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) in favor of Blue Label Telecoms Limited, dated November 15, 2016 |
8-K | 10.47 | November 18, 2016 | ||||||
|
||||||||||
10.52 |
Amendment No. 2 to Stock Purchase Agreement, dated November 16, 2016, between Net 1 UEPS Technologies, Inc. and N2 Partners Ltd. |
8-K | 10.48 | November 18, 2016 |
68
10.53 |
Amendment No. 2 to Stock Purchase Agreement, dated November 16, 2016, between Net 1 UEPS Technologies, Inc. and Draper Gain Investments Ltd. |
8-K | 10.49 | November 18, 2016 | ||||||
|
||||||||||
10.54 |
First Addendum to Amended and Restated Subscription Agreement, dated February 28, 2017, between Net1 Applied Technologies South Africa Proprietary Limited and Blue Label Telecoms Limited |
8-K | 10.50 | March 2, 2017 | ||||||
|
||||||||||
10.55 |
Amendment Letter from FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) to Net1 Applied Technologies South Africa Proprietary Limited to Net1 Applied Technologies South Africa Proprietary Limited, dated February 28, 2017 |
8-K | 10.51 | March 2, 2017 | ||||||
|
||||||||||
10.56 |
Side Letter from FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) to Net1 Applied Technologies South Africa Proprietary Limited, dated February 28, 2017 |
8-K | 10.52 | March 2, 2017 | ||||||
|
||||||||||
10.57 |
Bank Guarantee issued by FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) in favor of Blue Label Telecoms Limited, dated February 28, 2017 |
8-K | 10.53 | March 2, 2017 | ||||||
|
||||||||||
10.58 |
First Amendment and Restatement Agreement, dated March 15, 2017, by and among Net1 Applied Technologies South Africa Proprietary Limited, Net 1 UEPS Technologies, Inc. and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.54 | March 20, 2017 | ||||||
|
||||||||||
10.59 |
Amended and Restated Common Terms Agreement, dated October 20, 2016, as amended and restated on March 15, 2017, by and among Net1 Applied Technologies South Africa Proprietary Limited, Net 1 UEPS Technologies, Inc. and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.55 | March 20, 2017 | ||||||
|
||||||||||
10.60 |
Senior Facility A Agreement dated October 20, 2016, as amended and restated on March 15, 2017, by and between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.56 | March 20, 2017 | ||||||
|
||||||||||
10.61 |
Senior Facility B Agreement dated October 20, 2016, as amended and restated on March 15, 2017, by and between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.57 | March 20, 2017 | ||||||
|
||||||||||
10.62 |
Senior Facility C Agreement dated October 20, 2016, as amended and restated on March 15, 2017, by and between Net1 Applied Technologies South Africa Proprietary Limited and FIRSTRAND Bank Limited (acting through its Rand Merchant Bank Division) |
8-K | 10.58 | March 20, 2017 |
69
10.63 |
Equity Implementation Agreement, dated as of June 19, 2017, by and among 3C Telecommunications Proprietary Limited, The Prepaid Company Proprietary Limited, Net1 Applied Technologies South Africa Proprietary Limited, the parties identified on Schedule 1.1.52 thereto, Albanta Trading 109 Proprietary Limited, Cedar Cellular Investment 1 (RF) Proprietary Limited, Magnolia Cellular Investment 2 (RF) Proprietary Limited, Yellowwood Cellular Investment 3 (RF) Proprietary Limited, and Cell C Proprietary Limited. |
8-K | 10.67 | June 26, 2017 | ||||||
|
||||||||||
10.64 |
Subscription Agreement, dated as of June 19, 2017, by and between Net1 Applied Technologies South Africa Proprietary Limited and Cell C Proprietary Limited. |
8-K | 10.68 | June 26, 2017 | ||||||
|
||||||||||
10.65 |
Cell C Shareholders Agreement, dated as of June 19, 2017, by and between Albanta Trading 109 Proprietary Limited, the parties identified on Schedule 1.1.55 thereto, The Prepaid Company Proprietary Limited, Net1 Applied Technologies South Africa Proprietary Limited, Cedar Cellular Investment 1 (RF) Proprietary Limited, Magnolia Cellular Investment 2 (RF) Proprietary Limited, Yellowwood Cellular Investment 3 (RF) Proprietary Limited, and Cell C Proprietary Limited |
8-K | 10.69 | June 26, 2017 | ||||||
|
||||||||||
10.66 | X | |||||||||
|
||||||||||
10.67 | X | |||||||||
|
||||||||||
10.68 | X | |||||||||
|
||||||||||
10.69 | X | |||||||||
|
||||||||||
10.70 |
Memorandum of Incorporation DNI 4PL Contracts Proprietary Limited |
X | ||||||||
|
||||||||||
12 | X | |||||||||
|
||||||||||
14 |
Amended and Restated Code of Ethics |
10-K | 14 | August 28, 2014 | ||||||
|
||||||||||
21 | X | |||||||||
|
||||||||||
23 | X | |||||||||
|
||||||||||
31.1 | X |
70
31.2 | X | |||||||||
|
||||||||||
32 | X | |||||||||
|
||||||||||
101.INS | X | |||||||||
|
||||||||||
101.SCH | X | |||||||||
|
||||||||||
101.CAL | X | |||||||||
|
||||||||||
101.DEF | X | |||||||||
|
||||||||||
101.LAB | X | |||||||||
|
||||||||||
101.PRE | X |
* Indicates a management contract or compensatory plan or arrangement.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NET 1 UEPS TECHNOLOGIES,
INC.
By: /s/ Herman G. Kotzé
Herman G. Kotzé
Chief Executive
Officer, Chief Financial Officer, Treasurer, Secretary and Director
Date: August 24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME | TITLE | DATE |
/s/ Christopher S. Seabrooke | Chairman of the Board and Director | August 24, 2017 |
Christopher S. Seabrooke | ||
Chief Executive Officer, Chief Financial Officer, | August 24, 2017 | |
Treasurer, Secretary and Director (Principal Executive, | ||
/s/ Herman G. Kotzé | Financial and Accounting Officer) | |
Herman G. Kotzé | ||
/s/ Paul Edwards | Director | August 24, 2017 |
Paul Edwards | ||
/s/ Alfred T. Mockett | Director | August 24, 2017 |
Alfred T. Mockett | ||
/s/ Alasdair J. K. Pein | Director | August 24, 2017 |
Alasdair J. K. Pein |
72
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS
Technologies, Inc.
Johannesburg, South Africa
We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the Company) as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, shareholders equity, and cash flows for each of the three years in the period ended June 30, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Net 1 UEPS Technologies, Inc. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 24, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
August 24, 2017
National Executive: *LL Bam Chief Executive Officer *TMM Jordan
Deputy Chief Executive Officer
*MJ Jarvis Chief Operating Officer *AF Mackie
Audit & Assurance *N Sing Risk Advisory *NB Kader Tax TP Pillay Consulting S
Gwala BPS *K Black Clients & Industries *JK Mazzocco Talent &
Transformation MG Dicks Risk Independence & Legal *TJ Brown Chairman of the
Board
A full list of partners and directors is available on request | *Partner and Registered Auditor |
F-2
NET 1 UEPS TECHNOLOGIES, INC. |
CONSOLIDATED BALANCE SHEETS |
as of June 30, 2017 and 2016 |
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
for the years ended June 30, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | |||||||
(In thousands, except per share data) | |||||||||
REVENUE (Note 17) | $ | 610,066 | $ | 590,749 | $ | 625,979 | |||
Services rendered | 533,279 | 514,847 | 536,046 | ||||||
Loan-based fees received | 53,894 | 47,117 | 62,235 | ||||||
Sale of goods | 22,893 | 28,785 | 27,698 | ||||||
EXPENSE | |||||||||
Cost of goods sold, IT processing, servicing and support | 292,383 | 290,101 | 297,856 | ||||||
Selling, general and administration | 179,262 | 145,886 | 158,919 | ||||||
Depreciation and amortization | 41,378 | 40,394 | 40,685 | ||||||
OPERATING INCOME | 97,043 | 114,368 | 128,519 | ||||||
INTEREST INCOME | 20,897 | 15,292 | 16,355 | ||||||
INTEREST EXPENSE | 3,484 | 3,423 | 4,456 | ||||||
INCOME BEFORE INCOME TAXES | 114,456 | 126,237 | 140,418 | ||||||
INCOME TAX EXPENSE (Note 20) | 42,472 | 42,080 | 44,136 | ||||||
NET INCOME BEFORE EARNINGS FROM EQUITY- ACCOUNTED INVESTMENTS | 71,984 | 84,157 | 96,282 | ||||||
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS | 2,664 | 639 | 452 | ||||||
NET INCOME | 74,648 | 84,796 | 96,734 | ||||||
LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST | 1,694 | 2,342 | 1,999 | ||||||
NET INCOME ATTRIBUTABLE TO NET1 | $ | 72,954 | $ | 82,454 | $ | 94,735 | |||
Net income per share, in United States dollars: (Note 21) | |||||||||
Basic earnings attributable to Net1 shareholders | 1.34 | 1.72 | 2.03 | ||||||
Diluted earnings attributable to Net1 shareholders | 1.33 | 1.71 | 2.02 |
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS TECHNOLOGIES, INC. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
for the years ended June 30, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | |||||||
(In thousands) | |||||||||
NET INCOME | $ | 74,648 | $ | 84,796 | $ | 96,734 | |||
OTHER COMPREHENSIVE INCOME (LOSS): | |||||||||
Movement in foreign currency translation reserve | 30,466 | (49,941 | ) | (57,074 | ) | ||||
Movement in foreign currency translation reserve related to equity-accounted investments | (2,697 | ) | - | - | |||||
Transfer of assets available for sale, net of tax, to comprehensive income (Note 7) | - | (1,732 | ) | - | |||||
Net unrealized income on asset available for sale, net of tax | - | 692 | 422 | ||||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | 27,769 | (50,981 | ) | (56,652 | ) | ||||
COMPREHENSIVE INCOME | 102,417 | 33,815 | 40,082 | ||||||
Less comprehensive income attributable to non- controlling interest | (2,332 | ) | (1,880 | ) | (1,787 | ) | |||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NET1 | $ | 100,085 | $ | 31,935 | $ | 38,295 |
See accompanying notes to consolidated financial statements.
F-5
NET 1 UEPS TECHNOLOGIES, INC. |
Consolidated Statement of Changes in Equity for the year ended June 30, 2015 (dollar amounts in thousands) |
Net 1 UEPS Technologies, Inc. Shareholders |
Number | Number | Accumulated | ||||||||||||||||||||||||||||||||||
Number | of | of shares, | Additional | other | Total | Redeemable | Non- | |||||||||||||||||||||||||||||
of | Treasury | Treasury | net of | Paid-In | Retained | comprehensive | Net1 | common | controlling | |||||||||||||||||||||||||||
Shares | Amount | Shares | Shares | treasury | Capital | Earnings | (loss) income | Equity | stock | Interest | Total | |||||||||||||||||||||||||
Balance July 1, 2014 |
63,702,511 | $ | 63 | (15,883,212 | ) | $ | (200,681 | ) | 47,819,299 | $ | 202,401 | $ | 522,729 | $ | (82,741 | ) | $ | 441,771 | $ | - | $ | (23 | ) | $ | 441,748 | |||||||||||
Repurchase of common stock (Note 15) |
(1,837,432 | ) | (9,151 | ) | (1,837,432 | ) | (9,151 | ) | (9,151 | ) | ||||||||||||||||||||||||||
Restricted stock granted (Note 18) |
213,237 | 213,237 | - | - | ||||||||||||||||||||||||||||||||
Exercise of stock option (Note 18) |
773,633 | 1 | (336,584 | ) | (4,688 | ) | 437,049 | 6,732 | 2,045 | 2,045 | ||||||||||||||||||||||||||
Stock-based compensation charge (Note 18) |
3,195 | 3,195 | 3,195 | |||||||||||||||||||||||||||||||||
Income tax benefit from vested stock awards |
483 | 483 | 483 | |||||||||||||||||||||||||||||||||
Transactions with non-controlling interest (Note 15) |
1,085 | 404 | 1,489 | (82 | ) | 1,407 | ||||||||||||||||||||||||||||||
Dividends paid to non-controlling interest |
- | (1,024 | ) | (1,024 | ) | |||||||||||||||||||||||||||||||
Issue of shares pursuant to fiscal 2013 |
||||||||||||||||||||||||||||||||||||
N1MS acquisition |
47,412 | 47,412 | - | |||||||||||||||||||||||||||||||||
Net income |
94,735 | 94,735 | 1,999 | 96,734 | ||||||||||||||||||||||||||||||||
Other comprehensive loss (Note 16) |
(56,440 | ) | (56,440 | ) | (212 | ) | (56,652 | ) | ||||||||||||||||||||||||||||
Balance June 30, 2015 |
64,736,793 | $ | 64 | (18,057,228 | ) | $ | (214,520 | ) | 46,679,565 | $ | 213,896 | $ | 617,868 | $ | (139,181 | ) | $ | 478,127 | $ | - | $ | 658 | $ | 478,785 |
F-6
NET 1 UEPS TECHNOLOGIES, INC. |
Consolidated Statement of Changes in Equity for the year ended June 30, 2016 (dollar amounts in thousands) |
Net 1 UEPS Technologies, Inc. Shareholders |
Number | Number | Accumulated | ||||||||||||||||||||||||||||||||||
Number | of | of shares, | Additional | other | Total | Redeemable | Non- | |||||||||||||||||||||||||||||
of | Treasury | Treasury | net of | Paid-In | Retained | comprehensive | Net1 | common | controlling | |||||||||||||||||||||||||||
Shares | Amount | Shares | Shares | treasury | Capital | Earnings | (loss) income | Equity | stock | Interest | Total | |||||||||||||||||||||||||
Balance July 1, 2015 |
64,736,793 | $ | 64 | (18,057,228 | ) | $ | (214,520 | ) | 46,679,565 | $ | 213,896 | $ | 617,868 | $ | (139,181 | ) | $ | 478,127 | $ | - | $ | 658 | $ | 478,785 | ||||||||||||
Issue of common stock that is redeemable for cash or other assets (Note 15) |
9,984,311 | 10 | 9,984,311 | 10 | 107,672 | 107,682 | ||||||||||||||||||||||||||||||
Repurchase of common stock (Note 15) |
(2,426,704 | ) | (27,107 | ) | (2,426,704 | ) | (27,107 | ) | (27,107 | ) | ||||||||||||||||||||||||||
Restricted stock granted (Note 18) |
319,492 | 319,492 | - | - | ||||||||||||||||||||||||||||||||
Exercise of stock option (Note 18) |
323,645 | 323,645 | 3,762 | 3,762 | 3,762 | |||||||||||||||||||||||||||||||
Stock-based compensation charge (Note 18) |
3,598 | 3,598 | 3,598 | |||||||||||||||||||||||||||||||||
Income tax benefit from vested stock awards |
67 | 67 | 67 | |||||||||||||||||||||||||||||||||
Acquisition of non-controlling interest (Note 3 and Note 15) |
(1,308 | ) | (1,308 | ) | (37 | ) | (1,345 | ) | ||||||||||||||||||||||||||||
Transact24 acquisition (Note 3) |
391,645 | 391,645 | 3,963 | 3,963 | 3,963 | |||||||||||||||||||||||||||||||
Net income |
82,454 | 82,454 | 2,342 | 84,796 | ||||||||||||||||||||||||||||||||
Other comprehensive loss (Note 16) |
(50,519 | ) | (50,519 | ) | (462 | ) | (50,981 | ) | ||||||||||||||||||||||||||||
Balance June 30, 2016 |
75,755,886 | $ | 74 | (20,483,932 | ) | $ | (241,627 | ) | 55,271,954 | $ | 223,978 | $ | 700,322 | $ | (189,700 | ) | $ | 493,047 | $ | 107,672 | $ | 2,501 | $ | 603,220 |
F-7
NET 1 UEPS TECHNOLOGIES, INC. |
Consolidated Statement of Changes in Equity for the year ended June 30, 2017 (dollar amounts in thousands) |
Net 1 UEPS Technologies, Inc. Shareholders |
Number | Number | Accumulated | ||||||||||||||||||||||||||||||||||
Number | of | of shares, | Additional | other | Total | Redeemable | Non- | |||||||||||||||||||||||||||||
of | Treasury | Treasury | net of | Paid-In | Retained | comprehensive | Net1 | common | controlling | |||||||||||||||||||||||||||
Shares | Amount | Shares | Shares | treasury | Capital | Earnings | (loss) income | Equity | stock | Interest | Total | |||||||||||||||||||||||||
Balance July 1, 2016 |
75,755,886 | $ | 74 | (20,483,932 | ) | $ | (241,627 | ) | 55,271,954 | $ | 223,978 | $ | 700,322 | $ | (189,700 | ) | $ | 493,047 | $ | 107,672 | $ | 2,501 | $ | 603,220 | ||||||||||||
Sale of common stock (Note 15) |
5,000,000 | 5 | 5,000,000 | 44,995 | 45,000 | 45,000 | ||||||||||||||||||||||||||||||
Repurchase of common stock (Note 15) |
(4,407,360 | ) | (45,324 | ) | (4,407,360 | ) | (45,324 | ) | (45,324 | ) | ||||||||||||||||||||||||||
Restricted stock granted (Note 18) |
389,587 | 389,587 | - | - | ||||||||||||||||||||||||||||||||
Exercise of stock option (Note 18) |
321,026 | 1 | 321,026 | 2,878 | 2,879 | 2,879 | ||||||||||||||||||||||||||||||
Stock-based compensation charge (Note 18) |
3,905 | 3,905 | 3,905 | |||||||||||||||||||||||||||||||||
Reversal of stock compensation charge (Note 18) |
(205,470 | ) | (205,470 | ) | (1,923 | ) | (1,923 | ) | (1,923 | ) | ||||||||||||||||||||||||||
Utilization of APIC pool related to vested restricted stock |
(189 | ) | (189 | ) | (189 | ) | ||||||||||||||||||||||||||||||
Dividends paid to non-controlling interest |
- | (2,067 | ) | (2,067 | ) | |||||||||||||||||||||||||||||||
Stock based-compensation charge related to equity-accounted investment (Note 10) |
89 | 89 | 89 | |||||||||||||||||||||||||||||||||
Net income |
72,954 | 72,954 | 1,694 | 74,648 | ||||||||||||||||||||||||||||||||
Other comprehensive income (Note 16) |
27,131 | 27,131 | 638 | 27,769 | ||||||||||||||||||||||||||||||||
Balance June 30, 2017 |
81,261,029 | $ | 80 | (24,891,292 | ) | $ | (286,951 | ) | 56,369,737 | $ | 273,733 | $ | 773,276 | $ | (162,569 | ) | $ | 597,569 | $ | 107,672 | $ | 2,766 | $ | 708,007 |
See accompanying notes to consolidated financial statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
for the years ended June 30, 2017, 2016 and 2015 |
2017 | 2016 | 2015 | |||||||
(In thousands) | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
Net income | $ | 74,648 | $ | 84,796 | $ | 96,734 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 41,378 | 40,394 | 40,685 | ||||||
Earnings from equity-accounted investments | (2,664 | ) | (639 | ) | (452 | ) | |||
Fair value adjustment | (300 | ) | 519 | 248 | |||||
Interest payable | 20 | 1,829 | 1,283 | ||||||
Facility fee amortized | 1,326 | 138 | 208 | ||||||
Gain on release from accumulated other comprehensive income (Note 7) | - | (2,176 | ) | - | |||||
Gain on fair value of Transact24 (Note 3) | - | (1,909 | ) | - | |||||
Profit on disposal of property, plant and equipment | (639 | ) | (286 | ) | (296 | ) | |||
Stock compensation charge, net of forfeitures (Note 18) | 1,982 | 3,598 | 3,195 | ||||||
Dividends received from equity accounted investments | 1,187 | - | - | ||||||
(Increase) Decrease in accounts and finance loans receivable, and pre-funded grants receivable | (15,767 | ) | (3,401 | ) | 1,399 | ||||
Decrease (Increase) in inventory | 3,025 | 1,001 | (3,846 | ) | |||||
Decrease in accounts payable and other payables | (6,461 | ) | (7,840 | ) | (850 | ) | |||
(Decrease) Increase in taxes payable | (354 | ) | 763 | 606 | |||||
Decrease in deferred taxes | (220 | ) | (235 | ) | (3,656 | ) | |||
Net cash provided by operating activities | 97,161 | 116,552 | 135,258 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Capital expenditures | (11,195 | ) | (35,797 | ) | (36,436 | ) | |||
Proceeds from disposal of property, plant and equipment | 1,592 | 1,349 | 857 | ||||||
Investment in MobiKwik | (25,835 | ) | - | - | |||||
Investment in equity and loans in equity-accounted investments | (12,044 | ) | - | (13,200 | ) | ||||
Acquisitions, net of cash acquired (Note 3) | (4,651 | ) | (15,767 | ) | - | ||||
Acquisition of available for sale securities | - | (8,900 | ) | - | |||||
Proceeds from sale of business (Note 19) | - | - | 1,895 | ||||||
Other investing activities, net | - | (5 | ) | (29 | ) | ||||
Net change in settlement assets (Note 2) | (61,938 | ) | 53,364 | (33,870 | ) | ||||
Net cash used in investing activities | (114,071 | ) | (5,756 | ) | (80,783 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Proceeds from issue of common stock (Note 15 and Note 18) | 47,879 | 111,444 | 2,045 | ||||||
Acquisition of treasury stock (Note 15) | (45,794 | ) | (26,637 | ) | (9,151 | ) | |||
Repayment of long-term borrowings (Note 14) | (37,318 | ) | (8,716 | ) | (14,128 | ) | |||
Proceeds from bank overdraft (Note 12) | 16,176 | - | - | ||||||
Dividends paid to non-controlling interest | (2,067 | ) | - | (1,024 | ) | ||||
Payment of guarantee fee (Note 14) | (1,145 | ) | - | - | |||||
Long-term borrowings obtained (Note 14) | 800 | 2,107 | 3,765 | ||||||
Acquisition of interests in non-controlling interests (Note 15) | - | (11,189 | ) | - | |||||
Sale of equity to non-controlling interest (Note 15) | - | - | 1,407 | ||||||
Net change in settlement obligations (Note 2) | 61,938 | (53,364 | ) | 33,870 | |||||
Net cash provided by financing activities | 40,469 | 13,645 | 16,784 | ||||||
Effect of exchange rate changes on cash | 11,254 | (18,380 | ) | (12,348 | ) | ||||
Net increase in cash, cash equivalents and restricted cash | 34,813 | 106,061 | 58,911 | ||||||
Cash, cash equivalents and restricted cash beginning of year | 223,644 | 117,583 | 58,672 | ||||||
Cash, cash equivalents and restricted cash end of year | $ | 258,457 | $ | 223,644 | $ | 117,583 |
See accompanying notes to consolidated financial statements.
F-9
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
1. |
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Description of Business
Net 1 UEPS Technologies, Inc. (Net1 and collectively with its consolidated subsidiaries, the Company) was incorporated in the State of Florida on May 8, 1997. The Company provides payment solutions and transaction processing services across a wide range of industries and in various geographies. It has developed and markets a smart-card based alternative payment system for the unbanked and underbanked populations of developing economies. Its universal electronic payment system (UEPS) uses biometrically secure smart cards that operate in real-time but offline, which allows users to enter into transactions at any time with other card holders in even the most remote areas. The Company also develops and provides secure transaction technology solutions and services, and offers transaction processing, financial and on-line real-time healthcare management solutions in the United States. The Companys technology is widely used in South Africa today, where it distributes pension and welfare payments to recipient cardholders in South Africa, provides financial services, processes debit and credit card payment transactions on behalf of retailers through its EasyPay system, processes value-added services such as bill payments and prepaid electricity for the major bill issuers and local councils in South Africa, processes third-party and associated payroll payments for employees and provides mobile telephone top-up transactions for the major South African mobile carriers. Through KSNET, the Company offers card processing, payment gateway (PG) and banking value-added network services (VAN) in South Korea. The Company has expanded its card issuing and acquiring capabilities through the acquisition of Transact24 in Hong Kong. The Companys Masterpayment subsidiary in Germany provides value added payment services to online retailers across Europe.
Basis of presentation
The accompanying consolidated financial statements include subsidiaries over which Net1 exercises control and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
2. |
SIGNIFICANT ACCOUNTING POLICIES |
Principles of consolidation
The financial statements of entities which are controlled by Net1, referred to as subsidiaries, are consolidated. Inter-company accounts and transactions are eliminated upon consolidation.
The Company, if it is the primary beneficiary, consolidates entities which are considered to be variable interest entities (VIE). The primary beneficiary is considered to be the entity that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. No entities were required to be consolidated in terms of these requirements during the years ended June 30, 2017, 2016 and 2015.
Business combinations
The Company accounts for its business acquisitions under the acquisition method of accounting. The total value of the consideration paid for acquisitions is allocated to the underlying net assets acquired, based on their respective estimated fair values. The Company uses a number of valuation methods to determine the fair value of assets and liabilities acquired, including discounted cash flows, external market values, valuations on recent transactions or a combination thereof, and believes that it uses the most appropriate measure or a combination of measures to value each asset or liability. The Company recognizes measurement-period adjustments in the reporting period in which the adjustment amounts are determined.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-10
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Translation of foreign currencies
The primary functional currency of the Company is the South African Rand (ZAR) and its reporting currency is the U.S. dollar. The Company also has consolidated entities which have other currencies, primarily South Korean won (KRW), as their functional currency. Assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated other comprehensive income in total equity.
Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in selling, general and administration expense on the Companys consolidated statement of operations for the period.
Cumulative translation adjustment are released 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.
Allowance for doubtful accounts receivable
Allowance for doubtful finance loans receivable
The Company regularly reviews the ageing of outstanding amounts due from borrowers and adjusts the allowance based on managements estimate of the recoverability of the finance loans receivable. The Company writes off microlending finance loans receivable and related service fees if a borrower is in arrears with repayments for more than three months or dies. The Company writes off working capital finance receivable and related fees it is evident that reasonable recovery procedures, including where deemed necessary, formal legal action, has failed.
Allowance for doubtful accounts receivable
A specific provision is established where it is considered likely that all or a portion of the amount due from customers renting point of sale (POS) equipment, receiving support and maintenance or transaction services or purchasing licenses from the Company will not be recovered. Non-recoverability is assessed based on a review by management of the ageing of outstanding amounts, the location of the customer and the payment history in relation to those specific amounts.
Inventory
Inventory is valued at the lower of cost and market value. Cost is determined on a first-in, first-out basis and includes transport and handling costs.
Equity-accounted investments
The Company uses the equity method to account for investments in companies when it has significant influence but not control over the operations of the equity-accounted company. Under the equity method, the Company initially records the investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-accounted companys net income or loss. In addition, when an investment qualifies for the equity method (as a result of an increase in the level of ownership interest or degree of influence), the cost of acquiring the additional interest in the investee is added to the current basis of the Companys previously held interest and the equity method would be applied subsequently from the date on which the Company obtains the ability to exercise significant influence over the investee. Any unrealized holding gains or losses in accumulated other comprehensive income related to an available for sale security that becomes eligible for the equity method are recognized in earnings as of the date on which the investment qualifies for the equity method. The Company does not recognize cumulative losses in excess of its investment or loans in an equity-accounted investment except if it has an obligation to provide additional financial support. Dividends received from an equity-accounted investment reduce the carrying value of the Companys investment.
F-11
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Leasehold improvement costs
Costs incurred in the adaptation of leased properties to serve the requirements of the Company are capitalized and amortized over the shorter of the estimated useful life of the asset and the remaining term of the lease.
Property, plant and equipment
Property, plant and equipment are shown at cost less accumulated depreciation. Property, plant and equipment are depreciated on the straight-line basis at rates which are estimated to amortize the assets to their anticipated residual values over their useful lives. Within the following asset classifications, the expected economic lives are approximately:
Computer equipment | 3 to 8 years | |||
Office equipment | 2 to 10 years | |||
Vehicles | 3 to 8 years | |||
Furniture and fittings | 3 to 10 years | |||
Buildings and structures | 8 to 30 years | |||
Plant and equipment | 5 to 10 years |
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in income.
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values of the identifiable assets acquired and liabilities assumed. The Company tests for impairment of goodwill on an annual basis and at any other time if events or circumstances change that would more likely than not reduce the fair value of the reporting unit goodwill below its carrying amount.
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; and results of testing for recoverability of a significant asset group within a reporting unit.
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the statement of operations. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties; present value techniques of estimated future cash flows; or valuation techniques based on multiples of earnings or revenue, or a similar performance measure.
Intangible assets
Intangible assets are shown at cost less accumulated amortization. Intangible assets are amortized over the following useful lives:
Customer relationships | 1 to 15 years | |||
Software and unpatented technology | 3 to 5 years | |||
FTS patent | 10 years | |||
Exclusive licenses | 7 years | |||
Trademarks | 3 to 20 years |
Intangible assets are periodically evaluated for recoverability, and those evaluations take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
F-12
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Policy reserves and liabilities
Reserves for policy benefits and claims payable
The Company determines its reserves for policy benefits under its life insurance products using a model which estimates claims incurred that have not been reported at the balance sheet date. This model includes best estimate assumptions of experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The best estimate assumptions include those assumptions related to mortality, morbidity and claim reporting delays, and the main assumptions used to calculate the reserve for policy benefits include (i) mortality and morbidity assumptions reflecting the companys most recent experience and (ii) claim reporting delays reflecting Company specific and industry experience. The values of matured guaranteed endowments were increased by late payment interest (net of the asset management fee and allowance for tax on investment income).
Deposits on investment contracts
For the Companys interest-sensitive life contracts, liabilities approximate the policyholders account value.
Reinsurance contracts held
The Company enters into reinsurance contracts with reinsurers under which the Company is compensated for the entire amount or a portion of losses arising on one or more of the insurance contracts it issues.
The expected benefits to which the Company is entitled under its reinsurance contracts held are recognized as reinsurance assets. These assets consist of short-term balances due from reinsurers (classified within accounts receivable, net) as well as long-term receivables (classified within other long-term assets) that are dependent on the expected claims and benefits arising under the related reinsurance contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each reinsurance contract.
Reinsurance assets are assessed for impairment at each balance sheet date. If there is reliable objective evidence that amounts due may not be recoverable, the Company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognizes that impairment loss in its condensed consolidated statement of operations.
Reinsurance premiums are recognized when due for payment under each reinsurance contract.
Redeemable common stock
Common stock that is redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of Company is presented outside of total Net1 equity (i.e. permanent equity). Redeemable common stock is initially recognized at issuance date fair value and the Company does not adjust the issuance date fair value if redemption is not probable. The Company re-measures the redeemable common stock to the maximum redemption amount at the balance sheet date once redemption is probable. Reduction in the carrying amount of the redeemable common stock is only appropriate to the extent that the Company has previously recorded increases in the carrying amount of the redeemable equity instrument as the redeemable common stock may be not be carried at an amount that is less the initial amount reported outside of permanent equity.
Redeemable common stock is reclassified as permanent equity when presentation outside permanent equity is no longer required (if, for example, a redemption feature lapses, or there is a modification of the terms of the instrument). The existing carrying amount of the redeemable common stock is reclassified to permanent equity at the date of the event that caused the reclassification and prior period consolidated financial statements are not adjusted.
F-13
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Sales taxes
Revenue and expenses are presented net of sales, use and value added taxes, as the case may be.
Revenue recognition
The Company recognizes revenue when:
| there is persuasive evidence of an agreement or arrangement; | |
| delivery of products has occurred or services have been rendered; | |
| the sellers price to the buyer is fixed or determinable; and | |
| collectability is reasonably assured. |
The Companys principal revenue streams and their respective accounting treatments are discussed below:
Fees
Pension and welfare and South African participating merchants
The Company provides a welfare benefit distribution service to the South African Social Security Agency (SASSA). Fee income received for these services is recognized in the statement of operations when distributions have been made to the recipient cardholders.
Recipient cardholders are able to load their welfare grants at merchants enrolled in the Companys participating merchant system in certain provinces. There is no charge to the recipient cardholder to load the grant onto a smart card at the merchant location, however, a fee is charged to the merchant for purchases made at the merchant using the smart card. A fee is also charged to the merchant when the recipient cardholder makes a cash withdrawal. Fee income received for these services is recognized in the statement of operations when the transaction occurs.
Fees related to management of card issuance programs and utilization of ATMs
The Company manages card issuance programs and owns ATMs in South Africa from which it generates fee revenue. Fee revenue generated from card issuance programs includes interchange and other miscellaneous fees, which are recorded when cardholder transact at either a POS or an ATM. Fee revenue generated from utilization of ATMs includes cash withdrawal, balance enquiry, insufficient funds and other miscellaneous ATM fees which are recorded when an ATM user performs a transaction at an ATM.
Card VAN, banking VAN and payment gateway
Card VAN services consist of services relating to authorization of credit card transactions including transmission of transaction details (authorization service), and collection of receipts associated with the credit card transactions (collection service). With its authorization service, the Company connects credit card companies with merchants online when a customer uses his/her credit card via terminals installed at merchants sites and the Companys central processing server for approval of credit card transactions. Immediately after approval of credit card transactions, the Company transmits details of the transactions to credit card companies online for processing payments. Collection service captures the transaction data and gathers receipts as documented evidence and provides them to credit card companies upon request. The Company earns service fees based on the number of transactions processed for credit card companies when services are rendered in accordance with the contracts entered into between credit card companies and the Company. The Company bills for its service charges to credit card companies each month. Each service could be provided either individually or collectively, based on terms of contracts.
F-14
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue recognition (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway (continued)
The Company charges commission fees to credit card companies for the authorization service provided based on the number of approvals transferred. The right to receive a service fee is due once a credit card transaction has been approved and details of the transaction are transmitted by the Company. Therefore, revenues from the authorization service are recognized when the credit card transactions are authorized and details of the transactions are transmitted. The Company earns a collection service fee once it has provided settled funds to the credit card companies. Therefore, revenue from the collection service is recognized when the Company collects the receipts and provides them to the card companies.
For multiple-element arrangements, the Company has identified two deliverables. The first deliverable is the authorization service, and the second deliverable is the collection service. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company's control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP).
VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Companys best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. Because the Company has neither VSOE nor TPE for the two deliverables, the allocation of revenue has been based on the Companys ESPs. Amounts allocated to the authorization and the collection service are recognized at the time of service, provided the other conditions for revenue recognition have been met.
The Companys process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in developing the ESPs include prices charged by the Company, historical pricing practices and controls, range of prices for various customers and the nature of the services. Consideration is also given to market conditions such as competitor pricing strategies and market perception.
Banking VAN is a division supporting a companys fund management business (large payment transfers, collections, etc.) by relaying financial transactions between client companies and financial institutions. Financial transactions between two or more business enterprises, or between business enterprises and their customers, are conducted through the transaction-processing network established between the Company and the banks. Revenue from the banking VAN service is recognized when the service is rendered by the Company.
With its PG service, the Company provides the Internet-based settlement service between an on-line shopping mall and a credit card company when a customer uses his/her credit card, debit card or on-line payment to pay for goods or services. The Company receives fees for carrying out settlements for electronic transactions. Revenue from the PG service is recognized when the service is rendered by the Company.
Microlending service fee
The Company provides short-term loans to customers in South Africa and charges and recognizes monthly service fee revenue under the contractual terms of the loan. The monthly service fee amount is fixed upon initiation and does not change over the term of the loan.
F-15
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue recognition (continued)
Fees (continued)
Other fees and commissions
The Company provides an automated payment collection service to third parties, for which it charges monthly fees. These fees are recognized in the statement of operations as the underlying services are performed. The Company provides medical-related claims adjudication, reconciliation and settlement services (medical-related claim service) to customers, for which it charges fees. These fees are recognized in the statement of operations as the underlying services are performed. The Company sells prepaid electricity and recognizes a commission in its statement of operations once the prepaid electricity token has been delivered to the customer.
Contract variations fees
The Company records additional revenue from variations to contracts for the provision of welfare benefits, if:
| there is persuasive evidence of an agreement; | |
| collectability is reasonably assured; and | |
| all material terms and conditions of the agreement have been adhered to. |
Hardware and prepaid airtime voucher sales
Revenue from hardware and airtime voucher sales is recognized when risk of loss has transferred to the customer and there are no unfulfilled Company obligations that affect the customers final acceptance of the arrangement. Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
The Company buys terminals from manufacturers, and subsequently sells them through its agencies. Revenue is recognized when significant risks and rewards of ownership of terminals have passed to the buyer, usually on delivery of the terminals to the buyer.
To the extent that sales of hardware are made in an arrangement that includes software that is more than incidental, the Company considers post-contract maintenance and technical support or other future obligations which could impact the timing and amount of revenue recognized.
Software
Revenue from licensed software is recognized on a subscription basis over the period that the client is entitled to use the license. Revenue from the sale of software is recognized if all revenue recognition criteria have been met. Post-contract maintenance and technical support in respect of software is generally negotiated and sold as a separate service and is recognized over the period such items are delivered.
Systems implementation projects
The Company undertakes smart card system implementation projects. The hardware and software installed in these projects are in the form of customized systems, which ordinarily involve modification to meet the customers specifications. Software delivered under such arrangements is available to the customer permanently, subject to the payment of annual license fees. Revenue for such arrangements is recognized under the percentage of completion method, save for annual license fees, which are recognized in the period to which they relate. Up-front and interim payments received are recorded as client deposits until customer acceptance.
F-16
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Revenue recognition (continued)
Systems implementation projects (continued)
The Companys customer arrangements may have multiple deliverables. Generally, the Companys multiple element arrangements fall within the scope of specific accounting standards that provide guidance regarding the separation of elements in multiple-deliverable arrangements and the allocation of consideration among those elements. If not, the Company unbundles multiple element arrangements into separate units of accounting when the delivered element(s) has stand-alone value and fair value of the undelivered element(s) exists.
Terminal rental income
The Company leases terminals to merchants participating in its merchant acquiring system. Operating rental income is recognized monthly on a straight-line basis in accordance with the lease agreement.
Other income
Revenue from service and maintenance activities is charged to customers on a time-and-materials basis and is recognized in the statement of operations as services are delivered to customers.
Research and development expenditure
Research and development expenditure is charged to net income in the period in which it is incurred. During the years ended June 30, 2017, 2016 and 2015, the Company incurred research and development expenditures of $2.0 million, $2.3 million and $2.4 million, respectively.
Computer software development
Product development costs in respect of software intended for sale to licensees are expensed as incurred until technological feasibility is attained. Technological feasibility is attained when the Companys software has completed system testing and has been determined to be viable for its intended use. The time between the attainment of technological feasibility and completion of software development is generally short with immaterial amounts of development costs incurred during this period.
Costs in respect of the development of software for the Companys internal use are expensed as incurred, except to the extent that these costs are incurred during the application development stage. All other costs including those incurred in the project development and post-implementation stages are expensed as incurred.
Income taxes
The Company provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of changes in tax laws or enacted tax rates.
The Company measured its South African income taxes and deferred income taxes for the years ended June 30, 2017, 2016 and 2015, using the enacted statutory tax rate in South Africa of 28%.
As of June 30, 2017, the Company intends to permanently reinvest its non-U.S. undistributed earnings of $469.7 million in those non-U.S. jurisdictions. Accordingly, the Company has not recognized a deferred tax liability related to future distributions of these undistributed earnings. It is not practicable for the Company to estimate the amount of unrecognized deferred tax liability because of the complexities of the calculations involved. The Company will be required to record a tax charge if it is no longer able to permanently reinvest its undistributed earnings. This may result in an increase in the Companys effective tax rate in future periods.
F-17
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Income taxes (continued)
In establishing the appropriate deferred tax asset valuation allowances, the Company assesses the realizability of its deferred tax assets, and based on all available evidence, both positive and negative, determines whether it is more likely than not that the deferred tax assets or a portion thereof will be realized.
Reserves for uncertain tax positions are recognized in the financial statements for positions which are not considered more likely than not of being sustained based on the technical merits of the position on audit by the tax authorities. For positions that meet the more likely than not standard, the measurement of the tax benefit recognized in the financial statements is based upon the largest amount of tax benefit that, in managements judgement, is greater than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.
The Companys policy is to include interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administration in the consolidated statements of operations.
Stock-based compensation
Stock-based compensation represents the cost related to stock-based awards granted. The Company measures equity-based stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. In respect of awards with only service conditions that have a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. The forfeiture rate is estimated using historical trends of the number of awards forfeited prior to vesting. The expense is recorded in the statement of operations and classified based on the recipients respective functions.
The Company records deferred tax assets for awards that result in deductions on the Companys income tax returns, based on the amount of compensation cost recognized and the Companys statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Companys income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the statement of operations (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).
Equity instruments issued to third parties
Equity instruments issued to third parties represents the cost related to equity instruments granted. The Company measures this cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. The forfeiture rate is estimated based on the Companys expectation of the number of awards that will be forfeited prior to vesting.
The Company records deferred tax assets for equity instrument awards that result in deductions on the Companys income tax returns, based on the amount of equity instrument cost recognized and the Companys statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Companys income tax return are recorded in the statement of operations.
Settlement assets and settlement obligations
Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to recipient cardholders of social welfare grants and (2) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer.
F-18
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Settlement assets and settlement obligations (continued)
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to recipient cardholders of social welfare grants, and (2) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.
The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets and obligations.
Recent accounting pronouncements adopted
In February 2015, the FASB issued guidance regarding Amendments to the Consolidation Analysis . This guidance amends both the variable interest entity and voting interest entity consolidation models. The requirement to assess an entity under a different consolidation model may change previous consolidation conclusions. The guidance is effective for the Company beginning July 1, 2016. The adoption of this guidance did not have a material impact on the Companys financial statements.
In September 2015, the FASB issued guidance regarding Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments . This guidance eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Under this guidance, measurement-period adjustments are recognized during the period in which they are determined. The guidance is effective for the Company beginning July 1, 2016. The adoption of this guidance did not have a material impact on the Companys financial statements.
In November 2016, the FASB issued guidance regarding Restricted Cash - a consensus of the FASB Emerging Issues Task Force. This guidance amends current guidance to add or clarify the classification and presentation of restricted cash in the statement of cash flows. The guidance is effective for the Company beginning July 1, 2018, however the Company has early adopted the guidance, effective December 31, 2016. The adoption of this guidance did not have a material impact on the Companys financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2017
In May 2014, the FASB issued guidance regarding Revenue from Contracts with Customers . This guidance requires an entity to recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance was to be effective for the Company beginning July 1, 2017, however in August 2015, the FASB issued guidance regarding Revenue from Contracts with Customers, Deferral of the Effective Date . This guidance defers the required implementation date specified in Revenue from Contracts with Customers to March 2017. Public companies may elect to adopt the standard along the original timeline. The guidance is effective for the Company beginning July 1, 2018. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In August 2014, the FASB issued guidance regarding Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern . This guidance requires an entity to perform interim and annual assessments of its ability to continue as a going concern within one year of the date that its financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entitys ability to continue as a going concern. The guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In July 2015, the FASB issued guidance regarding Simplifying the Measurement of Inventory . This guidance requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The guidance will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). The guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
F-19
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recent accounting pronouncements not yet adopted as of June 30, 2017 (continued)
In November 2015, the FASB issued guidance regarding Balance Sheet Classification of Deferred Taxes . This guidance requires that deferred tax liabilities and assets are to be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. This guidance is effective for the Company beginning July 1, 2017, with early adoption permitted on a prospective or retrospective basis. The Company is currently assessing the impact of this guidance on its financial statements disclosures.
In January 2016, the FASB issued guidance regarding Recognition and Measurement of Financial Assets and Financial Liabilities . The guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the guidance clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This guidance is effective for the Company beginning July 1, 2018, and early adoption is not permitted, with certain exceptions. The amendments are required to be applied by means of a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In February 2016, the FASB issued guidance regarding Leases . The guidance increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. The amendments to current lease guidance include the recognition of assets and liabilities by lessees for those leases currently classified as operating leases. The guidance also requires disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for the Company beginning July 1, 2019. Early adoption is permitted. The Company expects that this guidance may have a material impact on its financial statements and is currently evaluating the impact of this guidance on its financial statements on adoption.
In March 2016, the FASB issued guidance regarding Improvements to Employee Share-Based Payment Accounting . The guidance simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for the Company beginning July 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued guidance regarding Measurement of Credit Losses on Financial Instruments . The guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, an entity is required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted beginning July 1, 2019. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In June 2016, the FASB issued guidance regarding Classification of Certain Cash Receipts and Cash Payments . The guidance is intended to reduce diversity in practice and explains how certain cash receipts and payments are presented and classified in the statement of cash flows, including beneficial interests in securitization, which would impact the presentation of the deferred purchase price from sales of receivables. This guidance is effective for the Company beginning July 1, 2018, and must be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
F-20
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
2. |
SIGNIFICANT ACCOUNTING POLICIES (continued) |
Recent accounting pronouncements not yet adopted as of June 30, 2017 (continued)
In January 2017, the FASB issued guidance regarding Clarifying the Definition of a Business. This guidance provides a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
In January 2017, the FASB issued guidance regarding Simplifying the Test for Goodwill Impairment. This guidance removes the requirement for an entity to calculate the implied fair value of goodwill (as part of step 2 of the current goodwill impairment test) in measuring a goodwill impairment loss. The guidance is effective for the Company beginning July 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently assessing the impact of this guidance.
In May 2017, the FASB issued guidance regarding CompensationStock Compensation (Topic 718): Scope of Modification Accounting. The guidance amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for the Company beginning July 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure.
3. |
ACQUISITIONS |
The cash paid, net of cash received related to the Companys various acquisitions during the years ended June 30, 2017, 2016 and 2015 are summarized in the table below:
2017 | 2016 | 2015 | ||||||||
Masterpayment Financial Services Limited (formerly C4U-Malta Limited) (Malta FS) | $ | 2,940 | $ | - | $ | - | ||||
Pros Software (Pty) Ltd (Pros Software) | 1,711 | - | - | |||||||
Transact24 Limited (Transact24) | - | 1,666 | - | |||||||
Masterpayment AG (Masterpayment) | - | 14,101 | - | |||||||
Total cash paid, net of cash received | $ | 4,651 | $ | 15,767 | $ | - |
2017 acquisitions
Malta FS
In November 2016, the Company acquired a 100% interest in Malta FS, a licensed Malta Financial Services Authority-supervised electronic money institution, for approximately $3.9 million (€3.6 million translated at the foreign exchange rates applicable on the date of acquisition). Malta FS license has been passported across all member states of the European Union. The Company intends to apply for a principal membership with the major card associations and to integrate a robust and reliable issuing and acquiring processing platform in Malta FS to enable the issuance of electronic money instruments, such as electronic money accounts, prepaid cards and virtual cards, after a transitional period of integration and technology adaption. The Company plans to build and reinforce Malta FS such that it operates as the Companys principal regulated electronic money institution with the ability to cover all of the Companys financial services activities and business in the European Union.
F-21
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
3. |
ACQUISITIONS (continued) |
2017 acquisitions (continued)
Pros Software
In October 2016, the Company acquired a 100% interest in Pros Software, a software development and consulting services company based near Johannesburg, South Africa, for ZAR 25.0 million ($1.8 million, translated at the foreign exchange rates applicable on the date of acquisition). Pros Software performs software development and consulting services for a number of clients, including for the Company, and has a specialty practice in business intelligence.
The final purchase price allocation of the Malta FS and Pros Software acquisitions, translated at the foreign exchange rates applicable on the date of acquisition, is provided in the table below:
Malta FS | Pros Software | Total | ||||||||
Cash and cash equivalents | $ | 999 | $ | 110 | $ | 1,109 | ||||
Accounts receivable | 983 | 165 | 1,148 | |||||||
Property, plant and equipment, net | 30 | 9 | 39 | |||||||
Intangible assets (Note 9) | 1,078 | 2,311 | 3,389 | |||||||
Goodwill (Note 9) | 2,475 | - | 2,475 | |||||||
Accounts payables and other payables | (1,570 | ) | (58 | ) | (1,628 | ) | ||||
Income taxes payable | - | (69 | ) | (69 | ) | |||||
Deferred tax liabilities | (56 | ) | (647 | ) | (703 | ) | ||||
Total purchase price | $ | 3,939 | $ | 1,821 | $ | 5,760 |
Pro forma results of operations have not been presented because the effect of the Malta FS and Pros Software acquisitions, individually and in the aggregate, were not material to the Company. During the year ended June 30, 2017, the Company incurred acquisition-related expenditure of $0.5 million related to the Malta FS and Pros Software acquisitions. Since the closing of the Malta FS acquisition on November 1, 2016, it has contributed revenue and a net loss after acquired intangible asset amortization, net of taxation, of $0.2 million and $0.7 million, respectively. Since the closing of the Pros Software acquisition on October 1, 2016, it has contributed revenue and a net loss after acquired intangible asset amortization, net of taxation, of $0.5 million and $1.8 million, respectively.
2016 acquisitions
Transact24 Limited
On January 20, 2016, the Company acquired the remaining 56% of the issued and outstanding ordinary shares of Transact24 for $3.0 million in cash and through the issue of 391,645 shares of the Companys common stock with an aggregate issue date fair value of approximately $4.0 million. Transact24 is a specialist Hong Kong-based payment services company. The Company acquired approximately 44% of Transact24 in May 2015.
The Company elected to settle part of the purchase price in shares in order to appropriately align the T24 management team with the Company and its global strategy. The parties agreed that 50% of the Companys shares issued in the transaction were contractually restricted as to resale until after June 30, 2016, and the remaining 50% of the shares were restricted until after June 30, 2017.
Masterpayment AG
In April 2016, the Company acquired a 60% interest in Masterpayment AG (Masterpayment), a specialist payment services processor based in Munich, Germany for approximately $9.4 million and paid a contractually agreed EBITDA earn-out of $5.4 million in June 2016, for a total purchase consideration of $14.8 million. Masterpayment provides payment and acquiring services for all major European debit and credit cards; and invoicing for online retail, digital goods and content. Masterpayment currently has a client portfolio of approximately 5,000 registered merchants.
F-22
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
3. |
ACQUISITIONS (continued) |
The final purchase price allocation of Transact24 and Masterpayment acquisitions, translated at the foreign exchange rates applicable on the date of acquisition, is provided in the table below:
Transact24 | Masterpayment | Total | ||||||||
Cash and cash equivalents | $ | 1,334 | $ | 665 | $ | 1,999 | ||||
Accounts receivable | 2,019 | 765 | 2,784 | |||||||
Property, plant and equipment, net | 154 | 18 | 172 | |||||||
Deferred tax assets | 1,070 | - | 1,070 | |||||||
Intangible assets (Note 9) | 4,974 | 9,428 | 14,402 | |||||||
Goodwill (Note 9) | 6,024 | 17,084 | 23,108 | |||||||
Accounts payables and other payables | (1,898 | ) | (1,114 | ) | (3,012 | ) | ||||
Deferred tax liabilities | (1,243 | ) | (2,236 | ) | (3,479 | ) | ||||
Fair value of assets and liabilities on acquisition | 12,434 | 24,610 | 37,044 | |||||||
Less: fair value of equity-accounted investment, comprising: | (5,471 | ) | - | (5,471 | ) | |||||
Less: gain on re-measurement of previously held interest | (1,908 | ) | - | (1,908 | ) | |||||
Less: carrying value at the acquisition date (Note 10) | (3,563 | ) | - | (3,563 | ) | |||||
Less: fair value attributable to controlling interests on acquisition date. | - | (9,844 | ) | (9,844 | ) | |||||
Total purchase price | $ | 6,963 | 14,766 | $ | 21,729 | |||||
Add: carrying value of non-controlling interests acquired | 9,867 | |||||||||
Add: adjustment to Net1 equity (Note 15) | 1,322 | |||||||||
Cash paid for non-controlling interest (Note 15) | 11,189 | |||||||||
Total consideration paid for Masterpayment | $ | 25,955 |
Pro forma results of operations have not been presented because the effect of the Transact24 and Masterpayment acquisitions, individually and in the aggregate, were not material to the Company. During the year ended June 30, 2016, the Company incurred acquisition-related expenditure of $0.2 million related to these acquisitions. Since the closing of the Transact24 acquisition, it has contributed revenue and net income of $3.8 million and $0.03 million, respectively, for the year ended June 30, 2016. Since the closing of the Masterpayment acquisition, it has contributed revenue and net loss, after acquired intangible asset amortization, net of taxation, non-controlling interest, of $2.4 million and $0.04 million, respectively, for the year ended June 30, 2016.
2015 acquisitions
None.
4. |
PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE |
Pre-funded social welfare grants receivable represents primarily amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The July 2017 payment service commenced on July 1, 2017, but the Company pre-funded certain merchants participating in the merchant acquiring systems on the last day of June 2017. The July 2016 payment service commenced on July 1, 2016, but the Company pre-funded certain merchants participating in the merchant acquiring systems in the last two days of June 2016.
F-23
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
5. |
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net |
Accounts receivable, net
2017 | 2016 | |||||||
Accounts receivable, trade, net | $ | 53,818 | $ | 57,563 | ||||
Accounts receivable, trade, gross | 55,073 | 59,232 | ||||||
Allowance for doubtful accounts receivable, end of year | 1,255 | 1,669 | ||||||
Beginning of year | 1,669 | 1,956 | ||||||
Acquired in acquisition | 10 | - | ||||||
Reversed to statement of operations | (42) | (68) | ) | |||||
Charged to statement of operations | 672 | 388 | ||||||
Utilized | (1,200) | (361) | ||||||
Foreign currency adjustment | 146 | (246) | ||||||
Current portion of payments to agents in South Korea amortized over the contract period | 22,562 | 26,572 | ||||||
Payments to agents in South Korea amortized over the contract period | 39,852 | 52,469 | ||||||
Less: Payments to agents in South Korea amortized over the contract period included in other long-term assets (Note 10) | 17,290 | 25,897 | ||||||
Loans provided to Finbond Group Limited (Finbond) (Note 10) | 11,920 | - | ||||||
Other receivables | 23,129 | 23,670 | ||||||
Total accounts receivable, net | $ | 111,429 | $ | 107,805 |
Receivables from customers renting POS equipment from the Company are included in accounts receivable, trade, and are stated net of an allowance for certain amounts that the Companys management has identified may be unrecoverable. Accounts receivable, trade, also includes amounts due from customers from the sale of hardware, software licenses and SIM cards and provision of transaction processing services. During the year ended June 30, 2017 and 2016, the Company recorded bad debt expense of $0.1 million and $1.2 million, respectively. The Company did not record bad debt expense during the years ended June 30, 2015.
Finance loans receivable, net
The Companys finance loans receivable, net, as of June 30, 2017 and 2016, is presented in the table below:
2017 | 2016 | |||||||
Microlending finance loans receivable, net | $ | 50,994 | $ | 37,009 | ||||
Microlending finance loans receivable, gross | 54,711 | 41,503 | ||||||
Allowance for doubtful microlending finance loans receivable, end of year | 3,717 | 4,494 | ||||||
Beginning of year | 4,494 | 4,227 | ||||||
Reversed to statement of operations | (55) | - | ||||||
Charged to statement of operations | - | 2,113 | ||||||
Utilized | (1,260) | (1,105) | ||||||
Foreign currency adjustment | 538 | (741) | ||||||
Working capital finance receivable, net | 29,183 | |||||||
Working capital finance receivable, gross | 32,935 | - | ||||||
Allowance for doubtful working capital finance receivable, end of year | 3,752 | - | ||||||
Beginning of year | - | - | ||||||
Charged to statement of operations | 3,752 | - | ||||||
Total finance loans receivable, net | $ | 80,177 | $ | 37,009 |
F-24
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
5. |
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net (continued) |
Finance loans receivable, net (continued)
Finance loans receivable, net, comprising microlending finance loans receivable related to the Companys microlending operations in South Africa and its working capital finance receivable related to its working capital financing offering in Europe and the United States. The Company did not expense any unrecoverable microlending finance loans receivable during the year ended June 30, 2017, 2016 or 2015, respectively, because these loans were written off directly against the allowance for doubtful microlending finance loans receivable. The Company has created an allowance for doubtful working capital finance receivables related to a receivable due from a customer based in the United States that has been outstanding for more than four months.
6. |
INVENTORY |
The Companys inventory as of June 30, 2017 and 2016, is presented in the table below:
2017 | 2016 | ||||||
Finished goods | $ | 8,020 | $ | 10,004 | |||
$ | 8,020 | $ | 10,004 |
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost, which includes transaction costs.
Risk management
The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and U.S. dollar. The Company has used forward contracts in order to limit its exposure in these transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the U.S. dollar and the euro, on the other hand.
Translation risk
Translation risk relates to the risk that the Companys results of operations will vary significantly as the U.S. dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated significantly over the past three years. As exchange rates are outside the Companys control, there can be no assurance that future fluctuations will not adversely affect the Companys results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the Companys operating results are exposed to fluctuations in interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited investment in cash equivalents and has occasionally invested in marketable securities.
F-25
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
Fair value of financial instruments (continued)
Risk management (continued)
Working capital finance customer concentration risk
Working capital finance customer concentration risk relates to the risk of loss that the Company would incur as a result of its initial concentration of customers as it grows its working capital financing receivables base in Europe and the U.S. During the year ended June 30, 2017, the Company commenced marketing activities to develop and expand its capital financing receivables base. The Company manages the risk through on-going marketing efforts to further expand its customer base as well as through regular contact with its customer to assess their need for the Companys product.
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 BB+ or better, as determined by credit rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Microlending credit risk
The Company is exposed to credit risk in its microlending activities, which provides unsecured short-term loans to qualifying customers. The Company manages this risk by performing an affordability test for each prospective customer and assigns a creditworthiness score, which takes into account a variety of factors such as other debts and total expenditures on normal household and lifestyle expenses.
Equity price and liquidity risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded price of equity securities that it holds and the risk that it may not be able to liquidate these securities. The market price of these securities may fluctuate for a variety of reasons, consequently, the amount the Company may obtain in a subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an extended period of time without influencing the exchange traded price, or at all.
Financial instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including the Companys own credit risk.
Fair value measurements and inputs are categorized into a fair value hierarchy which prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety.
F-26
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
Financial instruments (continued)
These levels are:
|
Level 1 inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. |
|
|
||
|
Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
||
|
Level 3 inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value.
Investments in common stock
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.
Derivative transactions - Foreign exchange contracts
As part of the Companys risk management strategy, the Company enters into derivative transactions to mitigate exposures to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter derivative transactions. Substantially all of the Companys derivative exposures are with counterparties that have long-term credit ratings of BB+ or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair value (Level 2). The Company has no derivatives that require fair value measurement under Level 1 or 3 of the fair value hierarchy.
The Companys outstanding foreign exchange contracts are as follows:
As of June 30, 2017
None.
As of June 30, 2016
Fair market | ||||
Notional amount |
Strike price | value price | Maturity | |
EUR 573,765.00 | ZAR 15.9587 | ZAR 16.3393 | July 20, 2016 | |
EUR 554,494.50 | ZAR 16.0643 | ZAR 16.4564 | August 19, 2016 | |
EUR 465,711.00 | ZAR 16.1798 | ZAR 16.582 | September 20, 2016 | |
EUR 393,675.00 | ZAR 16.2911 | ZAR 16.7017 | October 20, 2016 | |
EUR 302,368.50 | ZAR 16.4085 | ZAR 16.8301 | November 21, 2016 |
F-27
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
Financial instruments (continued)
The following table presents the Companys assets measured at fair value on a recurring basis as of June 30, 2017, 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: | |||||||||||||
Cash and cash equivalents (included in other long-term assets) | $ | 627 | $ | - | $ | - | $ | 627 | |||||
Fixed maturity investments (included in cash and cash equivalents) | 5,160 | - | - | 5,160 | |||||||||
Other | - | 37 | - | 37 | |||||||||
Total assets at fair value | $ | 5,787 | $ | 37 | $ | - | $ | 5,824 |
The following table presents the Companys assets measured at fair value on a recurring basis as of June 30, 2016, 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 | $ | 533 | $ | - | $ | - | $ | 533 | |||||
Foreign exchange contracts | - | 62 | - | 62 | |||||||||
Other | - | 37 | - | 37 | |||||||||
Total assets at fair value | $ | 533 | $ | 99 | $ | - | $ | 632 |
Changes in the Companys investment in Finbond (Level 3 that are measured at fair value on a recurring basis) were insignificant during the years ended June 30, 2016 and 2015, respectively. There have been no transfers in or out of Level 3 during the year ended June 30, 2017. During the year ended June 30, 2016, the Company determined that it was able to exert significant influence on Finbond and transferred the carrying value as of April 1, 2016, to equity-accounted investments.
Trade, finance loans and other receivables
Trade, finance loans and other receivables originated by the Company are stated at cost less allowance for doubtful accounts receivable. The fair value of trade, finance loans and other receivables approximate their carrying value due to their short-term nature.
F-28
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
Financial instruments (continued)
Trade and other payables
The fair values of trade and other payables approximates their carrying amounts, due to their short-term nature.
Assets and liabilities measured at fair value on a nonrecurring basis
The Company measures its assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The Company has no liabilities that are measured at fair value on a nonrecurring basis. The Company reviews the carrying values of its assets when events and circumstances warrant and considers all available evidence in evaluating when declines in fair value are other-than-temporary. The fair values of the Companys assets are determined using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the assets exceeds its fair value and the excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting periods presented herein.
8. |
PROPERTY, PLANT AND EQUIPMENT, net |
Summarized below is the cost, accumulated depreciation and carrying amount of property, plant and equipment as of June 30, 2017 and 2016:
2017 | 2016 | ||||||
Cost: | |||||||
Land | $ | 858 | $ | 851 | |||
Building and structures | 471 | 467 | |||||
Computer equipment | 131,589 | 130,998 | |||||
Furniture and office equipment | 8,769 | 7,262 | |||||
Motor vehicles | 17,936 | 15,368 | |||||
Plant and equipment | - | - | |||||
159,623 | 154,946 | ||||||
Accumulated depreciation: | |||||||
Land | - | - | |||||
Building and structures | 171 | 151 | |||||
Computer equipment | 97,475 | 81,423 | |||||
Furniture and office equipment | 6,804 | 5,048 | |||||
Motor vehicles | 15,762 | 13,347 | |||||
Plant and equipment | - | - | |||||
120,212 | 99,969 | ||||||
Carrying amount: | |||||||
Land | 858 | 851 | |||||
Building and structures | 300 | 316 | |||||
Computer equipment | 34,114 | 49,575 | |||||
Furniture and office equipment | 1,965 | 2,214 | |||||
Motor vehicles | 2,174 | 2,021 | |||||
Plant and equipment | - | - | |||||
$ | 39,411 | $ | 54,977 |
F-29
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
9. |
GOODWILL AND INTANGIBLE ASSETS, net |
Goodwill
Summarized below is the movement in the carrying value of goodwill for the years ended June 30, 2017, 2016 and 2015:
Gross | Accumulated | Carrying | ||||||||
value | impairment | value | ||||||||
Balance as of July 1, 2014 | $ | 186,576 | $ | - | $ | 186,576 | ||||
Foreign currency adjustment (1) | (20,139 | ) | - | (20,139 | ) | |||||
Balance as of June 30, 2015 | 166,437 | - | 166,437 | |||||||
Acquisition of Transact24 (Note 3) | 6,024 | - | 6,024 | |||||||
Acquisition of Masterpayment (Note 3) | 17,084 | - | 17,084 | |||||||
Foreign currency adjustment (1) | (10,067 | ) | - | (10,067 | ) | |||||
Balance as of June 30, 2016 | 179,478 | - | 179,478 | |||||||
Acquisition of Malta FS (Note 3) | 2,475 | - | 2,475 | |||||||
Foreign currency adjustment (1) | 6,880 | - | 6,880 | |||||||
Balance as of June 30, 2017 | $ | 188,833 | $ | - | $ | 188,833 |
(1) the foreign currency adjustment represents the effects of the fluctuations between the South African rand, Euro and the Korean won, and the U.S. dollar on the carrying value.
Goodwill associated with the acquisition of Transact24, Masterpayment and Malta FS represents the excess of cost over the fair value of acquired net assets. The Transact24, Masterpayment and Masterpayment Financial Services goodwill is not deductible for tax purposes. See Note 3 for the allocation of the purchase price to the fair value of acquired net assets. Transact24, Masterpayment and Malta FS have all been allocated to the Companys International transaction processing operating segment.
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur and circumstances change indicating potential impairment. The Company performs its annual impairment test as of June 30 of each year. The results of the Companys impairment tests during the year ended June 30, 2017 and 2016, indicated that the fair value of the Companys reporting units exceeded their carrying values and therefore the Companys reporting units were not at risk of potential impairment.
Goodwill has been allocated to the Companys reportable segments as follows:
South | Financial | ||||||||||||
African | International | inclusion and | |||||||||||
transaction | transaction | applied | Carrying | ||||||||||
processing | processing | technologies | value | ||||||||||
Balance as of July 1, 2015 | $ | 24,579 | $ | 115,519 | $ | 26,339 | $ | 166,437 | |||||
Acquisition of Transact24 (Note 3) | - | 6,024 | - | 6,024 | |||||||||
Acquisition of Masterpayment (Note 3) | - | 17,084 | - | 17,084 | |||||||||
Foreign currency adjustment (1) | (4,154 | ) | (2,442 | ) | (3,471 | ) | (10,067 | ) | |||||
Balance as of June 30, 2016 | 20,425 | 136,185 | 22,868 | 179,478 | |||||||||
Acquisition of Malta FS (Note 3) | - | 2,475 | - | 2,475 | |||||||||
Foreign currency adjustment (1) | 2,706 | 1,910 | 2,264 | 6,880 | |||||||||
Balance as of June 30, 2017 | $ | 23,131 | $ | 140,570 | $ | 25,132 | $ | 188,833 |
(1) the foreign currency adjustment represents the effects of the fluctuations between the South African rand, Euro and the Korean won, and the U.S. dollar on the carrying value.
F-30
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
9. |
GOODWILL AND INTANGIBLE ASSETS, net (continued) |
Intangible assets, net
Summarized below is the fair value of intangible assets acquired, translated at the exchange rate applicable as of the relevant acquisition dates, and the weighted-average amortization period:
Weighted- | |||||||
Fair value as | Average | ||||||
of acquisition | Amortization | ||||||
date | period (in years) | ||||||
Finite-lived intangible asset: | |||||||
Transact24 customer relationships | $ | 3,749 | 5 | ||||
Masterpayment customer relationships | 6,595 | 5 | |||||
Transact24 software and unpatented technology | 1,225 | 3 | |||||
Masterpayment software and unpatented technology | 1,765 | 3 | |||||
Masterpayment trademarks | 1,068 | 5 | |||||
Customer relationships Pros Software | 2,311 | 0.75 | |||||
Customer relationships Malta FS | 186 | 0.65 | |||||
Software and unpatented technology | 147 | 1.25 | |||||
Infinite-lived intangible asset: | |||||||
Financial institution license | $ | 745 | n/a |
On acquisition, the Company recognized deferred tax liabilities of approximately $0.7 million and $3.5 million related to the acquisition of intangible assets during the years ended June 30, 2017 and 2016, respectively.
The Company assesses the carrying value of intangible assets for impairment whenever events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. No intangible assets have been impaired during the years ended June 30, 2017, 2016 and 2015, respectively.
Summarized below is the carrying value and accumulated amortization of intangible assets as of June 30, 2017 and 2016:
As of June 30, 2017 | As of June 30, 2016 | ||||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||||
value | amortization | value | value | amortization | value | ||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||
Customer relationships (1) | $ | 99,209 | $ | (65,595 | ) | $ | 33,614 | $ | 94,529 | $ | (51,557 | ) | $ | 42,972 | |||||
Software and unpatented | |||||||||||||||||||
technology (1) | 33,273 | (31,112 | ) | 2,161 | 31,452 | (28,791 | ) | 2,661 | |||||||||||
FTS patent | 2,935 | (2,935 | ) | - | 2,592 | (2,592 | ) | - | |||||||||||
Exclusive licenses | 4,506 | (4,506 | ) | - | 4,506 | (4,506 | ) | - | |||||||||||
Trademarks | 6,972 | (4,759 | ) | 2,213 | 6,685 | (3,762 | ) | 2,923 | |||||||||||
Total finite-lived intangible assets | 146,895 | (108,907 | ) | 37,988 | 139,764 | (91,208 | ) | 48,556 | |||||||||||
Infinite-lived intangible assets: | |||||||||||||||||||
Financial institution license | 776 | - | 776 | - | - | - | |||||||||||||
Total infinite-lived intangible assets | 776 | - | 776 | - | - | - | |||||||||||||
Total intangible assets | $ | 147,671 | $ | (108,907 | ) | $ | 38,764 | $ | 139,764 | $ | (91,208 | ) | $ | 48,556 |
(1) Includes the customer relationships acquired as part of the Pros Software acquisition in October 2016, and the customer relationships and software and unpatented technology acquired as part of the Malta FS acquisition in November 2016.
F-31
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
9. |
GOODWILL AND INTANGIBLE ASSETS, net (continued) |
Intangible assets, net (continued)
Amortization expense charged for the years to June 30, 2017, 2016 and 2015 was $14.0 million, $11.2 million, and $19.4 million, respectively.
Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on June 30, 2017, 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.
2018 | $ | 12,318 | ||
2019 | 10,800 | |||
2020 | 10,097 | |||
2021 | 4,383 | |||
2022 | 77 | |||
Thereafter | $ | 313 | ||
Total future estimated annual amortization expense | $ | 37,988 |
10. |
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS |
Equity-accounted investments
The Companys ownership percentage in its equity-accounted investments as of June 30, 2017 and 2016, was as follows:
2017 | 2016 | ||||||
Finbond | 26% | 26% | |||||
KZ One Limited (formerly One Credit Limited) (KZ One) | 25% | 25% | |||||
SmartSwitch Namibia (Pty) Ltd (SmartSwitch Namibia) | 50% | 50% | |||||
Walletdoc Proprietary Limited (Walletdoc) | 20% | 20% |
The Companys management does not believe that its equity-accounted investments, either individual or in aggregate, are material in relation to its balance sheet or statement of operations presented and therefore summarized financial information as to assets, liabilities and results of operations of its equity-accounted investments have not been provided.
The Company has provided a credit facility of up to $10 million in the form of convertible debt to KZ One, of which $2 million had been utilized as of June 30, 2016. The credit facility had not been utilized as of June 30, 2015.
As of June 30, 2017, the Company owned 197,522,435 shares in Finbond. Finbond is listed on the Johannesburg Stock Exchange and its closing price on June 30, 2017, was R2.95 per share. The aggregate value of the Companys holding in Finbond on June 30, 2017, was R582.7 million ($44.6 million translated at exchange rates applicable as of June 30, 2017.) On July 13, 2017, the Company acquired an additional 3.6 million shares in Finbond for approximately ZAR 11.2 million ($0.9 million translated at exchange rates applicable as of June 30, 2017.) On July 17, 2017, the Company received 4,361,532 shares as a capitalization share issue in lieu of a dividend.
On October 7, 2016, the Company provided a loan of ZAR 139.2 million ($10.0 million, translated at the foreign exchange rates applicable on the date of the loan) to Finbond in order for Finbond to partially finance its expansion strategy in the United States. Interest on the loan is payable quarterly in arrears and is based on the London Interbank Offered Rate (LIBOR) in effect from time to time plus a margin of 12.00%. The LIBOR rate was 1.121% on June 30, 2017. The loan was initially repayable in full at the earlier of Finbond concluding a rights offer or February 28, 2017, but the agreement was subsequently amended to extend this date to August 31, 2017. If Finbond does not settle the amount outstanding on August 31, 2017, the Company has the election to convert its loan to Finbond shares at an agreed conversion price or to continue to earn interest until such time as the loan is settled in full. The Company expects the parties to agree to extend the expiration date of the agreement to a period not exceeding 12 months from August 31, 2017.
F-32
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
10. |
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued) |
Equity-accounted investments (continued)
Summarized below is the movement in equity-accounted investments during the years ended June 30, 2017 and 2016:
Finbond | KZ One | Other (1) | Total | ||||||||||
Investment in equity: | |||||||||||||
Balance as of July 1, 2015 | $ | - | $ | 10,036 | $ | 4,293 | $ | 14,329 | |||||
Acquisition of shares | - | - | - | - | |||||||||
Comprehensive income: | - | 17 | 622 | 639 | |||||||||
Equity accounted earnings | - | 17 | 622 | 639 | |||||||||
Other comprehensive income | - | - | - | - | |||||||||
Dividends received | - | - | (143 | ) | (143 | ) | |||||||
Transfer from assets available for sale | 16,250 | - | - | 16,250 | |||||||||
Consolidation of Transact24 (Note 3) | - | - | (3,563 | ) | (3,563 | ) | |||||||
Foreign currency adjustment (2) | 54 | (2,895 | ) | (182 | ) | (3,023 | ) | ||||||
Balance as of June 30, 2016 | 16,304 | 7,158 | 1,027 | 24,489 | |||||||||
Stock-based compensation | 89 | - | - | 89 | |||||||||
Comprehensive income (loss): | 816 | (1,213 | ) | 364 | (33 | ) | |||||||
Other comprehensive loss | (1,687 | ) | (1,010 | ) | - | (2,697 | ) | ||||||
Equity accounted earnings (loss) | 2,503 | (203 | ) | 364 | 2,664 | ||||||||
Share of net income | 2,709 | (203 | ) | 364 | 2,870 | ||||||||
Dilution resulting from corporate transactions | (206 | ) | - | - | (206 | ) | |||||||
Dividends received | (477 | ) | - | (710 | ) | (1,187 | ) | ||||||
Foreign currency adjustment (2) | 2,229 | - | 116 | 2,345 | |||||||||
Balance as of June 30, 2017 | $ | 18,961 | $ | 5,945 | $ | 797 | $ | 25,703 | |||||
Investment in loans: | |||||||||||||
Balance as of July 1, 2015 | $ | - | $ | - | $ | - | $ | - | |||||
Transfer from other receivables, net | 1,011 | - | - | 1,011 | |||||||||
Loans granted | - | - | 141 | 141 | |||||||||
Foreign currency adjustment (2) | 4 | - | - | 4 | |||||||||
Balance as of June 30, 2016 | 1,015 | - | 141 | 1,156 | |||||||||
Loans granted | 10,044 | 2,000 | - | 12,044 | |||||||||
Interest accrued | 107 | - | - | 107 | |||||||||
Foreign currency adjustment (2) | 754 | - | 18 | 772 | |||||||||
Included in accounts receivable, net (Note 5) | (11,920 | ) | (11,920 | ) | |||||||||
Balance as of June 30, 2017 | $ | - | $ | 2,000 | $ | 159 | $ | 2,159 |
Equity | Loans | Total | ||||||||
Carrying amount as of June 30: | ||||||||||
2016 | $ | 24,489 | $ | 1,156 | $ | 25,645 | ||||
2017 | $ | 25,703 | $ | 2,159 | $ | 27,862 |
(1) Includes Transact 24 from July 1, 2015 to December 31, 2015, and SmartSwitch Namibia and Walletdoc for the entire period presented;
(2) The foreign currency adjustment represents the effects of the fluctuations South African rand, Nigerian Naira and the Namibian dollar, and the U.S. dollar on the carrying value.
F-33
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
10. |
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued) |
Equity-accounted investments (continued)
Strategic investments
DNI-4PL Contracts Proprietary Limited (DNI)
On June 23, 2017, the Company entered into a series of agreements pursuant to which the Company agreed to, among other things, subscribe for 44,999,999 ordinary A shares in DNI, representing a 45% voting and economic interest in DNI, for a subscription price of ZAR 945 million ($72.4 million) in cash. Under the terms of the agreements with DNI, the Company is required to pay to DNI an additional amount of up to ZAR 360 million ($27.6 million), in cash, subject to the achievement of certain performance targets by DNI. The transaction was subject to certain suspensive conditions that were fulfilled on or before July 27, 2017, and the transaction closed on the same date. All amounts were translated at exchange rates applicable as of June 30, 2017.
Bank Frick
On January 12, 2017, the Company entered into a share purchase agreement with the Kuno Frick Family Foundation (Frick Foundation) to acquire a 30% interest in Bank Frick & Co AG (Bank Frick), a fully licensed bank based in Balzers, Liechtenstein, from the Frick Foundation for approximately CHF 39.8 million ($41.5 million translated at exchange rates applicable as of June 30, 2017). The completion of the investment is subject to approval from the Financial Market Authority Liechtenstein. Following the successful completion of this investment, the Company will have a two-year option to acquire an additional 35% interest in Bank Frick.
Bank Frick provides a complete suite of banking services, with one of its key strategic pillars being the provision of payment services and funding of financial technology opportunities. Bank Frick holds acquiring licenses from both Visa and MasterCard and operates a branch in London. The Company and Bank Frick have jointly identified several funding opportunities, including for the Companys working capital finance, card issuing and acquiring and transaction processing activities. The pending investment in Bank Frick has the potential to provide the Company with a stable, long term and strategic relationship with a fully licensed bank. The Company and Bank Frick have agreed that approximately $30 million of the Bank Fricks free equity will be utilized as seed capital for a fund dedicated to the Companys future activities.
Other long-term assets
Summarized below is the breakdown of other long-term assets as of June 30, 2017 and 2016
2017 | 2016 | ||||||
Investment in One MobiKwik Systems Private Limited (MobiKwik), at cost. | $ | 26,317 | $ | - | |||
Long-term portion of payments to agents in South Korea amortized over the contract period (Note 5) | 17,290 | 25,897 | |||||
Policy holder assets under investment contracts (Note 11) | 627 | 528 | |||||
Reinsurance assets under insurance contracts Note 11) | 191 | 171 | |||||
Other long-term assets | 5,271 | 4,525 | |||||
$ | 49,696 | $ | 31,121 |
The Company has signed a subscription agreement with MobiKwik, which is Indias largest independent mobile payments network, with over 55 million users and 1.5 million merchants. Pursuant to the subscription agreement, the Company agreed to make an equity investment of up to $40.0 million in MobiKwik over a 24 month period. The Company made an initial $15.0 million investment in August 2016 and a further $10.6 million investment in June 2017, under this subscription agreement. As of June 30, 2017, the Company owned approximately 13.5% of MobiKwik. In August 2017, MobiKwik raised additional funding through the issuance of additional shares to a new shareholder at a 90% premium to the Companys investments and its percentage ownership was diluted to 12.0%.
F-34
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
10. |
EQUITY-ACCOUNTED INVESTMENTS AND OTHER LONG-TERM ASSETS (continued) |
Other long-term assets (continued)
In addition, through a technology agreement, the Companys Virtual Card technology will be integrated across all MobiKwik wallets in order to provide ubiquity across all merchants in India, and as part of the Companys continued strategic relationship, a number of our other products including our digital banking platform, are expected to be deployed by MobiKwik over the next year.
On June 19, 2017, the Company, through one of its subsidiaries, Net1 Applied Technologies South Africa Proprietary Limited (Net1 SA), entered into a Subscription Agreement (the Subscription Agreement) with Cell C Proprietary Limited (Cell C), a leading mobile provider in South Africa, to purchase approximately 75,000,000 class A shares of Cell C for an aggregate purchase price of ZAR 2.0 billion ($153.3 million translated at exchange rates applicable as of June 30, 2017) in cash. The Company funded the transaction through a combination of cash and the facilities described in Note 14. The transaction closed on August 2, 2017.
11. | REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT CONTRACTS |
Reinsurance assets and policy holder liabilities under insurance contracts
Summarized below is the movement in reinsurance assets and policy holder liabilities under insurance contracts during the years ended June 30, 2017 and 2016:
Reinsurance | Insurance | ||||||
assets (1) | contracts (2) | ||||||
Balance as of July 1, 2015 | $ | 183 | $ | (567 | ) | ||
Increase in policy holder benefits under insurance contracts | 463 | (1,408 | ) | ||||
Claims and policyholders benefits under insurance contracts | (444 | ) | 801 | ||||
Foreign currency adjustment (3) | (31 | ) | 96 | ||||
Balance as of June 30, 2016 | 171 | (1,078 | ) | ||||
Increase in policy holder benefits under insurance contracts | 262 | (4,481 | ) | ||||
Claims and policyholders benefits under insurance contracts | (265 | ) | 4,091 | ||||
Foreign currency adjustment (3) | 23 | (143 | ) | ||||
Balance as of June 30, 2017 | $ | 191 | $ | (1,611 | ) |
(1) |
Included in other long-term assets (refer to Note 10); |
|
(2) |
Included in other long-term liabilities; |
|
(3) |
The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the U.S. dollar. |
The Company 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.
F-35
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
11. | REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT CONTRACTS (continued) |
Assets and policy holder liabilities under investment contracts (continued)
Summarized below is the movement in assets and policy holder liabilities under investment contracts during the years ended June 30, 2017 and 2016:
Investment | |||||||
Assets (1) | contracts (2) | ||||||
Balance as of July 1, 2015 | $ | 593 | $ | (593 | ) | ||
Increase in policy holder benefits under investment contracts | 35 | (35 | ) | ||||
Foreign currency adjustment (3) | (100 | ) | 100 | ||||
Balance as of June 30, 2016 | 528 | (528 | ) | ||||
Increase in policyholder benefits under insurance contracts | 40 | (40 | ) | ||||
Claims and policyholders benefits under insurance contracts | (11 | ) | 11 | ||||
Foreign currency adjustment (3) | 70 | (70 | ) | ||||
Balance as of June 30, 2017 | $ | 627 | $ | (627 | ) |
(1) |
Included in other long-term assets (refer to Note 10); |
|
(2) |
Included in other long-term liabilities; |
|
(3) |
The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the U.S. dollar. |
The Company does not offer any investment products with guarantees related to capital or returns.
12. |
SHORT-TERM FACILITIES |
Summarized below are the Companys available short-term facilities and the amounts utilized as of June 30, 2017 and 2016, all amounts translated at exchange rates applicable as of the period presented:
2017 | 2016 | ||||||||||||
Available | Utilized | Available | Utilized | ||||||||||
Europe: | |||||||||||||
Bank Frick (1) | $ | 66,579 | $ | 16,579 | $ | - | $ | - | |||||
South Africa: | |||||||||||||
Nedbank Limited (Nedbank | 30,600 | 10,000 | 13,528 | 8,870 | |||||||||
Overdraft facility (1) | 19,109 | - | 3,382 | - | |||||||||
Indirect and derivative facilities | 11,491 | 10,000 | 10,146 | 8,870 | |||||||||
South Korea: | |||||||||||||
Hana Bank overdraft facility (1) | 8,738 | - | 8,675 | - | |||||||||
$ | 105,917 | $ | 26,579 | $ | 22,203 | $ | 8,870 |
(1) |
Utilized amount included in short-term facilities. |
Europe
The Company has obtained EUR 40.0 million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft facilities from Bank Frick. As of June 30, 2017, the Company had utilized approximately CHF 15.9 million ($16.6 million) of the CHF 20 million facility and had not utilized any of the EUR 40 million facility. All amounts have been translated at exchange rates applicable as of June 30, 2017.
As of June 30, 2017, the interest rate on these facilities was 5.00%. The Company has assigned all claims against amounts due from Masterpayment customers, which have been financed from the CHF 20 million facility, plus all secondary rights and preferential rights as collateral for this facility to Bank Frick. Masterpayment was required to open a primary business account with Bank Frick and this account has been pledged to Bank Frick as collateral for the EUR 40 million facility. Net1 also stands as guarantor for both of these facilities.
F-36
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
12. |
SHORT-TERM FACILITIES (continued) |
Europe (continued)
The EUR 40 million facility has an initial term to December 31, 2019, and will automatically be extended for a year if not terminated with 12 months written notice. The CHF 20 million facility does not have a fixed term, however it may be terminated by either party with six months written notice at the end of a calendar month.
South Africa
The aggregate amount of the Companys short-term South African credit facility with Nedbank Limited (Nedbank) was ZAR 400 million ($30.6 million) and consists of (i) a primary amount of up to ZAR 200 million ($15.3 million), which is immediately available, and (ii) a secondary amount of up to ZAR 200 million ($15.3 million), which is not immediately available (all amounts denominated in ZAR and translated at exchange rates applicable as of June 30, 2017). The primary amount comprises an overdraft facility of up to ZAR 50 million ($3.8 million) and indirect and derivative facilities of up to ZAR 150 million ($11.5 million), which include letters of guarantee, letters of credit and forward exchange contracts (all amounts denominated in ZAR and translated at exchange rates applicable as of June 30, 2017).
On December 9, 2016, Nedbank issued a letter (the Nedbank Facility Letter) to the Company under which it agreed to temporarily increase the overdraft facility by the secondary amount of ZAR 200 million to ZAR 250 million ($19.2 million).
As of June 30, 2017, the interest rate on the overdraft facility was 9.35%. On July 21, 2017, the interest rate reduced by 0.25% to 9.10%. The Company has ceded its investment in Cash Paymaster Services Proprietary Limited (CPS), a South African subsidiary, as security for its repayment obligations under the facility. A commitment fee of 0.35% per annum is payable on the monthly unutilized amount of the overdraft portion of the short-term facility. The Company is required to comply with customary non-financial covenants, including, without limitation, covenants that restrict its ability to dispose of or encumber its assets, incur additional indebtedness or engage in certain business combinations.
As of each of June 30, 2017 and 2016, respectively, the Company had not utilized any of its overdraft facility. As of June 30, 2017, the Company had utilized approximately ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017) of its ZAR 150 million indirect and derivative facilities to obtain foreign exchange contracts from the bank and to enable the bank to issue guarantees, including stand-by letters of credit, in order for the Company to honor its obligations to third parties requiring such guarantees (refer to Note 24). As of June 30, 2016, the Company had utilized approximately ZAR 131.1 million ($8.9 million, translated at exchange rates applicable as of June 30, 2016) of its ZAR 150 million indirect and derivative facilities.
South Korea
The Company obtained a one year KRW 10 billion short-term overdraft facility from Hana Bank, a South Korean bank, in January 2014. The facility expired in January 2017 and was renewed for one more year, but has subsequently been cancelled before June 30, 2017, as the facility is no longer required. The Company had ceded the warehouse it owns in South Korea as security for its repayment obligations under the facility. As of June 30, 2016, the Company had not utilized any of its KRW 10.0 billion ($8.7 million, translated at exchange rates applicable as of June 30, 2017) overdraft facility.
F-37
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
13. |
OTHER PAYABLES |
Summarized below is the breakdown of other payables as of June 30, 2017 and 2016:
2017 | 2016 | ||||||
Accruals | $ | 10,874 | $ | 12,588 | |||
Provisions | 8,073 | 10,461 | |||||
Other | 8,592 | 7,981 | |||||
Value-added tax payable | 5,397 | 5,022 | |||||
Payroll-related payables | 1,320 | 992 | |||||
Participating merchants settlement obligation | 543 | 435 | |||||
$ | 34,799 | $ | 37,479 |
14. |
LONG-TERM BORROWINGS |
South Korea
The Companys wholly owned subsidiary, Net1 Applied Technologies Korea (Net1 Korea), signed a five-year senior secured facilities agreement (the Facilities Agreement) with a consortium of South Korean banks in October 2013. The Facilities Agreement provides for three separate facilities to Net1 Korea: a Facility A loan of up to KRW 60.0 billion ($52.4 million), a Facility B loan of up to KRW 15 billion ($13.1 million) and a Facility C revolving credit facility of up to KRW 10.0 billion ($8.7 million) (all facilities denominated in KRW and translated at exchange rates applicable as of June 30, 2017).
The Facility A loan is repayable in three scheduled annual installments of KRW 10 billion, commencing on April 29, 2016, and the third installment is due in April 2018, with a final installment for the remaining outstanding balance of KRW 7.9 billion due at the maturity date (October 29, 2018). The Facility B loan was repaid in full on October 29, 2014. The Facility C revolving credit facility is repayable in full on the maturity date. Prepayment of the revolving credit facility may be withdrawn at any time up to three months before the maturity date.
On July 29, 2016, the Company utilized approximately KRW 0.3 billion ($0.2 million) of its Facility C revolving credit facility to pay interest due. On the same day, the Company made unscheduled voluntary payments of KRW 20 billion ($17.8 million) towards its Facility A loan, and KRW 10 billion ($8.9 million) towards its Facility C revolving credit facility. On October 31, 2016, the Company made an unscheduled payment of KRW 2.1 billion ($1.8 million) towards its Facility A loan as a result of a distribution from KSNET paid to Net1 Korea which was contractually required to be applied against interest and principal outstanding. On January 29, 2017, the Company utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C revolving credit facility to pay interest due. On April 29, 2017, the Company made a scheduled repayment of KRW 10 billion ($8.8 million) and utilized approximately KRW 0.3 billion ($0.3 million) of its Facility C revolving credit facility to pay interest due. The Company drew approximately KRW 2.5 billion ($2.1 million) and KRW 4.0 billion ($3.8 million) during the years ended June 30, 2016 and 2015, respectively, to pay interest due under the Facilities Agreement. The carrying value as of June 30, 2017, was $16.2 million. As of June 30, 2017, the carrying amount of the long-term borrowings approximated its fair value.
Interest on the loans and revolving credit facility is payable quarterly and is based on the South Korean CD rate in effect from time to time plus a margin of 3.10% for the Facility A loan and Facility C revolving credit facility; and a margin of 2.90% for the Facility B loan. The CD rate was 1.41% on June 30, 2017, and therefore the interest rate in effect as of June 30, 2017, for the Facility A loan and Facility C revolving credit facility was 4.51%. 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 facilities during the year ended June 30, 2017, 2016 and 2015, was $2.6 million, $1.2 million and $3.6 million, respectively. The Company paid facilities fees of approximately KRW 0.9 billion ($0.9 million) on October 29, 2013, and amortized approximately $0.1 million, $0.1 million and $0.2 million of these fees during the years ended June 30, 2017, 2016 and 2015, respectively.
F-38
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
14. |
LONG-TERM BORROWINGS (continued) |
South Korea (continued)
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).
July 2017 Facilities
On July 21, 2017, Net1 SA entered into a Common Terms Agreement, Senior Facility A Agreement, Senior Facility B Agreement, Senior Facility C Agreement, Subordination Agreement, Security Cession & Pledge and certain ancillary loan documents (collectively, the Original Loan Documents) with FirstRand Bank Limited (acting through its Rand Merchant Bank division) (RMB), a South African corporate and investment bank, and Nedbank Limited (acting through its Corporate and Investment Banking division), an African corporate and investment bank, and any other lenders that may participate in such loans (collectively, the Lenders), pursuant to which, among other things, Net1 SA may borrow up to an aggregate of ZAR 1.25 billion to finance a portion of its investment in Cell C and to fund its on-going working capital requirements. Net1 agreed to guarantee the obligations of Net1 SA to the Lenders and subordinate any claims it may have against Net1 SA and certain of its subsidiaries to the Lenders claims against such persons. On July 26, 2017, Net1 SA entered into a letter agreement (the Letter and together with the Original Loan Documents, the Loan Documents) with the Lenders to amend the Common Terms Agreement to, among other things, permit the amounts borrowed under the Senior Facility B to fund the acquisition of Cell C shares and adjust the terms of certain conditions precedent.
The Loan Documents provide for a Facility A term loan of up to ZAR 750 million, a Facility B term loan of up to ZAR 500 million, and a Facility C term loan in an amount equal to the aggregate amount of voluntary prepayments of the outstanding principal amount of the Facility A loan. Net1 SA paid a non-refundable deal origination fee of approximately ZAR 6.3 million in August 2017. Interest on the loans is payable quarterly based on the Johannesburg Interbank Agreed Rate (JIBAR) in effect from time to time plus a margin of 2.25% for the Facility A loan, 3.5% for the Facility B loan and 2.25% for the Facility C loan. The JIBAR rate has been set at 6.96% for the period to September 29, 2017. Funds were disbursed from the Lenders to Net1 SA on July 27, 2017. All of the loans mature on the date falling on the second anniversary of the date of disbursement.
Principal repayments on the Facility A and Facility B loans are due in eight equal quarterly installments, beginning on September 30, 2017. Principal repayment on the Facility C loan is to be determined by the Lenders based on the date of the repayment of any borrowings under the Facility A loan. Voluntary prepayments are permitted without early repayment fees or penalties. The loans are secured by a pledge by Net1 SA of, among other things, its entire equity interests in Cell C and DNI-4PL Contracts Proprietary Limited. The Loan Documents contain customary covenants that require Net1 SA to maintain a specified total net leverage ratio and restrict the ability of Net1 SA, and certain of its subsidiaries to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make investment above specified levels, engage in certain business combinations and engage in other corporate activities.
October 2016 Facilities
On October 4, 2016, Net1 SA, entered into a Subscription Agreement (the Blue Label Subscription Agreement) with Blue Label Telecoms Limited (Blue Label), a JSE-listed company which is a leading provider of prepaid electricity and airtime in South Africa. Pursuant to the Blue Label Subscription Agreement, Net1 SA intended to subscribe for approximately 117.9 million ordinary shares of Blue Label at a price of ZAR 16.96 per share, for an aggregate price of ZAR 2.0 billion. Net1 SA entered into a facility agreement RMB to fund ZAR 1.4 billion of the required ZAR 2 billion Blue Label transaction and paid a guarantee fee of approximately ZAR 16.0 million during the year ended June 30, 2017. In May 2017, Blue Label and Net1 SA mutually agreed that Net1 SA would not subscribe for the shares in Blue Label and the Blue Label Subscription Agreement was terminated. Interest expense for the year ended June 30, 2017, includes the ZAR 16.0 million guarantee fee expensed related to the October 2017 facilities obtained from RMB.
F-39
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
15. |
COMMON STOCK |
Common stock
Holders of shares of Net1s common stock are entitled to receive dividends and other distributions when declared by Net1s board of directors out of legally available funds. Payment of dividends and distributions is subject to certain restrictions under the Florida Business Corporation Act, including the requirement that after making any distribution Net1 must be able to meet its debts as they become due in the usual course of its business.
Upon voluntary or involuntary liquidation, dissolution or winding up of Net1, holders of common stock share ratably in the assets remaining after payments to creditors and provision for the preference of any preferred stock according to its terms. There are no pre-emptive or other subscription rights, conversion rights or redemption or scheduled installment payment provisions relating to shares of common stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is entitled to one vote per share for the election of directors and for all other matters to be voted on by shareholders. Holders of common stock may not cumulate their votes in the election of directors, and are entitled to share equally and ratably in the dividends that may be declared by the board of directors, but only after payment of dividends required to be paid on outstanding shares of preferred stock according to its terms. The shares of Net1 common stock are not subject to redemption.
The Companys number of shares, net of treasury, presented in the consolidated balance sheets and consolidated statement of changes in equity includes participating non-vested equity shares (specifically contingently returnable shares) as described below in Note 18 Amended and Restated Stock Incentive PlanRestricted StockGeneral Terms of Awards. The following table presents reconciliation between the number of shares, net of treasury, presented in the consolidated statement of changes in equity and the number of shares, net of treasury, excluding non-vested equity shares that have not vested during the years ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
Number of shares, net of treasury: | ||||||||||
Statement of changes in equity common stock | 56,369,737 | 55,271,954 | 46,679,565 | |||||||
Less: Non-vested equity shares that have not vested as of end of year (Note 18) | 505,473 | 589,447 | 341,529 | |||||||
Number of shares, net of treasury excluding non-vested equity shares that have not vested | 55,864,264 | 54,682,507 | 46,338,036 |
Redeemable common stock issued pursuant to transaction with the IFC Investors
Holders of redeemable common stock have all the rights of enjoyed by holders of common stock, however, holders of redeemable common stock have additional contractual rights. On April 11, 2016, the Company entered into a Subscription Agreement (the Subscription Agreement) with International Finance Corporation, IFC African, Latin American and Caribbean Fund, LP, IFC Financial Institutions Growth Fund, LP, and Africa Capitalization Fund, Ltd. (collectively, the IFC Investors). Under the Subscription Agreement, the IFC Investors purchased, and the Company sold in the aggregate, approximately 9.98 million shares of the Companys common stock, par value $0.001 per share, at a price of $10.79 per share, for gross proceeds to the Company of approximately $107.7 million. The Company has accounted for these 9.98 million shares as redeemable common stock as a result of the put option discussed below.
The Company has entered into a Policy Agreement with the IFC Investors (the Policy Agreement). The material terms of the Policy Agreement are described below.
F-40
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
15. |
COMMON STOCK (continued) |
Common stock (continued)
Board Rights
For so long as the IFC Investors in aggregate beneficially own shares representing at least 5% of the Companys common stock, the IFC Investors will have the right to nominate one director to the Companys board of directors. For so long as the IFC Investors in aggregate beneficially own shares representing at least 2.5% of the Companys common stock, the IFC Investors will have the right to appoint an observer to the Companys board of directors at any time when they have not designated, or do not have the right to designate, a director.
Registration Rights
The Company has agreed to grant certain registration rights to the IFC Investors for the resale of their shares of the Companys common stock, including filing a resale shelf registration statement and taking certain actions to facilitate resales thereunder.
Redeemable common stock issued pursuant to transaction with the IFC Investors (continued)
Put Option
Each Investor will have the right, upon the occurrence of specified triggering events, to require the Company to repurchase all of the shares of its common stock purchased by the IFC Investors pursuant to the Subscription Agreement (or upon exercise of their preemptive rights discussed below). Events triggering this put right relate to (1) the Company being the subject of a governmental complaint alleging, a court judgment finding or an indictment alleging that the Company (a) engaged in specified corrupt, fraudulent, coercive, collusive or obstructive practices; (b) entered into transactions with targets of economic sanctions; or (c) failed to operate its business in compliance with anti-money laundering and anti-terrorism laws; or (2) the Company rejecting a bona fide offer to acquire all of its outstanding Common Stock at a time when it has in place or implements a shareholder rights plan, or adopting a shareholder rights plan triggered by a beneficial ownership threshold of less than twenty percent. The put price per share will be the higher of the price per share paid by the IFC Investors pursuant to the Subscription Agreement (or paid when exercising their preemptive rights) and the volume weighted average price per share prevailing for the 60 trading days preceding the triggering event, except that with respect a put right triggered by rejection of a bona fide offer, the put price per share will be the highest price offered by the offeror. The Company believes that the put option has no value and, accordingly, has not recognized the put option in its consolidated financial statements.
Preemptive Rights
For so long as the IFC Investors hold in aggregate 5% of the outstanding shares of common stock of the Company, each Investor will have the right to purchase its pro-rata share of new issuances of securities by the Company, subject to certain exceptions.
Sale of common stock during fiscal 2017
In February 2017, the Company sold a total of five million shares of its common stock at a price of $9.00 per share to two investors, for aggregate gross proceeds to the Company of $45.0 million. These sales were made pursuant to stock purchase agreements entered into on October 6, 2016, as amended. One of the investors was contractually restricted from disposing of the shares until April 6, 2017, and the other is restricted until August 16, 2017. The sale of the shares has been registered under the Securities Act of 1933, as amended, pursuant to the Companys shelf registration statement on Form S-3.
F-41
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
15. |
COMMON STOCK (continued) |
Common stock repurchases
Executed under share repurchase authorizations
On February 3, 2016, the Companys Board of Directors approved the replenishment of its share repurchase authorization to repurchase up to an aggregate of $100 million of common stock. The authorization has no expiration date. The share repurchase authorization will be used at managements discretion, subject to limitations imposed by SEC Rule 10b-18 and other legal requirements and subject to price and other internal limitations established by the Board. Repurchases will be funded from the Companys available cash. Share repurchases may be made through open market purchases, privately negotiated transactions, or both. There can be no assurance that the Company will purchase any shares or any particular number of shares. The authorization may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, liquidity and other factors that management deems appropriate.
On June 29, 2016, the Company adopted a Rule 10b5-1 plan for the purpose of repurchasing approximately $50 million of its common stock. The 10b5-1 Plan was established in connection with the $100 million share repurchase program approved on February 3, 2016. A plan under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. A broker selected by the Company had the authority under the terms and limitations specified in the 10b5-1 Plan to repurchase shares on the Companys behalf in accordance with the terms thereof. The plan expired at the end of August 2016.
During the first quarter of the year ended June 30, 2017, the Company repurchased 3,137,609 shares under its share repurchase authorization for approximately $31.6 million. During November and December 2015, the Company repurchased an aggregate of 749,213 shares of its common stock for approximately $11.2 million under its share repurchase authorization that was approved on August 21, 2013. During February and June 2016, the Company repurchased an aggregate of 1,677,491 shares for approximately $15.9 million under its replenished share repurchase authorization which resulted in a total of 2,426,704 shares repurchased for approximately $27.1 million under its various share repurchase authorizations during the year ended June 30, 2016.
The Company did not repurchase any of its shares during the years ended June 30, 2015, under this authorization.
Other repurchases
On May 24, 2017, the Company and one of its co-founders, the former chief executive officer and former member of its board of directors, Mr. S.C.P. Belamant, entered into a Separation and Release of Claims Agreement (the Separation Agreement). As contemplated by the Separation Agreement, the Company and Mr. S.C.P. Belamant also entered into a Stock Repurchase Agreement (the Stock Repurchase Agreement). The Separation Agreement provided for certain payments and other benefits to Mr. S.C.P. Belamant, including without limitation, the repurchase from Mr. Belamant by the Company of his shares of the Companys common stock pursuant to the Stock Repurchase Agreement and the repurchase of 252,286 of Mr. S.C.P. Belamant in-the-money stock options at a price per option equal to (i) $10.80 minus (ii) the applicable exercise price per option. To effectuate the repurchase of the options pursuant to the Separation Agreement, the options were exercised by Mr. S.C.P. Belamant and the shares issued pursuant to such options were repurchased by the Company. In summary, the Company repurchased 1,269,751 shares of its common stock from Mr. Belamant, at a price of $10.80 per share, for an aggregate consideration of $13.7 million. The Remuneration Committee met on May 3, 2017, to discuss Mr. S.C.P. Belamants early retirement, and proposed a repurchase price of $10.80 per share, which was 6 cents lower than the closing price on May 2, 2017.
During the year ended June 30, 2015, the Company entered into a Subscription and Sale of Shares Agreement with Business Venture Investments No 1567 Proprietary Limited (RF) (BVI), one of the Companys BEE partners, in preparation for any new potential SASSA tender. Pursuant to the agreement: (i) the Company repurchased BVIs remaining 1,837,432 shares of the Companys common stock for approximately ZAR 97.4 million in cash ($9.2 million translated at exchange rates prevailing as of August 27, 2014) and (ii) BVI subscribed for new ordinary shares of Cash Paymaster Services (Pty) Ltd (CPS) representing approximately 12.5% of CPS ordinary shares outstanding after the subscription for ZAR 15.0 million in cash (approximately $1.4 million translated at exchange rates prevailing as of August 27, 2014).
The Company did not repurchase any of its shares during the years ended June 30, 2016, outside of the authorization.
F-42
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
15. |
COMMON STOCK (continued) |
Acquisition of non-controlling interests
During the year ended June 30, 2016, the Company acquired all of the issued share capital of Masterpayment and Smart Life that it did not previously own for approximately $11.2 million and $0.001 million, respectively, in cash. These transactions were 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 respective non-controlling interest was adjusted to reflect the change in ownership interest in each of Masterpayment and Smart Life. The difference between the fair value of the consideration paid and the amount by which the non-controlling interest was adjusted, of $1.3 million, was recognized in total Net1 equity during the year ended June 30, 2016.
16. |
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME |
The table below presents the change in accumulated other comprehensive (loss) income per component during years ended June 30, 2017, 2016 and 2015:
Accumulated | ||||||||||
Net | ||||||||||
unrealized | ||||||||||
Accumulated | income (loss) | |||||||||
Foreign | on asset | |||||||||
currency | available for | |||||||||
translation | sale, net of | |||||||||
reserve | tax | Total | ||||||||
Balance as of July 1, 2014 | $ | (83,359 | ) | $ | 618 | $ | (82,741 | ) | ||
Movement in foreign currency translation reserve | (56,862 | ) | - | (56,862 | ) | |||||
Unrealized gain on asset available for sale, net of tax of $97 | - | 422 | 422 | |||||||
Balance as of June 30, 2015 | (140,221 | ) | 1,040 | (139,181 | ) | |||||
Movement in foreign currency translation reserve | (49,479 | ) | - | (49,479 | ) | |||||
Unrealized gain on asset available for sale, net of tax of $159 | - | 692 | 692 | |||||||
Release of gain on asset available for sale, net of taxes of | ||||||||||
$444 | - | (1,732 | ) | (1,732 | ) | |||||
Balance as of June 30, 2016 | (189,700 | ) | - | (189,700 | ) | |||||
Movement in foreign currency translation reserve related to | ||||||||||
equity accounted investment | (2,697 | ) | (2,697 | ) | ||||||
Movement in foreign currency translation reserve | 29,828 | - | 29,828 | |||||||
Balance as of June 30, 2017 | $ | (162,569 | ) | $ | 0 | $ | (162,569 | ) |
There were no reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the year ended June 30, 2017 and 2015, respectively. The Company released a gain of approximately $2.2 million from its accumulated net unrealized income (loss) on asset available for sale, net of tax, to selling, general and administration expense and related taxes of $0.4 million to income tax expense on its consolidated statement of operations during the year ended June 30, 2016, as a result of change in accounting for Finbond to the equity method (see also Note 7). There were no other reclassifications from accumulated other comprehensive loss to comprehensive (loss) income during the year ended June 30, 2016.
17. |
REVENUE |
2017 | 2016 | 2015 | ||||||||
Services rendered comprising mainly fees and commissions | $ | 533,279 | $ | 514,847 | $ | 536,046 | ||||
Loan-based fees received | 53,894 | 47,117 | 62,235 | |||||||
Sale of goods comprising mainly hardware and software sales | 22,893 | 28,785 | 27,698 | |||||||
$ | 610,066 | $ | 590,749 | $ | 625,979 |
During the years ended June 30, 2017, 2016 and 2015, the Company did not recognize any revenue using the percentage of completion method.
F-43
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION |
Amended and Restated Stock Incentive Plan
The Companys Amended and Restated 2015 Stock Incentive Plan (the Plan) was most recently amended and restated on November 11, 2015, after approval by shareholders. No evergreen provisions are included in the Plan. This means that the maximum number of shares issuable under the Plan is fixed and cannot be increased without shareholder approval, the plan expires by its terms upon a specified date, and no new stock options are awarded automatically upon exercise of an outstanding stock option. Shareholder approval is required for the repricing of awards or the implementation of any award exchange program.
The Plan permits Net1 to grant to its employees, directors and consultants incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance-based awards and other awards based on its common stock. The Remuneration Committee of the Companys Board of Directors (Remuneration Committee) administers the Plan.
The total number of shares of common stock issuable under the Plan is 11,052,580. The maximum number of shares for which awards, other than performance-based awards, may be granted in any combination during a calendar year to any participant is 569,120. The maximum limits on performance-based awards that any participant may be granted during a calendar year are 569,120 shares subject to stock option awards and $20 million with respect to awards other than stock options. Shares that are subject to awards which terminate or lapse without the payment of consideration may be granted again under the Plan. Shares delivered to the Company as part or full payment for the exercise of an option or to satisfy withholding obligations upon the exercise of an option may be granted again under the Plan in the Remuneration Committees discretion. No awards may be granted under the Plan after August 19, 2025, but awards granted on or before such date may extend to later dates.
Options
General Terms of Awards
Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant, with vesting conditioned upon the recipients continuous service through the applicable vesting date and expire 10 years after the date of grant. The options generally become exercisable in accordance with a vesting schedule ratably over a period of three years from the date of grant. The Company issues new shares to satisfy stock option award exercises but may also use treasury shares.
F-44
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Amended and Restated Stock Incentive Plan (continued)
Options (continued)
Valuation Assumptions
No stock options were awarded during the years ended June 30, 2017 and 2016, respectively. The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the assumptions noted in the following table. The estimated expected volatility is calculated based on the Companys 250 day volatility. The estimated expected life of the option was determined based historical behavior of employees who were granted options with similar terms. The Company has estimated no forfeitures for options awarded in 2015. The table below presents the range of assumptions used to value options granted during the years ended June 30, 2015:
2015 | ||||
Expected volatility | 60% | |||
Expected dividends | 0% | |||
Expected life (in years) | 3 | |||
Risk-free rate | 1.0% |
Restricted Stock
General Terms of Awards
Shares of restricted stock are considered to be participating non-vested equity shares (specifically contingently returnable shares) for the purposes of calculating earnings per share (refer to Note 21) because, as discussed in more detail below, the recipient is obligated to transfer any unvested restricted stock back to the Company for no consideration and these shares of restricted stock are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Restricted stock generally vests ratably over a three year period, with vesting conditioned upon the recipients continuous service through the applicable vesting date and under certain circumstances, the achievement of certain performance targets, as described below.
Restricted stock awarded to non-employee directors and employees of the Company vests ratably over a three-year period. Recipients are entitled to all rights of a shareholder of the Company except as otherwise provided in the restricted stock agreements.
These rights include the right to vote and receive dividends and/or other distributions. However, the restricted stock agreements generally prohibit transfer of any nonvested and forfeitable restricted stock. If a recipient ceases to be a member of the Board of Directors or an employee for any reason, all shares of his restricted stock that are not then vested and nonforfeitable will be immediately forfeited and transferred to the Company for no consideration.
The Company issues new shares to satisfy restricted stock awards.
Valuation Assumptions
The fair value of restricted stock is based on the closing price of the Companys stock quoted on The Nasdaq Global Select Market on the date of grant.
F-45
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Market Conditions - Restricted Stock Granted in August and November 2014
In August and November 2014, respectively, the Remuneration Committee approved an award of 127,626 and 71,530 shares of restricted stock to employees. These shares of restricted stock will vest in full only on the date, if any, the following conditions are satisfied: (1) the closing price of the Companys common stock equals or exceeds $19.41 (subject to appropriate adjustment for any stock split or stock dividend) for a period of 30 consecutive trading days during a measurement period commencing on the date that the Company files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending on December 31, 2017 and (2) the recipient is employed by the Company on a full-time basis when the condition in (1) is met. If either of these conditions is not satisfied, then none of the shares of restricted stock will vest and they will be forfeited. The $19.41 price target represents a 20% increase, compounded annually, in the price of the Companys common stock on Nasdaq over the $11.23 closing price on August 27, 2014.
The 127,626 and 71,530 shares of restricted stock are effectively forward starting knock-in barrier options with a strike price of zero. The fair value of these shares of restricted stock was calculated utilizing an adjusted Monte Carlo simulation discounted cash flow model which was developed for the purpose of the valuation of these shares. For each simulated share price path, the market share price condition was evaluated to determine whether or not the shares would vest under that simulation. The adjustment to the Monte Carlo simulation model incorporates a jump diffusion process to the standard Geometric Brownian Motion simulation, in order to capture the discontinuous share price jumps observed in the Companys share price movements on stock exchanges on which it is listed. Therefore, the simulated share price paths capture the idiosyncrasies of the observed Company share price movements.
In scenarios where the shares do not vest, the final vested value at maturity is zero. In scenarios where vesting occurs, the final vested value on maturity is the share price on vesting date. The value of the grant is the average of the discounted vested values. The Company used an expected volatility of 76.01%, an expected life of approximately three years, a risk-free rate of 1.27% and no future dividends in its calculation of the fair value of the 127,626 shares of restricted stock. The Company used an expected volatility of 63.73%, an expected life of approximately three years, a risk-free rate of 1.21% and no future dividends in its calculation of the fair value of the 71,530 shares of restricted stock. Estimated expected volatility was calculated based on the Companys 30 day VWAP share price using the exponentially weighted moving average of returns.
Performance Conditions - Restricted Stock Granted in August 2015
In August 2015, the Remuneration Committee approved an award of 301,537 shares of restricted stock to employees. The shares of restricted stock awarded to employees in August 2015 are subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2018. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2018 (2018 Fundamental EPS), as follows:
| One-third of the shares will vest if the Company achieves 2018 Fundamental EPS of $2.88; | |
| Two-thirds of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.30; and | |
| All of the shares will vest if the Company achieves 2018 Fundamental EPS of $3.76. |
F-46
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Performance Conditions - Restricted Stock Granted in August 2015 (continued)
At levels of 2018 Fundamental EPS greater than $2.88 and less than $3.76, the number of shares that will vest will be determined by linear interpolation relative to 2018 Fundamental EPS of $3.30. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of the Companys common stock quoted on The Nasdaq Global Select Market on the date of grant. The Company has reversed the stock-based compensation charge recognized to date related to the 301,537 shares of restricted stock because it believes that it is unlikely that the 2018 Fundamental EPS target will be achieved due to the dilutive impact on the fundamental EPS calculation as a result of issuance of the approximate 10 million shares to the IFC in May 2016.
Performance Conditions - Restricted Stock Granted in August 2016
In August 2016, the Remuneration Committee approved an award of 350,000 shares of restricted stock to executive officers. The shares of restricted stock awarded to executive officers in August 2016 are subject to time-based and performance-based vesting conditions. In order for any of the shares to vest, the recipient must remain employed by the Company on a full-time basis on the date that it files its Annual Report on Form 10-K for the fiscal year ended June 30, 2019. If that condition is satisfied, then the shares will vest based on the level of Fundamental EPS the Company achieves for the fiscal year ended June 30, 2019 (2019 Fundamental EPS), as follows:
| One-third of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.60; | |
| Two-thirds of the shares will vest if the Company achieves 2019 Fundamental EPS of $2.80; and | |
| All of the shares will vest if the Company achieves 2019 Fundamental EPS of $3.00. |
At levels of 2019 Fundamental EPS greater than $2.60 and less than $3.00, the number of shares that will vest will be determined by linear interpolation relative to 2019 Fundamental EPS of $2.80. Any shares that do not vest in accordance with the above-described conditions will be forfeited. All shares of restricted stock have been valued utilizing the closing price of shares of the Companys common stock quoted on The Nasdaq Global Select Market on the date of grant.
Stock Appreciation Rights
The Remuneration Committee also may grant stock appreciation rights, either singly or in tandem with underlying stock options. Stock appreciation rights entitle the holder upon exercise to receive an amount in any combination of cash or shares of common stock (as determined by the Remuneration Committee) equal in value to the excess of the fair market value of the shares covered by the right over the grant price. No stock appreciation rights have been granted.
F-47
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Amended and Restated Stock Incentive Plan (continued)
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June 30, 2017, 2016 and 2015:
Weighted | ||||||||||||||||
Average | Weighted | |||||||||||||||
Weighted | Remaining | Aggregate | Average | |||||||||||||
average | Contractual | Intrinsic | Grant | |||||||||||||
Number of | exercise | Term | Value | Date Fair | ||||||||||||
shares | price ($) | (in years) | ($000) | Value ($) | ||||||||||||
Outstanding July 1, 2014 | 2,710,392 | 14.16 | 5.38 | 3,909 | ||||||||||||
Granted under Plan: August 2014 | 464,410 | 11.23 | 10.00 | 2,113 | 4.55 | |||||||||||
Exercised | (773,633 | ) | 8.35 | 3,845 | ||||||||||||
Outstanding June 30, 2015 | 2,401,169 | 15.34 | 4.74 | 11,516 | ||||||||||||
Exercised | (323,645 | ) | 11.62 | 2,669 | ||||||||||||
Outstanding June 30, 2016 | 2,077,524 | 15.92 | 3.65 | 926 | ||||||||||||
Exercised | (321,026 | ) | 8.97 | 3,607 | ||||||||||||
Expired unexercised | (474,443 | ) | 22.51 | - | ||||||||||||
Forfeitures | (435,448 | ) | 17.88 | - | ||||||||||||
Outstanding June 30, 2017 | 846,607 | 13.87 | 3.80 | 486 |
The following table presents stock options vesting and expecting to vest as of June 30, 2017:
Weighted | |||||||||||||
Weighted | Average | ||||||||||||
average | Remaining | Aggregate | |||||||||||
exercise | Contractual | Intrinsic | |||||||||||
Number of | price | Term | Value | ||||||||||
shares | ($) | (in years) | ($000) | ||||||||||
Vested and expecting to vest June 30, 2017 | 846,607 | 13.87 | 3.80 | 486 |
These options have an exercise price range of $7.35 to $24.46.
The following table presents stock options that are exercisable as of June 30, 2017:
Weighted | |||||||||||||
Average | |||||||||||||
Weighted | Remaining | Aggregate | |||||||||||
average | Contractual | Intrinsic | |||||||||||
Number of | exercise | Term | Value | ||||||||||
shares | price ($) | (in years) | ($000) | ||||||||||
Exercisable June 30, 2017 | 731,286 | 14.30 | 3.25 | 486 |
F-48
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Stock option and restricted stock activity (continued)
Options (continued)
During the years ended June 30, 2017, 2016 and 2015, approximately 154,803, 373,435 and 330,967 stock options became exercisable, respectively. During the year ended June 30, 2017, the Company received approximately $2.9 million from the exercise of 321,026 stock options. During the year ended June 30, 2016, the Company received approximately $3.8 million from the exercise of 323,645 stock options. During the year ended June 30, 2015, the Company received approximately $2.0 million from 201,395 stock options exercised. The remaining 572,238 stock options were exercised through recipients delivering 336,584 shares of the Companys common stock to the Company on September 9, 2014, to settle the exercise price due. During the year ended June 30, 2017, employees forfeited 435,448 stock options and 474,443 stock options awarded in August 2006, expired unexercised. There were no forfeitures during the years ended June 30, 2016 and 2015, respectively. The Company issues new shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the years ended June 30, 2017, 2016 and 2015:
Number of | Weighted | ||||||
Shares of | Average Grant | ||||||
Restricted | Date Fair Value | ||||||
Stock | ($000) | ||||||
Non-vested July 1, 2014 | 385,778 | 3,534 | |||||
Granted August 2014 | 141,707 | 581 | |||||
Granted November 2014 | 71,530 | 229 | |||||
Total granted | 213,237 | ||||||
Vested August 2014 | (74,152) | 828 | |||||
Vested February 2015 | (183,334) | 2,400 | |||||
Total vested | (257,486) | ) | |||||
Non-vested June 30, 2015 | 341,529 | 1,759 | |||||
Granted August 2015 | 319,492 | 6,406 | |||||
Vested August 2015 | (71,574) | 1,435 | |||||
Non-vested June 30, 2016 | 589,447 | 7,622 | |||||
Granted August 2016 | 387,000 | 4,145 | |||||
Granted May 2017 | 2,587 | 27 | |||||
Total granted | 389,587 | ||||||
Vested August 2016 | (68,091) | 694 | |||||
Vested June 2017 | (200,000) | 1,896 | |||||
Total vested | (268,091) | ||||||
Forfeitures | (205,470) | 2,219 | |||||
Non-vested June 30, 2017 | 505,473 | 11,173 |
The fair value of restricted stock vested during the years ended June 30, 2017, 2016 and 2015, was $2.6 million, $1.4 million and $3.2 million, respectively. The Company agreed to accelerate the vesting of 200,000 shares of restricted stock granted to the Companys former Chief Executive Officer in August 2017 pursuant to the Separation Agreement signed in May 2017. Employees and the former Chief Executive Officer that resigned during the year ended June 30, 2017, forfeited 205,470 shares of restricted stock that had not vested. Forfeited shares of restricted stock are returned to the Company and, in accordance with the Plan, are available for future issuances by the Remuneration Committee.
F-49
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
18. |
STOCK-BASED COMPENSATION (continued) |
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a net stock compensation charge of $2.0 million, $3.6 million and $3.2 million for the years ended June 30, 2017, 2016 and 2015, respectively, which comprised:
Allocated to | ||||||||||
cost of goods | ||||||||||
sold, IT | Allocated to | |||||||||
Total | processing, | selling, | ||||||||
charge | servicing | general and | ||||||||
(reversal) | and support | administration | ||||||||
Year ended June 30, 2017 | ||||||||||
Stock-based compensation charge | $ | 3,905 | $ | - | $ | 3,905 | ||||
Reversal of stock compensation charge related to stock options | ||||||||||
and restricted stock forfeited | (1,923 | ) | - | (1,923 | ) | |||||
Total year ended June 30, 2017 | $ | 1,982 | $ | - | $ | 1,982 | ||||
Year ended June 30, 2016 | ||||||||||
Stock-based compensation charge | $ | 3,598 | $ | - | $ | 3,598 | ||||
Total year ended June 30, 2016 | $ | 3,598 | $ | - | $ | 3,598 | ||||
Year ended June 30, 2015 | ||||||||||
Stock-based compensation charge | $ | 3,195 | $ | - | $ | 3,195 | ||||
Total year ended June 30, 2015 | $ | 3,195 | $ | - | $ | 3,195 |
The stock compensation charge and reversals have been allocated to cost of goods sold, IT processing, servicing and support and selling, general and administration based on the allocation of the cash compensation paid to the employees.
As of June 30, 2017, the total unrecognized compensation cost related to stock options was approximately $0.1 million, which the Company expects to recognize over approximately two months. As of June 30, 2017, the total unrecognized compensation cost related to restricted stock awards was approximately $1.7 million, which the Company expects to recognize over approximately two years. This amount excludes the total unrecognized compensation cost, net of forfeitures, as of June 30, 2017, related to restricted stock awards that the Company expects will not vest due to it not achieving the 2018 Fundamental EPS of approximately $3.9 million. As of June 30, 2017, the cumulative unrecorded stock-based compensation charge related to these awards of restricted stock that the Company has determined are expected not to vest and has not expensed in its consolidated statement of operations is approximately $2.5 million (which amount includes the $1.8 million reversed during the year ended Jun 30, 2017).
Tax consequences
The Company has recorded a deferred tax asset of approximately $0.9 million and $1.8 million, respectively, for the years ended June 30, 2017 and 2016, related to the stock-based compensation charge recognized related to employees of Net1 as it is able to deduct the difference between the market value on date of exercise by the option recipient and the exercise price from income subject to taxation in the United States.
F-50
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
19. |
DISPOSAL OF BUSINESS |
Disposal of assets related to NUETS business
On June 30, 2014, the Company sold the NUETS business, which consisted primarily of customer contracts, other than contracts for UEPS systems in Botswana and Namibia, and equipment for approximately $2.2 million in cash. The Company received $0.2 million of these cash proceeds in June 2014, and the remaining $1.9 million was received in July 2014, and was included in accounts receivable, net, as of June 30, 2014.
20. |
INCOME TAXES |
Income tax provision
The table below presents the components of income before income taxes for the years ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
South Africa | $ | 129,786 | $ | 119,097 | $ | 137,138 | ||||
United States | (20,902 | ) | (5,915 | ) | (7,286 | ) | ||||
Other | 5,572 | 13,055 | 10,566 | |||||||
Income before income taxes | $ | 114,456 | $ | 126,237 | $ | 140,418 |
Presented below is the provision for income taxes by location of the taxing jurisdiction for the years ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
Current income tax | $ | 45,857 | $ | 88,807 | $ | 48,795 | ||||
South Africa | 35,986 | 31,815 | 39,901 | |||||||
United States | 4,686 | 50,750 | 3,109 | |||||||
Other | 5,185 | 6,242 | 5,785 | |||||||
Deferred taxation (benefit) charge | (40) | (161) | (2,292) | |||||||
South Africa | (473) | 3,044 | 398 | |||||||
United States | 1,123 | (274) | 485 | |||||||
Other | (690) | (2,931) | (3,175) | |||||||
Foreign tax credits generated United States | (3,345) | (46,566) | (2,367) | |||||||
Income tax provision | $ | 42,472 | $ | 42,080 | $ | 44,136 |
There were no changes to the enacted tax rate in the years ended June 30, 2017, 2016 and 2015.
The movement in the valuation allowance for the year ended June 30, 2017, is primarily attributable to a decrease resulting from the utilization of foreign tax credits and an increase related to a valuation allowance created for net operating loss carryforwards for the Companys German subsidiaries. The movement in the valuation allowance for the year ended June 30, 2016, relates primarily to an increase in the valuation allowance resulting from the generation of unused foreign tax credits during the year. The movement in the valuation allowance for the year ended June 30, 2015, relates primarily to the release of the valuation allowance resulting from the utilization of foreign tax credits during the year.
Net1 included actual and deemed dividends received from one of its South African subsidiaries in its years ended June 30, 2017, 2016 and 2015, taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax credits as a result of the inclusion of the dividends in its taxable income in 2016. Net1 has applied certain of these foreign tax credits against its current income tax provision for the year ended June 30, 2017, 2016 and 2015.
F-51
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
20. |
INCOME TAXES (continued) |
Income tax provision (continued)
A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Companys effective tax rate, for the years ended June 30, 2017, 2016 and 2015, is as follows:
2017 | 2016 | 2015 | ||||||||
Income tax rate reconciliation: | ||||||||||
Income taxes at fully-distributed South African tax rates | 28.00% | 28.00% | 28.00% | |||||||
Non-deductible items | 1.01% | 0.38% | 2.36% | |||||||
Foreign tax rate differential | 0.00% | 7.42% | 0.06% | |||||||
Foreign tax credits | (0.05% | ) | (36.88% | ) | (1.68% | ) | ||||
Taxation on deemed dividends in the United States | 8.00% | 34.60% | 3.46% | |||||||
Movement in valuation allowance | 0.07% | (0.09% | ) | (0.08% | ) | |||||
Prior year adjustments | 0.07% | (0.09% | ) | (0.69% | ) | |||||
Income tax provision | 37.10% | 33.34% | 31.43% |
Net1 received dividends from one of its South African subsidiaries during the year ended June 30, 2017, which resulted in an increase in taxation on dividends received. No significant foreign tax credits were generated during the year ended June 30, 2017, and the Company utilized foreign tax credits generated in prior years. The utilization of these foreign tax credits used in prior years is included in the movement in the valuation allowance. The non-deductible items during the year ended June 30, 2017, includes transaction related expenses, including legal and consulting fees incurred that are not deductible for tax purposes. Net1 received substantial dividends from one of its South African subsidiaries during the year ended June 30, 2016, which resulted in an increase in the amount of foreign tax credits generated and an increase in taxation on dividends received. A portion of these foreign tax credits generated were not used during the year and a valuation allowance has been created for unused foreign tax credits. The non-deductible items during the year ended June 30, 2015, include primarily legal and consulting fees incurred that are not deductible for tax purposes. The foreign tax rate differential represents the difference between statutory tax rates in South Africa and foreign jurisdictions, primarily the United States.
Deferred tax assets and liabilities
Deferred income taxes reflect the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The primary components of the temporary differences that gave rise to the Companys deferred tax assets and liabilities as of June 30, and their classification, were as follows:
2017 | 2016 | ||||||
Total deferred tax assets | |||||||
Net operating loss carryforwards | $ | 4,946 | $ | 1,982 | |||
Provisions and accruals | 4,413 | 4,245 | |||||
FTS patent | 475 | 496 | |||||
Intangible assets | 829 | 733 | |||||
Foreign tax credits | 32,574 | 36,750 | |||||
Other | 5,717 | 7,448 | |||||
Total deferred tax assets before valuation allowance | 48,954 | 51,654 | |||||
Valuation allowances |
(38,967 | ) | (38,834 | ) | |||
Total deferred tax assets, net of valuation allowance | 9,987 | 12,820 | |||||
Total deferred tax liabilities: | |||||||
Intangible assets | 9,141 | 11,799 | |||||
Other | 6,655 | 6,624 | |||||
Total deferred tax liabilities | 15,796 | 18,423 | |||||
Reported as | |||||||
Current deferred tax assets | 5,330 | 6,956 | |||||
Long term deferred tax liabilities | 11,139 | 12,559 | |||||
Net deferred income tax liabilities | $ | 5,809 | $ | 5,603 |
F-52
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
20. |
INCOME TAXES (continued) |
Deferred tax assets and liabilities (continued)
Increase in total deferred tax liabilities
Net operating loss carryforwards
Net operating loss carryforwards have increased primarily as a result of the losses incurred by the Companys German subsidiaries.
Intangible assets
Deferred tax liabilities intangible assets have moderately decreased during the year ended June 30, 2017, as a result of the amortization of KSNET, Masterpayment and Transact24 intangible assets.
Foreign tax credits
The decrease in foreign tax credits as of June 30, 2017, resulted from the utilization of foreign tax credits generated in previous years against taxes payable associated with the dividends received by Net1 during the year ended June 30, 2017.
Increase in valuation allowance
At June 30, 2017, the Company had deferred tax assets of $10.0 million (2016: $12.8 million), net of the valuation allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At June 30, 2017, the Company had a valuation allowance of $39.0 million (2016: $38.9 million) to reduce its deferred tax assets to estimated realizable value. The movement in the valuation allowance for the years ended June 30, 2017 and 2016, is presented below:
Net | ||||||||||||||||
Foreign | operating | |||||||||||||||
tax | loss carry- | FTS | ||||||||||||||
Total | credits | forwards | patent | Other | ||||||||||||
July 1, 2015 | $ | 22,550 | $ | 20,211 | $ | 1,088 | $ | 254 | $ | 997 | ||||||
Charged to statement of operations | 16,537 | 16,537 | - | - | - | |||||||||||
Utilized | (128 | ) | - | (128 | ) | - | - | |||||||||
Foreign currency adjustment | (125 | ) | - | (29 | ) | (96 | ) | - | ||||||||
June 30, 2016 | $ | 38,834 | $ | 36,748 | $ | 931 | $ | 158 | $ | 997 | ||||||
Reversed to statement of operations | (4,302 | ) | (4,174 | ) | (128 | ) | - | - | ||||||||
Charged to statement of operations | 4,684 | - | 3,107 | - | 1,577 | |||||||||||
Foreign currency adjustment | (249 | ) | - | (211 | ) | (38 | ) | - | ||||||||
June 30, 2017 | $ | 38,967 | $ | 32,574 | $ | 3,699 | $ | 120 | $ | 2,574 |
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2017, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
Year of expiration | U.S. net operating | |||
loss carry | ||||
forwards | ||||
2024 | $ | 2,242 |
F-53
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
20. |
INCOME TAXES (continued) |
Net operating loss carryforwards and foreign tax credits (continued)
United States (continued)
Net1 did not generate any additional foreign tax credits during the year ended June 30, 2017. During the year ended June 30, 2016, Net1 generated additional foreign tax credits related to the cash dividends received. Net1 had no net unused foreign tax credits that are more likely than not to be realized as of June 30, 2017 and 2016, respectively. The unused foreign tax credits generated expire after ten years in 2026, 2024, 2023, 2022, 2021 and 2020.
Uncertain tax positions
As of June 30, 2017 and 2016, the Company has unrecognized tax benefits of $0.5 million and $1.9 million, respectively, all of which would impact the Companys effective tax rate. The Company files income tax returns mainly in South Africa, South Korea, Germany, Hong Kong, India, the United Kingdom, Botswana and in the U.S. federal jurisdiction. As of June 30, 2017, the Companys South African subsidiaries are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2013. The Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its financial position, statement of cash flows, or results of operations. The Company does not expect the change related to unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.
The following is a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
Unrecognized tax benefits - opening balance | $ | 1,930 | $ | 2,322 | $ | 1,160 | ||||
Gross decreases - tax positions in prior periods | (2,109 | ) | (609 | ) | - | |||||
Gross increases - tax positions in current period | 440 | 641 | 1,311 | |||||||
Lapse of statute limitations | - | - | - | |||||||
Foreign currency adjustment | 214 | (424 | ) | (149 | ) | |||||
Unrecognized tax benefits - closing balance | $ | 475 | $ | 1,930 | $ | 2,322 |
As of each of June 30, 2017 and 2016, the Company had accrued interest related to uncertain tax positions of approximately $0.1 million, respectively, on its balance sheet.
21. |
EARNINGS PER SHARE |
The Company has issued redeemable common stock (refer to Note 15) which is redeemable at an amount other than fair value. Redemption of a class of common stock at other than fair value increases or decreases the carrying amount of the redeemable common stock and is reflected in basic earnings per share using the two-class method. There were no redemptions of common stock, or adjustments to the carrying value of the redeemable common stock during the years ended June 30, 2017, 2016 or 2015. Accordingly the two-class method presented below does not include the impact of any redemption.
Basic earnings per share include shares of restricted stock that meet the definition of a participating security because these shares are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic earnings per share have been calculated using the two-class method and basic earnings per share for the years ended June 30, 2017, 2016 and 2015, 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.
F-54
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
21. |
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 October 2010, November 2010, February 2012, August 2014 and November 2014 as these shares of restricted stock are considered contingently returnable shares for the purposes of the diluted earnings per share calculation and the vesting conditions in respect of a portion of the restricted stock had been satisfied. The vesting conditions are discussed in Note 18.
The following table presents net income attributable to Net1 (income from continuing operations) and the share data used in the basic and diluted earnings per share computations using the two-class method for the years ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
(in thousands except percent and | ||||||||||
per share data) | ||||||||||
Numerator: | ||||||||||
Net income attributable to Net1 | $ | 72,954 | $ | 82,454 | $ | 94,735 | ||||
Undistributed earnings | 72,954 | 82,454 | 94,735 | |||||||
Percent allocated to common shareholders (Calculation 1) | 99% | 99% | 99% | |||||||
Numerator for earnings per share: basic and diluted | $ | 72,188 | $ | 81,370 | $ | 93,750 | ||||
Denominator: | ||||||||||
Denominator for basic earnings per share: weighted-average common shares outstanding | 53,966 | 47,234 | 46,247 | |||||||
Effect of dilutive securities: | ||||||||||
Stock options | 109 | 242 | 152 | |||||||
Denominator for diluted earnings per share: adjusted weighted average common shares outstanding and assumed conversion | 54,075 | 47,476 | 46,399 | |||||||
Earnings per share: | ||||||||||
Basic | $ | 1.34 | $ | 1.72 | $ | 2.03 | ||||
Diluted | $ | 1.33 | $ | 1.71 | $ | 2.02 | ||||
(Calculation 1) | ||||||||||
Basic weighted-average common shares outstanding (A) | 53,966 | 47,234 | 46,247 | |||||||
Basic weighted-average common shares outstanding and unvested restricted shares expected to vest (B) | 54,539 | 47,863 | 46,733 | |||||||
Percent allocated to common shareholders (A) / (B) | 99% | 99% | 99% |
Options to purchase 542,711 shares of the Companys common stock at prices ranging from $10.59 to $24.46 per share were outstanding during the year ended June 30, 2017, but were not included in the computation of diluted earnings per share because the options exercise price were greater than the average market price of the Companys common shares. The options, which expire at various dates through on August 27, 2024, were still outstanding as of June 30, 2017.
F-55
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
22. |
SUPPLEMENTAL CASH FLOW INFORMATION |
The following table presents the supplemental cash flow disclosures for the years ended June 30, 2017, 2016 and 2015:
2017 | 2016 | 2015 | ||||||||
Cash received from interest | $ | 21,130 | $ | 15,262 | $ | 16,399 | ||||
Cash paid for interest | $ | 3,713 | $ | 3,439 | $ | 4,360 | ||||
Cash paid for income taxes | $ | 45,165 | $ | 42,123 | $ | 45,459 |
Financing activities
Treasury shares, at cost included in the Companys consolidated balance sheet as of June 30, 2016, includes 47,056 shares of the Companys common stock acquired for approximately $0.5 million which were paid for on July 1, 2016. The liability for this payment was included in accounts payable on the Companys consolidated balance sheet as of June 30, 2016. The payment of approximately $0.5 million is included in acquisition of treasury stock in the Companys consolidated statement of cash flows for the year ended June 30, 2017.
As discussed in Note 3, on January 20, 2016, the Company issued 391,645 shares of its common stock with an aggregate issue date fair value of approximately $4.0 million as part consideration for the Companys 56% interest in Transact24.
As discussed in Note 18, during the year ended June 30, 2015, employees exercised stock options through the delivery 336,584 shares of the Companys common stock at the closing price on September 9, 2014 or $13.93 under the terms of their option agreements. These shares are included in the Companys total share count and amount reflected as treasury shares on the consolidated balance sheet as of June 30, 2015 and consolidated statement of changes in equity for the year ended June 30, 2015.
23. |
OPERATING SEGMENTS |
Operating segments
The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues.
The Company currently has three reportable segments: South African transaction processing, International transaction processing and Financial inclusion and applied technologies. The South African transaction processing and Financial inclusion and applied technologies segments operate mainly within South Africa and the International transaction processing segment operates mainly within South Korea, Hong Kong and the European Union. The Companys reportable segments offer different products and services and require different resources and marketing strategies and share the Companys assets.
The South African transaction processing segment currently consists mainly of a welfare benefit distribution service provided to the South African government, an ATM infrastructure deployed in South, and transaction processing for retailers, utilities, and banks. Fee income is earned based on the number of recipient cardholders paid. Fee income is also earned from customers utilizing our ATM infrastructure. Utility providers and banks are charged a fee for transaction processing services performed on their behalf at retailers. This segment has individually significant customers that each provides more than 10% of the total revenue of the Company. For the year ended June 30, 2017, there was one such customer, providing 22% of total revenue (2016: one such customer, providing 21% of total revenue; 2015: one such customer, providing 24% of total revenue).
The International transaction processing segment consists mainly of activities in South Korea from which the Company generates revenue from the provision of payment processing services to merchants and card issuers through its VAN. This segment generates fee revenue from the provision of payment processing services and to a lesser extent from the sale of goods, primarily point of sale terminals, to customers in South Korea. Fees generated from payment services processing and other processing activities by Transact24 and Masterpayment are included in this segment. Finally, the segment includes start up costs related to ZAZOO in the United Kingdom and India and generates transaction fee revenue from transaction processing of UEPS-enabled smartcards in Botswana.
F-56
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
23. |
OPERATING SEGMENTS (continued) |
Operating segments (continued)
The Financial inclusion and applied technologies segment derives revenue from the provision of short-term loans as a principal and the provision of smart card accounts, as a fixed monthly fee per card is charged for the maintenance of these accounts. This segment also includes fee income and associated expenses from merchants and card holders using the Companys merchant acquiring system, the sale of prepaid products (electricity and airtime) as well as the sale of hardware and software. Finally, the Company earns premium income from the sale of life insurance products through its insurance business.
Corporate/eliminations includes the Companys head office cost center and the amortization of acquisition-related intangible assets. The $8.0 million paid to the Companys founder, former chief executive officer and former member of our board of directors during the year ended June 30, 2017, is also included in corporate/ eliminations. The $1.9 million fair value gain resulting from the acquisition of Transact24 (refer to Note 3) and the $2.2 million gain resulting from the change in accounting for Finbond (refer to Note 16) that were recognized during the year ended June 30, 2016, have been allocated to corporate/ elimination.
The reconciliation of the reportable segments revenue to revenue from external customers for the years ended June 30, 2017, 2016 and 2015, respectively, is as follows:
Revenue | ||||||||||
From | ||||||||||
Reportable | Inter- | external | ||||||||
Segment | segment | customers | ||||||||
South African transaction processing | $ | 249,144 | $ | 24,518 | $ | 224,626 | ||||
International transaction processing | 176,729 | - | 176,729 | |||||||
Financial inclusion and applied technologies | 235,901 | 27,190 | 208,711 | |||||||
Total for the year ended June 30, 2017 | $ | 661,774 | $ | 51,708 | $ | 610,066 | ||||
South African transaction processing | $ | 212,574 | $ | 17,615 | $ | 194,959 | ||||
International transaction processing | 169,807 | - | 169,807 | |||||||
Financial inclusion and applied technologies | 249,403 | 23,420 | 225,983 | |||||||
Total for the year ended June 30, 2016 | $ | 631,784 | $ | 41,035 | $ | 590,749 | ||||
South African transaction processing | $ | 236,452 | $ | 20,521 | $ | 215,931 | ||||
International transaction processing | 164,554 | - | 164,554 | |||||||
Financial inclusion and applied technologies | 272,600 | 27,106 | 245,494 | |||||||
Total for the year ended June 30, 2015 | $ | 673,606 | $ | 47,627 | $ | 625,979 |
The Company does not allocate interest income, interest expense or income tax expense to its reportable segments. The Company evaluates segment performance based on segment operating income before acquisition-related intangible asset amortization which represents operating income before acquisition-related intangible asset amortization and allocation of expenses allocated to Corporate/Eliminations, all under GAAP. The reconciliation of the reportable segments measure of profit or loss to income before income taxes for the years ended June 30, 2017, 2016 and 2015, respectively, is as follows:
For the years ended June 30, | ||||||||||
2017 | 2016 | 2015 | ||||||||
Reportable segments measure of profit or loss | $ | 130,799 | $ | 129,774 | $ | 150,538 | ||||
Operating income: Corporate/Eliminations | (33,756 | ) | (15,406 | ) | (22,019 | ) | ||||
Interest income | 20,897 | 15,292 | 16,355 | |||||||
Interest expense | (3,484 | ) | (3,423 | ) | (4,456 | ) | ||||
Income before income taxes | $ | 114,456 | $ | 126,237 | $ | 140,418 |
F-57
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
23. |
OPERATING SEGMENTS (continued) |
The following tables summarize segment information which is prepared in accordance with GAAP for the years ended June 30, 2017, 2016 and 2015:
For the years ended June 30, | ||||||||||
2017 | 2016 | 2015 | ||||||||
Revenues | ||||||||||
South African transaction processing | $ | 249,144 | $ | 212,574 | $ | 236,452 | ||||
International transaction processing | 176,729 | 169,807 | 164,554 | |||||||
Financial inclusion and applied technologies | 235,901 | 249,403 | 272,600 | |||||||
Total | 661,774 | 631,784 | 673,606 | |||||||
Operating income (loss) | ||||||||||
South African transaction processing | 59,309 | 51,386 | 51,008 | |||||||
International transaction processing | 13,705 | 23,389 | 26,805 | |||||||
Financial inclusion and applied technologies | 57,785 | 54,999 | 72,725 | |||||||
Subtotal: Operating segments | 130,799 | 129,774 | 150,538 | |||||||
Corporate/Eliminations | (33,756 | ) | (15,406 | ) | (22,019 | ) | ||||
Total | 97,043 | 114,368 | 128,519 | |||||||
Depreciation and amortization | ||||||||||
South African transaction processing | 4,614 | 6,157 | 7,093 | |||||||
International transaction processing | 21,366 | 21,852 | 17,846 | |||||||
Financial inclusion and applied technologies | 1,422 | 1,158 | 808 | |||||||
Subtotal: Operating segments | 27,402 | 29,167 | 25,747 | |||||||
Corporate/Eliminations | 13,976 | 11,227 | 14,938 | |||||||
Total | 41,378 | 40,394 | 40,685 | |||||||
Expenditures for long-lived assets | ||||||||||
South African transaction processing | 2,473 | 5,101 | 7,008 | |||||||
International transaction processing | 7,745 | 28,029 | 28,205 | |||||||
Financial inclusion and applied technologies | 977 | 2,667 | 1,223 | |||||||
Subtotal: Operating segments | 11,195 | 35,797 | 36,436 | |||||||
Corporate/Eliminations | - | - | - | |||||||
Total | $ | 11,195 | $ | 35,797 | $ | 36,436 |
The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an arbitrary allocation and segment asset allocation is therefore not presented.
It is impractical to disclose revenues from external customers for each product and service or each group of similar products and services.
Geographic Information
Revenues based on the geographic location from which the sale originated for the years ended June 30, 2017, 2016 and 2015, are presented in the table below:
2017 | 2016 | 2015 | ||||||||
South Africa | $ | 434,124 | $ | 422,022 | $ | 461,425 | ||||
South Korea | $ | 153,403 | 158,609 | 160,853 | ||||||
Rest of world | $ | 22,539 | 10,118 | 3,701 | ||||||
Total | $ | 610,066 | $ | 590,749 | $ | 625,979 |
F-58
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
23. |
OPERATING SEGMENTS (continued) |
Geographic Information (continued)
Long-lived assets based on the geographic location for the years ended June 30, 2017, 2016 and 2015, are presented in the table below:
Long-lived assets | ||||||||||
2017 | 2016 | 2015 | ||||||||
South Africa | $ | 74,370 | $ | 69,213 | $ | 72,467 | ||||
South Korea | 192,473 | 221,459 | 230,109 | |||||||
Rest of world | 77,723 | 49,105 | 20,058 | |||||||
Total | $ | 344,566 | $ | 339,777 | $ | 322,634 |
24. |
COMMITMENTS AND CONTINGENCIES |
Operating lease commitments
The Company leases certain premises. At June 30, 2017, the future minimum payments under operating leases consist of:
Due within 1 year | $ | 5,276 | ||
Due within 2 years | $ | 1,496 | ||
Due within 3 years | $ | 481 | ||
Due within 4 years | $ | 376 | ||
Due within 5 years | $ | 165 |
Operating lease payments related to the premises and equipment were $9.8 million, $8.0 million and $6.8 million, respectively, for the years ended June 2017, 2016 and 2015, respectively.
Capital commitments
As of each of June 30, 2017 and 2016, the Company had outstanding capital commitments of approximately $0.1 million.
Purchase obligations
As of June 30, 2017 and 2016, the Company had purchase obligations totaling $2.3 million and $3.1 million, respectively. The purchase obligations as of June 30, 2017, primarily include inventory that will be delivered to the Company and sold to customers in July 2017.
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 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017) and thereby utilizing part of the Companys short-term facility. The Company in turn has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017). The Company pays commission of between 0.4% 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.
F-59
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
24. |
COMMITMENTS AND CONTINGENCIES (continued) |
Guarantees (continued)
The Company has not recognized any obligation related to these counter-guarantees in its consolidated balance sheet as of June 30, 2017. The maximum potential amount that the Company could pay under these guarantees is ZAR 130.5 million ($10.0 million, translated at exchange rates applicable as of June 30, 2017). The guarantees have reduced the amount available for borrowings under the Companys short-term credit facility described in Note 12.
As described in Note 12, the Company, Net1 specifically has provided guarantees to Bank Frick related to the EUR 40.0 million ($45.7 million) and CHF 20 million ($20.9 million) revolving overdraft facilities provided to Masterpayment. As of June 30, 2017, Masterpayment had utilized approximately $16.6 million of CHF 20 million facility and these obligations are recorded as short-term facilities in the Companys consolidated balance sheet. The maximum potential amount that the Company could pay under the guarantees to Bank Frick was $16.6 million.
Contingencies
The Company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of business.
Management currently believes that the resolution of these matters, individually or in the aggregate, will not have a material adverse impact on the Companys financial position, results of operations and cash flows.
25. |
RELATED PARTY TRANSACTIONS |
As described in Note 3, the Company has acquired all of the outstanding and issued ordinary shares in Transact24 that it did not own in January 2016 and commenced consolidating Transact24 from that date. Transact24 had an existing relationship in place between itself and a company controlled by the spouse of Transact24s Managing Director at the time of the Transact24 acquisition. This arrangement therefore was also in place before the Managing Director became an executive officer of the Company. This relationship was disclosed to the Company during the due diligence process and has been considered by the Companys management to be critical to the ongoing operations of Transact24. The company controlled by the spouse of the managing director performs transaction processing and Transact24 provides technical and administration services to the company.
The Company has recorded revenue of approximately $4.2 million related to this relationship during the year ended June 30, 2017. Transact24s Managing Director has an indirect interest in these transactions as a result of his relationship with his spouse, with an approximate value of $1.6 million during the year ended June 30, 2017. As of June 30, 2017, $0.4 million is due to the Company related to the service provided by Transact24 and this amount is included in accounts receivables, net as of June 30, 2017.
The Company has recorded revenue of approximately $1.9 million related to this relationship during the six months ended June 30, 2016. Transact24s Managing Director has an indirect interest in these transactions as a result of his relationship with his spouse, with an approximate value of $0.1 million during the six months ended June 30, 2016. As of June 30, 2016, $0.4 million is due to the Company related to the service provided by Transact24 and this amount is included in accounts receivables, net as of June 30, 2016.
F-60
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements |
for the years ended June 30, 2017, 2016 and 2015 |
(All amounts stated in thousands of United States Dollars, unless otherwise stated) |
26. |
UNAUDITED QUARTERLY RESULTS |
The following tables contain selected unaudited consolidated statements of operations information for each quarter of fiscal 2017 and 2016:
Three months ended | ||||||||||||||||
Year | ||||||||||||||||
ended | ||||||||||||||||
Jun 30, | Mar 31, | Dec 31, | Sep 30, | June 30, | ||||||||||||
2017 | 2017 | 2016 | 2016 | 2017 | ||||||||||||
(In thousands except per share data) | ||||||||||||||||
Revenue | $ | 155,056 | $ | 147,944 | $ | 151,433 | $ | 155,633 | $ | 610,066 | ||||||
Operating income | 14,726 | 24,547 | 25,589 | 32,181 | 97,043 | |||||||||||
Net income attributable to Net1 | $ | 11,289 | $ | 18,392 | $ | 18,641 | $ | 24,632 | $ | 72,954 | ||||||
Net income per share, in United States dollars | ||||||||||||||||
Basic earnings attributable to Net1 shareholders | $ | 0.20 | $ | 0.34 | $ | 0.35 | $ | 0.46 | $ | 1.34 | ||||||
Diluted earnings attributable to Net1 shareholders | $ | 0.20 | $ | 0.33 | $ | 0.35 | $ | 0.46 | $ | 1.33 |
Three months ended | ||||||||||||||||
Year | ||||||||||||||||
ended | ||||||||||||||||
Jun 30, | Mar 31, | Dec 31, | Sep 30, | June 30, | ||||||||||||
2016 | 2016 | 2015 | 2015 | 2016 | ||||||||||||
(In thousands except per share data) | ||||||||||||||||
Revenue | $ | 151,259 | $ | 134,736 | $ | 150,281 | $ | 154,473 | $ | 590,749 | ||||||
Operating income | 32,183 | 26,191 | 24,779 | 31,215 | 114,368 | |||||||||||
Net income attributable to Net1 | $ | 24,356 | $ | 18,420 | $ | 16,658 | $ | 23,020 | $ | 82,454 | ||||||
Net income per share, in United States dollars | ||||||||||||||||
Basic earnings attributable to Net1 shareholders | $ | 0.48 | $ | 0.40 | $ | 0.35 | $ | 0.49 | $ | 1.72 | ||||||
Diluted earnings attributable to Net1 shareholders | $ | 0.47 | $ | 0.39 | $ | 0.35 | $ | 0.48 | $ | 1.71 |
27. |
SUBSEQUENT EVENTS |
On July 31, 2017, the Company’s board of directors issued its former chief executive officer a 90-day written notice to terminate his two-year consulting agreement with the Company. As described in Note 15, Mr. S.C.P. Belamant retired on May 31, 2017. The Company will not be making any termination payments to Mr. Belamant beyond the 90-day notice period.
There have been no subsequent events except as described in Note 10, related to the investments in DNI and Cell C, and in Note 14, related to lending facilities obtained from the Lenders.
*********************
F-61
Exhibit 10.5
NON-EMPLOYEE DIRECTOR AGREEMENT
This Non-Employee Director Agreement is made effective as of [ ] (the Agreement), between Net 1 UEPS Technologies, Inc., a Florida corporation (the Company), and [ ] (Director).
WHEREAS, it is essential to the Company to retain and attract as directors the most capable persons available to serve on the board of directors of the Company (the Board); and
WHEREAS, the Company believes that Director possesses the necessary qualifications and abilities to serve as a director of the Company and to perform the functions and meet the Companys needs related to its Board,
NOW, THEREFORE, in consideration of the mutual promises contained herein, the benefits to be derived by each party hereunder and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Service as Director . Director will serve as a director of the Company and perform all duties as a director of the Company, including without limitation (a) attending meetings of the Board, (b) serving on one or more committees of the Board (each a Committee) and attending meetings of each Committee of which Director is a member, and (c) using reasonable efforts to promote the business of the Company. The Company currently intends to hold at least one regular meeting of the Board and each Committee each quarter, together with additional meetings of the Board and Committees as may be required by the business and affairs of the Company. In fulfilling his responsibilities as a director of the Company, Director agrees that he will act in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he reasonably believes to be in the best interests of the Company. Director agrees to abide by the policies and procedures of the Company, including the Companys insider trading policy.
2. Compensation and Expenses .
(a) Board Compensation . For the services provided to the Company as a director, the Director will be entitled to compensation as determined by the Board from time to time.
(b) Expenses . The Company will reimburse Director in accordance with the non-employee director expense policy attached hereto as Exhibit A.
(c) Other Benefits . The Board (or its designated Committee) may from time to time authorize additional compensation and benefits for Director, including additional compensation for service as chairman of a Committee and awards under any stock incentive, stock option, stock compensation or long-term incentive plan of the Company, including, without limitation, the Companys Amended and Restated 2015 Stock Incentive Plan or any other plan that may later be established by the Company.
3. Director and Officer Liability Insurance . The Company shall maintain an insurance policy or policies providing directors and officers liability insurance, and Director shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any of the Companys directors or officers. At a minimum, such coverage shall consist of an aggregate of at least $35,000,000, comprised of $20,000,000 in traditional A/B/C coverage and $15,000,000 in Side-A excess difference-in-conditions coverage with a retention of $350,000. The Company shall maintain such insurance coverage for Director for at least six years after such time that Director ceases to be a member of the Board.
4. Limitation of Liability; Right to Indemnification . Director shall be entitled to indemnification by the Company under the terms of an indemnification agreement, attached hereto as Exhibit B (the Indemnification Agreement).
5. Amendments and Waiver . No supplement, modification or amendment of this Agreement will be binding unless executed in writing by both parties. No waiver of any provision of this Agreement on a particular occasion will be deemed or will constitute a waiver of that provision on a subsequent occasion or a waiver of any other provision of this Agreement.
6. Binding Effect . This Agreement will be binding upon and inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
7. Severability . The provisions of this Agreement are severable, and any provision of this Agreement that is held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable in any respect will not affect the validity or enforceability of any other provision of this Agreement.
8. Governing Law . This Agreement will be governed by and construed and enforced in accordance with the laws of the State of Florida applicable to contracts made and to be performed in that state without giving effect to the principles of conflicts of laws.
9. Entire Agreement . This Agreement and the Indemnification Agreement constitute the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understanding relating to such subject matter.
10. Miscellaneous . This Agreement may be executed by the Company and Director in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same instrument. A signed copy of this Agreement transmitted by facsimile, email or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original executed copy of this Agreement for all purposes. Director acknowledges that this Agreement does not constitute a contract of employment and does not imply that the Company will continue his service as a director for any period of time.
[Signature page follows.]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date shown above.
Net 1 UEPS Technologies, Inc.
By: | ||
Name: | [ ] | |
Title: | [ ] |
[ ] |
Exhibit A
Expense Policy
NET 1 UEPS TECHNOLOGIES, INC. (Net1)
NON-EMPLOYEE DIRECTOR (NED) EXPENSE POLICY
When travelling on Net1 business, NEDs of Net1 will be entitled to be reimbursed for all expenses necessarily incurred specifically:
|
First or business class air travel (at the election of the director). |
|
|
||
|
Single room hotel accommodation and reasonable extras (three to five star at the election of the NED). |
|
|
||
|
Meals and reasonable incidental expenditure. |
|
|
||
|
Other travel costs (car hire, trains, taxis, etc). |
The above policy applies to NEDs for a maximum of three nights per single day board meeting with or without a board dinner the night before or after, and four nights if there are two days of meetings.
A summary schedule of expenditure by each NED will be tabled annually in August for review by the Nominating and Corporate Governance Committee.
Approved
May 3
rd
, 2017
A-1
Exhibit B
Indemnification Agreement
(see attached)
Exhibit 10.66
ADDITIONAL SUBSCRIPTION AGREEMENT | ||
dated
23 JUNE 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED
and
AJD HOLDINGS PROPRIETARY LIMITED
and
RICHMARK HOLDINGS PROPRIETARY LIMITED
in relation to and including as a party,
DNI - 4PL CONTRACTS PROPRIETARY LIMITED
Baker & McKenzie
1 Commerce Square
39 Rivonia Road
Sandhurst, Sandton
Johannesburg
South Africa
www.bakermckenzie.com
Table of contents
2
ADDITIONAL SUBSCRIPTION AGREEMENT
This Agreement is dated 23 June 2017
between
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED ;
AJD HOLDINGS PROPRIETARY LIMITED ;
RICHMARK HOLDING PROPRIETARY LIMITED; and
DNI - 4PL CONTRACTS PROPRIETARY LIMITED .
1. |
INTERPRETATION |
1.1 |
This Agreement shall be interpreted in accordance with clause 1 of the Framework Agreement (as defined below). |
1.2 |
Any defined terms in this Agreement not defined in clause 1.3 below shall bear the meaning assigned to them in clause 1.2 of the Framework Agreement. |
1.3 |
In this Agreement, the following terms shall bear the meanings assigned to them below and cognate expressions shall bear corresponding meanings: |
(a) |
Agreement this additional subscription agreement together with its annexures; |
|
(b) |
Auditors - the auditors of the Company; |
|
(c) |
Average PBT - the average PBT in respect of the Measurement Period as determined by solving for "A" in the following formula: |
A = (B + C) ÷ 2
B means the 2018 PBT;
C means the 2019 PBT;
(d) |
Condition Precedent - the suspensive conditions set out in clause 3.1; |
|
(e) |
Extraordinary Items - material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the Company or any of its subsidiaries, being non-recurring and non-trading items, including (for the avoidance of doubt) income, expenditure items accounted for during the financial year under review in respect of any prior financial year and which shall further include any profit or loss made on the disposal or acquisition of any fixed assets, or operations or business or investments and any operations and/or business which have been discontinued or sold; |
|
(f) |
Framework Agreement - the framework agreement entered into among Net 1, Gain, AJD Holdings, Richmark and the Company on the Signature Date; |
|
(g) |
Gain - Peter Kennedy Gain, identity number xxx; |
|
(h) |
Group the Company and its subsidiaries, and " Group Company " shall mean any of them; |
|
(i) |
IFRS - International Financial Reporting Standards as issued by the Board of the International Accounting Standards Committee from time to time; |
3
(j) |
Measurement Accounts the 2018 Financial Statements and the 2019 Financial Statements; |
|
(k) |
Measurement Period - the period commencing on 1 July 2017 and ending 30 June 2019; |
|
(l) |
Net 1 - Net 1 Applied Technologies South Africa Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2002/031446/07; |
|
(m) |
PBT - the attributable profits before tax of the Company, as determined in accordance with IFRS and with reference to the Measurement Accounts, provided that for purposes of determining such PBT: |
(i) |
the PBT shall be normalised to exclude: |
||
(A) |
any Extraordinary Items, before any tax affects; |
||
(B) |
the Company's share of profits and losses from its shareholding in International Tower Corporation Proprietary Limited; and |
||
(ii) |
the PBT shall be normalised to include: |
||
(A) |
up to 50% of the profits or losses, as the case may be, generated by Evercomm Proprietary Limited shall be included in the calculation; |
||
(B) |
100% of the profit before tax of The Starterpack Company Proprietary Limited; |
Prime Rate - the publicly quoted basic rate of interest (percent per annum, calculate daily, compounded monthly in arrear and calculated on a 365 day year) from time to time published by Investec Bank Limited as its prime overdraft lending rate, as certified by any manager of such bank, or his delegee, whose appointment and designation need not be provided, which shall in the absence of manifest or clerical error be prima facie proof thereof;
(n) |
Signature Date the date of signature of this Agreement by the last of the Parties; |
|
(o) |
Shareholders' Proportions - means, in respect of: |
(i) |
AJD Holdings -
|
|
(ii) |
Richmark -
|
(p) |
Subscription Date 5 th Business Day after the Subscription Price Determination Date; |
|
(q) |
Subscription Price - means the amount payable by Net 1 to the Company in terms of clause 5.2; |
|
(r) |
Subscription Price Determination Date the date on which the 2018 PBT, the 2019 PBT and the Average PBT have been agreed to by Net 1 in terms of clause 6.6 or finally determined in terms of clause 6.9, as the case may be; |
|
(s) |
Subscription Shares - means, 1 ordinary A share, to be issued by the Company to Net 1; |
|
(t) |
2018 PBT PBT determined with reference to the 2018 Financial Statements; |
4
(u) |
2018 Financial Statements the signed, unqualified, consolidated audited financial statements of the Company in respect of the financial period from 1 July 2017 to 30 June 2018; |
|
(v) |
2019 PBT PBT determined with reference to the 2019 Financial Statements; |
|
(w) |
2019 Financial Statements the signed, unqualified, consolidated audited financial statements of the Company in respect of the financial period from 1 July 2018 to 30 June 2019; |
|
(x) |
Warrantors - means Richmark and AJD Holdings |
2. |
IMPLEMENTATION |
This Agreement constitutes Step 4 of the Proposed Transaction, as provided for in clause 2.2(d) of the Framework Agreement |
|
3. |
CONDITION PRECEDENT |
3.1 |
This Agreement (other than the provisions of clause 1, this clause 3, and clauses 9 to 15, by which the Parties shall be bound and remain bound from the Signature Date) is subject to the fulfilment of the following conditions precedent, namely that on or before 31 December 2017: |
(a) |
the Framework Agreement has been entered into and become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional); |
|
(b) |
the Company has provided Net 1 with written confirmation that there has been no breach of any of the Title Warranties or Capacity and Authority Warranties (as defined in the Subscription Agreement); and |
|
(c) |
Net 1 has not terminated the Subscription Agreement in terms of clause 10 of the Subscription Agreement. |
3.2 |
If any of the Conditions Precedent are not fulfilled on or before the date prescribed for fulfilment thereof in 3.1 (or such later date or dates as may be agreed in writing between the Parties) then: |
(a) |
this whole Agreement (other than the provisions of clause 1, clause 3 and clauses 9 to 15, by which the Parties shall remain bound) shall be of no force or effect; |
|
(b) |
the Parties shall be restored as near as possible to the positions in which they would have been had this Agreement not been entered into; and |
|
(c) |
no Party shall have any claim against the others in terms of this Agreement. |
4. |
SUBSCRIPTION AND SETTLEMENT BY NET 1 |
4.1 |
On the Subscription Date, Net 1 shall subscribe for the Subscription Share, at the Subscription Price. |
4.2 |
The Subscription Price shall be settled in full by Net 1 in cash on the Subscription Date as provided for in 7.1 below. |
4.3 |
It is hereby recorded that the Subscription Price was negotiated and ultimately agreed to with reference to the earnings of the Company. |
4.4 |
On the Subscription Date and against payment of the Subscription Price as provided for in 7.1, all risk in and benefits attaching to the Subscription Share shall vest in Net 1. |
5
5. |
CALCULATION OF THE SUBSCRIPTION PRICE |
5.1 |
Net 1 shall subscribe for the Subscription Share, for the Subscription Price which shall be calculated in terms of clause 5.2 below. |
5.2 |
Determination of the Subscription Price : |
(a) |
In the event that the Average PBT is less than ZAR 303,000,000, then the Subscription Price shall be ZAR 21. |
|
(b) |
In the event that the Average PBT is equal to or greater than ZAR 303,000,000 but equal to or less than ZAR 361,000,000, then the Subscription Price shall be determined by solving for "D" in the following formula: |
D = (E - ZAR 303,000,000) x 3.8
Where
E means the Average PBT.
(c) |
In the event that the Average PBT is greater than ZAR 361,000,000, then the Subscription Price shall be determined by solving for "X" in the following formula: |
X = D + (Z x 3.1)
Where:
D bears the same meaning ascribed thereto in 5.2(b); and
Z means the Average PBT minus ZAR 361,000,000.
Notwithstanding the aforegoing, X shall be capped at ZAR 360,000,000.
6. |
MEASUREMENT ACCOUNTS |
6.1 |
The Company shall procure the preparation of the Measurement Accounts and the audit thereof by the Auditors as soon as reasonably possible but in any event within 90 days after the end of the Measurement Period. In addition, the Company shall procure that the Auditors extract or calculate (i) the 2018 PBT from the 2018 Financial Statements, (ii) the 2019 PBT from the 2019 Financial Statements and (iii) the Average PBT. |
6.2 |
The Company shall deliver the Measurement Accounts to Net 1 as soon as they are available. |
6.3 |
The Company shall use all reasonable endeavours to procure that the Auditors prepare the Measurement Accounts: |
(a) |
in conformity with the requirements of the Companies Act and in accordance with IFRS; and |
|
(b) |
save as expressly stated therein as to method and effect, on a basis consistent with the basis upon which previous consolidated audited financial statements of the Group were prepared. |
6.4 |
Net 1 shall, within 10 Business Days after delivery of the Measurement Accounts ( Objection Period ), review same in conjunction with its professional advisors and notify the Company in writing if it accepts the Measurement Accounts and the calculation of the 2018 PBT, the 2019 PBT and the Average PBT (in which case the provisions of clause 6.6 shall apply) or if it wishes to raise an objection (in which case the provisions of clause 6.5 and clauses 6.7 to 6.9 (both inclusive) shall apply). |
6
6.5 |
During the Objection Period, the Company shall ensure that Net 1 and its professional advisors are provided with access to the Auditors for the purposes of reviewing and discussing the audit work papers of the Auditors in preparing the Measurement Accounts and the extraction or calculation of the 2018 PBT, the 2019 PBT and the Average PBT. |
6.6 |
In the event that Net 1 advises the Company that it accepts the Measurement Accounts and the calculation of the 2018 PBT, the 2019 PBT and the Average PBT, the Measurement Accounts and the calculation of the 2018 PBT, 2019 PBT and the Average PBT shall be final and binding on the Parties for all purposes under this Agreement. |
6.7 |
Should any objection be raised by Net 1 in respect of the Measurement Accounts and/or the calculation of 2018 PBT, 2019 PBT and/or the Average PBT, by way of a written notice to that effect to the Company ( Dispute Notice ) within the Objection Period, then the difference or dispute shall be submitted for determination as follows |
(a) |
the difference or dispute shall be decided on by an independent investment bank or one of KPMG, Deloitte, PricewaterhouseCoopers or Ernst & Young, agreed upon between the Parties within 10 days after the Dispute Notice is delivered, failing such agreement, to be nominated by the chairperson or like officeholder for the time being of the South African Institute of Chartered Accountants, or its successor-in-title or, failing that body, by the Arbitration Foundation of South Africa ( Expert ); |
|
(b) |
the Expert shall: |
(i) |
in making his determination, act as an expert and not as an arbitrator. However, the Company and Net 1 will be afforded a reasonable opportunity to make representations to the Expert and shall provide such information as may be required by the Expert in accordance with the procedures, and within the time periods, determined by the Expert, provided that the Expert shall be entitled to make his decision whether or not such representations were submitted to him; and |
|
(ii) |
hear the matter informally and as soon as possible, it being agreed that the Parties shall use their commercially reasonable endeavours to procure that the Expert makes his determination within 30 days after the date upon which the matter was referred to the Expert; |
|
(iii) |
the Expert's decision as to any matter referred to him for determination shall, in the absence of manifest error, be final and binding in all respects on the Parties; and |
|
(iv) |
the fees and expenses of the Expert shall be borne and paid as the Expert shall direct (or in the absence of any such direction, shall be paid by the Company). |
6.8 |
If: |
(a) |
all of Net 1 objections are rejected by the Expert, then the Measurement Accounts, the 2018 PBT, the 2019 PBT and the Average PBT as submitted to the Expert shall be final and binding on the Parties for all purposes of this Agreement (save for any manifest error in calculation); or |
|
(b) |
any of Net 1's objections are accepted by the Expert, then the Measurement Accounts, the 2018 PBT, the 2019 PBT and the Average PBT, as amended by the Expert in response to the objections, shall be final and binding on the Parties for all purposes of this Agreement (save for any manifest error in calculation). |
7
6.9 |
Once the Expert has given his ruling on all matters raised in the Dispute Notice, the Measurement Accounts, the 2018 PBT, the 2019 PBT and the Average PBT shall, to the extent necessary, be amended by the Expert as part of his ruling to reflect all matters included in that ruling and shall then be regarded as agreed for all purposes of this Agreement. |
7. |
PAYMENT |
7.1 |
On the Subscription Date, Net 1 shall make payment of the Subscription Price by way of an electronic transfer into a bank account nominated by the Company for this purpose in writing, which payment shall be in full and final settlement of Net 1's obligations to make payment of the Subscription Price to the Company. |
7.2 |
Upon receipt of the Subscription Price, subject to section 46 of the Companies Act, the Company shall distribute dividends in an amount of the Subscription Price to the Warrantors, in the Shareholders' Proportions. |
7.3 |
If for whatsoever reason Net 1 fails and/or neglects to pay on the Subscription Date, the whole or any portion of the Subscription Price, taking into account interest and other adjustments thereto under this Agreement, then and in such event, in addition to any other remedies to which the aggrieved Party is entitled, penalty interest shall accrue thereon at the Prime Rate plus 2% per annum, calculated from its due date for payment, to date of actual payment. |
8. |
CLOSING |
8.1 |
On the Subscription Date, representatives of the Parties shall meet at Richmark's offices, Capital Hill Building, 6 Benmore Road, Sandton, 2196 or such other date and/or time as may be agreed by the Parties in writing. |
8.2 |
At that meeting, and in respect of the subscription as herein contemplated: |
(a) |
Net 1 shall discharge its obligations in terms of the Subscription Price, as provided for in clause 7.1 above; |
|
(b) |
the Company shall, on receipt of the proof of payment of the Subscription Price as contemplated in clause 7: |
(i) |
allot and issue the Subscription Share to Net 1 and deliver share certificates in respect of the Subscription Share to Net 1; |
|
(ii) |
procure that Net 1 is recorded as a shareholder in the securities register of the Company and deliver an extract of the securities register of the Company to Net 1 updated to reflect Net 1 as the holder of the Subscription Share; and |
8.3 |
The Parties may however dispense with a formal meeting as contemplated in this clause 8 and instead arrange for completion of such matters in such manner as may be specifically agreed, in writing (including email), to be convenient. |
9. |
WARRANTIES |
This Agreement is subject to the warranties provided for in clause 7 of the Framework Agreement and clauses 2 and 3 of Annexure A of the Subscription Agreement, mutatis mutandis . |
|
10. |
CONFIDENTIALITY |
This Agreement is subject to the confidentiality provisions provided in clause 9 of the Framework Agreement. |
8
11. |
DOMICILIUM AND NOTICES |
The Parties have provided for domicilium citandi et executandi for all purposes of this Agreement in terms of clause 11 of the Framework Agreement. |
|
12. |
BREACH |
This Agreement is subject to the breach provisions provided in clause 12 of the Framework Agreement. |
|
13. |
ARBITRATION |
Any dispute arising from or in connection with this Agreement shall be resolved in accordance with clause 13 of the Framework Agreement. |
|
14. |
GENERAL |
This Agreement shall be subject to the general provisions provided in clause 14 of the Framework Agreement. |
|
15. |
COSTS |
Any costs relating to the negotiation, preparation and drawing of this Agreement shall be dealt with in terms of clause 15 of the Framework Agreement |
9
Execution
Signed at Rosebank on 23 June 2017
Net 1 Applied Technologies Proprietary Limited | |
/s/ Herman Kotzé | |
who warrants that he/she is duly | |
authorised hereto | |
Name: Herman Kotzé | |
Capacity: Director |
10
Signed at Sandton on 23 June 2017
DNI - 4PL Contracts Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J Dunn | |
Capacity: CEO |
11
Signed at Sandton on 23 June 2017
AJD Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J Dunn | |
Capacity: Director |
12
Signed at Sandton on 23 June 2017
Richmark Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
13
Exhibit 10.67
FRAMEWORK AGREEMENT | ||
dated
23 JUNE 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED
and
PETER KENNEDY GAIN
and
AJD HOLDINGS PROPRIETARY LIMITED
and
RICHMARK HOLDINGS PROPRIETARY LIMITED
and
DNI - 4PL CONTRACTS PROPRIETARY LIMITED
Baker & McKenzie
1 Commerce Square
39 Rivonia Road
Sandhurst, Sandton
Johannesburg
South Africa
www.bakermckenzie.com
Table of contents
2
FRAMEWORK AGREEMENT
This Agreement is dated 23 June 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED;
PETER KENNEDY GAIN;
AJD HOLDINGS PROPRIETARY LIMITED;
RICHMARK HOLDINGS PROPRIETARY LIMITED; and
DNI - 4PL CONTRACTS PROPRIETARY LIMITED.
INTERPRETATION
In this Agreement clause headings are inserted for convenience only and shall not be used in its interpretation and, unless the context clearly indicates a contrary intention,
1.1 |
an expression which denotes - |
(a) |
any gender includes the other gender; |
|
(b) |
a natural person includes a juristic person and vice versa; and |
|
(c) |
the singular includes the plural and vice versa; |
1.2 |
the following expressions shall bear the meanings assigned to them below and cognate expressions bear corresponding meanings |
(a) |
Additional Subscription Agreement - the subscription agreement headed " Additional Subscription Agreement " to be entered into between AJD Holdings, Richmark, the Company and Net 1, contemporaneously with this Agreement; |
|
(b) |
Additional Subscription Share - 1 class "A" ordinary share, to be issued by the Company to Net 1 in terms of the Additional Subscription Agreement; |
|
(c) |
Agreement - this framework agreement together with its annexures; |
|
(d) |
AJD Holdings - AJD Holdings Proprietary Limited, a private limited liability company duly incorporated in accordance with the laws of RSA with registration number 1975/004328/07; |
|
(e) |
BLT - Blue Label Telecoms Limited, a public limited liability company duly incorporated in accordance with the laws of RSA with registration number 2006/022679/06; |
|
(f) |
BLT Subscription Agreement the agreement headed " Subscription Agreement " entered into between AJD Holdings, Gain, Richmark and BLT on or about 31 May 2017, in terms of with each of AJD Holdings, Gain and Richmark subscribes for shares in BLT; |
|
(g) |
Business Day - any day other than a Saturday, Sunday or official public holiday in the RSA; |
|
(h) |
CDH Cliffe Dekker Hofmeyr Inc. of 1 Protea Place, Sandton; |
|
(i) |
Companies Act - the Companies Act, 71 of 2008, as amended from time to time; |
3
(j) |
Company - DNI - 4PL Contracts Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2005/040937/07; |
|
(k) |
Conditions Precedent - the conditions precedent in 4 below; |
|
(l) |
Due Diligence Investigation - the legal, financial and commercial due diligence investigation conducted by Net 1 in relation to the Company prior to the Signature Date; |
|
(m) |
DVD a memory storage disk containing the written materials, documents and other content disclosed to Net 1 during the Due Diligence Investigation and which will be initialled by the duly authorised representatives of Net 1 and the Company for the purpose of identification prior to the Effective Date; |
|
(n) |
Effective Date - the effective date of the Transaction Agreements, being the later of: (i) the day of the fulfilment or waiver (as the case may be) of the last of the Conditions Precedent; or (ii) the effective date of the BLT Subscription Agreement; |
|
(o) |
Gain - Peter Kennedy Gain, identity number xxx; |
|
(p) |
Gain Sale of Shares Agreement - the agreement headed " Sale of Shares Agreement " to be entered into between Gain, AJD Holdings and Richmark, contemporaneously with this Agreement, in terms of which Gain will sell 25 of the issued ordinary shares in the Company held by him, to AJD Holdings and Richmark, as follows: |
AJD Holdings - 7 ordinary shares, constituting 5.6% of the issued ordinary shares in the Company;
Richmark - 18 ordinary shares, constituting 14.4% of the issued ordinary shares in the Company;
(q) |
Gain Sale Shares 25 ordinary shares in the Company held by Gain; |
|
(r) |
Issue Date the later to occur of the following dates: |
(i) |
the Effective Date; and |
|
(ii) |
the 1 st (first) Business Day after the date on which the New MOI has been filed at the Companies and Intellectual Property Commission in the manner and form prescribed in the Companies Act; |
(s) |
Measurement Period - the period commencing on 1 July 2017 and ending 30 June 2019; |
|
(t) |
Net 1 - Net 1 Applied Technologies South Africa Proprietary Limited, a private limited liability company duly incorporated in accordance with the laws of RSA with registration number 2002/031446/07; |
|
(u) |
New MOI - shall bear the meaning ascribed thereto in 4.1(a)(v); |
|
(v) |
Participation Percentage expressed as percentage, each of the Shareholders: |
voting rights in the Company;
right to participate in distributions made by the Company; and
right to receive the net assets of the Company upon its liquidation;
4
(w) |
Parties - collectively, the Company, AJD Holdings, Gain, Richmark and Net 1, and where the context so indicates or requires, includes the Company, and "Party" shall mean any one of the Parties as the context may indicate; |
|
(x) |
Proposed Transaction - shall bear the meaning ascribed thereto in 2.2; |
|
(y) |
Richmark - Richmark Holdings Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2000/013818/07; |
|
(z) |
RSA the Republic of South Africa; |
|
(aa) |
Shareholders the shareholders of the Company, as at the Effective Date, being AJD Holdings, Richmark and Net 1; |
|
(bb) |
Shareholders' Agreement - the agreement headed " Shareholders Agreement " to be entered into between Net 1, AJD Holdings and Richmark, in relation to and including as a party, the Company, contemporaneously with this Agreement; |
|
(cc) |
Signature Date - the date of signature of this Agreement by the last signing Party; |
|
(dd) |
Subscription Agreement - the subscription agreement headed " Subscription Agreement " to be entered into between Net 1, AJD Holdings, Richmark and the Company, contemporaneously with this Agreement; |
|
(ee) |
Subscription Price - means ZAR 944,999,979 being the subscription price payable by Net 1 to the Company for the Net 1 Subscription Shares; |
|
(ff) |
Subscription Shares - 44,999,999 class "A" ordinary shares, to be issued by the Company to Net 1 in terms of the Subscription Agreement; |
|
(gg) |
Transaction Agreements - as defined in clause 0 below; and |
|
(hh) |
ZAR South African Rand, being the legal currency of the RSA; |
1.3 |
any reference to any legislation is to such legislation as at the Signature Date and as amended or re-enacted from time to time; |
1.4 |
if any provision in a definition is a substantive provision conferring any right or imposing any obligation on any Party, then notwithstanding that it is only in the interpretation clause effect shall be given to it as if it were a substantive provision in this Agreement; |
1.5 |
when any number of days is prescribed such number shall exclude the first and include the last day unless the last day falls on a day which is not a Business Day, in which case the last day shall be the next succeeding day which is a Business Day; |
1.6 |
unless any annexure provides otherwise, any annexure to this Agreement shall be deemed to be incorporated in and form part of this Agreement; |
1.7 |
any reference to days (other than a reference to Business Days) months or years shall be a reference to calendar days, months or years, as the case may be; |
1.8 |
the use of the words " including ", " includes " and " include " followed by a specific example/s shall not be construed as limiting the meaning of the general wording preceding it and the rule of interpretation to the contrary shall not be applied in the interpretation of such general wording or such specific example/s; |
1.9 |
where any term is defined within the context of any particular clause in this Agreement, the terms so defined, unless it is clear from the clause in question that the term has limited application to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this Agreement, notwithstanding that that term has not been defined in this interpretation clause; |
5
1.10 |
the terms of this Agreement having been negotiated, the rule of interpretation to the effect that the Agreement shall be interpreted against the party responsible for its drafting shall not be applied in the interpretation of this Agreement; and |
1.11 |
the expiration or termination of this Agreement shall not affect such of the provisions of this Agreement as expressly provide that they shall operate after such expiration or termination or which of necessity must continue to have effect after such expiration or termination, notwithstanding that the clauses themselves do not expressly provide for this. |
IMPLEMENTATION STEPS
2.1 |
As at the Signature Date, the issued shares in the Company are held as follows: |
(a) |
AJD Holdings - 25 ordinary shares, which entitles AJD Holdings to a Participation Percentage of 20% in the Company; |
|
(b) |
Gain - 25 ordinary shares, which entitles Gain to a Participation Percentage of 20% of the issued shares in the Company; and |
|
(c) |
Richmark - 75 ordinary shares, which entitles Richmark to a Participation Percentage of 60% in the Company, |
(herein after collectively referred to as the Existing Shareholders ).
2.2 |
The Parties wish to implement the following transaction as one indivisible transaction in the following sequence, on the Effective Date (save for Step 4, which will not be implemented on the Effective Date), provided that if the New MOI is not filed at the Companies and Intellectual Property Commission in the manner and form prescribed in the Companies Act by the Effective Date, then Net 1 shall subscribe for the Subscription Shares on the Effective Date and the Company shall issue the Subscription Shares to Net 1 on the Issue Date: |
(a) |
Step 1: Gain Sale of Shares Agreement |
(i) |
Gain will sell the Gain Sale Shares to AJD Holdings and Richmark in accordance with the Gain Sale of Shares Agreement. |
|
(ii) |
The sale of the Gain Sale Shares will have been implemented upon |
(A) |
the creation of a loan account, in favour of Gain, in each of the books of account of AJD Holdings and Richmark, for amounts equal to their respective portions of the applicable purchase price under the Gain Sale of Shares Agreement; and |
|
(B) |
Gain having delivered to each of AJD Holdings and Richmark, in the applicable proportions: |
(1) |
the original share certificates in respect of the Gain Sale Shares; and |
|
(2) |
a copy of the securities register of the Company reflecting AJD Holdings and Richmark as the holders of the Gain Sale Shares, in the applicable proportions. |
6
(iii) |
Immediately following the implementation of the Gain Sale of Shares Agreement, the issued ordinary shares in the Company will be held as follows: |
(A) |
AJD Holdings - 32 ordinary shares, which will entitle AJD Holdings to a Participation Percentage of 25.6% in the Company; and |
|
(B) |
Richmark - 93 shares, which will entitle Richmark to a Participation Percentage of 74.4% in the Company. |
(b) |
Step 2: Net 1 subscribes for the Subscription Shares: |
(i) |
Immediately following the implementation of the Gain Sale of Shares Agreement, Net 1 will subscribe for the Subscription Shares at the Subscription Price on the Effective Date in accordance with the Subscription Agreement. |
|
(ii) |
The subscription by Net 1 for the Subscription Shares will have been implemented upon |
(A) |
Net 1 having delivered proof of payment of the Subscription Price to the Company on the Effective Date; and |
|
(B) |
the Company having delivered the following to Net 1 on the Issue Date - |
(1) |
the original share certificates in respect of the Subscription Shares; and |
|
(2) |
a copy of the securities register of the Company reflecting Net 1 as the holder of the Subscription Shares. |
(c) |
Step 3: The distribution of the Subscription Price to AJD Holdings and Richmark: |
(i) |
Immediately following the payment of the Subscription Price as contemplated in step 2 above, the Company shall distribute ZAR 944,999,979 to AJD Holdings and Richmark as follows: |
(A) |
ZAR 241,919,994.62 to AJD Holdings; and |
|
(B) |
ZAR 703,079,984.37 to Richmark. |
(ii) |
AJD Holdings and Richmark shall use the proceeds received in terms of the distribution in 2.2(c)(i) above to pay to Gain ZAR 265,000,000, as an upfront payment, in terms of clause 5.1(a) of the Gain Sale of Shares Agreement. |
(d) |
Step 4: Additional Subscription |
On the termination of the Measurement Period (or such earlier date as may be provided for in the Shareholders Agreement) Net 1 will subscribe for the Additional Subscription Share, in accordance with the Additional Subscription Agreement.
2.3 |
On the Issue Date after and upon the implementation of Step 1 to Step 3, the issued shares in the Company will be held as follows: |
(a) |
AJD Holdings - 32 ordinary shares, which will entitle AJD Holdings to a Participation Percentage of 14.08%; |
7
(b) |
Richmark - 93 ordinary shares, which will entitle Richmark to a Participation Percentage of 40.92%; and |
|
(c) |
Net 1 44,999,999 class "A" ordinary shares, which will entitle Net 1 to a Participation Percentage of 45%. |
2.4 |
The implementation of Steps 1 to 3 above and the conclusion of the Shareholders' Agreement, shall herein after be referred to as the as the Initial Transaction. |
2.5 |
The implementation of Steps 1 to 4 above and the conclusion of the Shareholders' Agreement, shall herein after be referred to as the as the Proposed Transaction . |
2.6 |
Accordingly, in implementing the Proposed Transaction, the Parties agree as set out herein. |
TRANSACTION AGREEMENTS
To give effect to the Proposed Transaction in the steps provided for above, the following transaction agreements shall be entered into by the Parties:
3.1 |
Step 1 - the Gain Sale of Shares Agreement; |
3.2 |
Step 2 - the Subscription Agreement; |
3.3 |
Step 3 - the Additional Subscription Agreement; |
3.4 |
the Shareholders' Agreement, |
(collectively referred to as the Transaction Agreements ).
4. |
CONDITIONS PRECEDENT |
4.1 |
This Agreement is subject to the fulfilment of the following conditions precedent, that on or before: |
(a) |
the Signature Date: |
||
(i) |
the Subscription Agreement has been entered into and such agreement has become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional); |
||
(ii) |
the Additional Subscription Agreement has been entered into and such agreement has become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional); |
||
(iii) |
the Shareholders Agreement has been entered into and such agreement has become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional); |
||
(iv) |
the Gain Sale of Shares Agreement has been entered into and such agreement has become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional); |
||
(v) |
a memorandum of incorporation in respect of the Company is in agreed form, as between the Parties, and has been initialled by the duly authorised representatives of the Parties for identification purposes (" New MOI "); |
8
(b) |
5 Business Days following the Signature Date |
(i) |
the board of directors of the Company shall have delivered to Net 1, certified copies of written resolutions by its board of directors approving the Proposed Transaction, such resolutions having been approved prior to adoption, in substance and in form, by Net 1 in writing and acting reasonably, specifically to: |
(A) |
approve the issue of the Subscription Shares, including determining that the Subscription Price constitutes adequate consideration to the Company as contemplated in section 40 of the Companies Act, as required for fulfilment of step 2 above; |
|
(B) |
authorise the Company to distribute ZAR 944,999,979 to AJD Holdings and Richmark pursuant to clause 2.2(c) above in terms of section 46 of the Companies Act, as required for fulfilment of step 3 above; and |
|
(C) |
acknowledge that the board of the Company has applied the solvency and liquidity test, as set out in section 4 of the Companies Act, and reasonably concluded that the Company will satisfy the solvency and liquidity test immediately after completing the distribution of ZAR 944,999,979 to AJD Holdings and Richmark, as required for fulfilment of step 4 above. |
(ii) |
the board of directors of Net 1 shall have delivered to the Company, a certified copy of a written resolution by its board of directors approving the Proposed Transaction; |
|
(iii) |
the Company shall have delivered to Net 1 such resolutions by the Existing Shareholders as may be legally necessary to authorise the Proposed Transaction, such resolutions having been approved prior to adoption, in substance and in form, by Net 1 in writing and acting reasonably, and specifically to approve the issue of the Subscription Shares in terms of section 41(3) of the Companies Act by way of a special resolution, as required for fulfilment of step 2 above; |
|
(iv) |
the Company shall have delivered to Net 1 such resolutions by the Existing Shareholders as may be legally necessary to approve the adoption of the New MOI, such resolutions having been approved prior to adoption, in substance and in form, by Net 1 in writing and acting reasonably; |
|
(v) |
the Company has signed and delivered to CDH all documents necessary to enable CDH to file the New MOI on behalf of the Company, in the prescribed manner and form, with the Companies and Intellectual Property Commission; |
|
(vi) |
Net 1 has confirmed in writing to the Company that it is satisfied that the DVD does not contain any written material, document or other content which was not disclosed to Net 1 during the Due Diligence Investigation; |
|
(vii) |
the duly authorised representatives of Net 1 and the Company have initialled the DVD for identification purposes; |
9
(c) |
20 July 2017 |
to the extent necessary and applicable, Gain obtains the permission of the Financial Surveillance Department of the South African Reserve Bank, for the Parties to enter into and give effect to the Gain Sale of Shares Agreement;
(d) |
30 September 2017 |
the BLT Subscription Agreement becomes effective and unconditional in accordance with its terms (save for any condition relating to this Agreement becoming unconditional in accordance with its terms)
4.2 |
The Parties shall, to the extent that it is within their control, use their respective commercial endeavours and shall cooperate in good faith to procure fulfilment of the conditions precedent as soon as is reasonably possible after the Signature Date. |
4.3 |
The Conditions Precedent in 4.1(b)(i), 4.1(b)(ii), 4.1(b)(iii) and 4.1(c) are required by law and are therefore not capable of being waived. |
4.4 |
The Conditions Precedent in 4.1(a)(i), 4.1(a)(ii), 4.1(a)(iii) 4.1(a)(iv), 4.1(a)(v), 4.1(b)(vi) and 4.1(b)(vii) 4.1(b)(iv), and 4.1(d) are expressed to be for the benefit of all Parties, who may, by giving written notice to that effect to the other Parties on or before the date of fulfilment thereof, waive such Condition Precedent or postpone the date for fulfilment thereof. |
4.5 |
The Parties shall be entitled by written agreement to extend the date for fulfilment of the Conditions Precedent. |
4.6 |
If the Conditions Precedent are not fulfilled on or before the date prescribed for fulfilment thereof in 4.1(a), 4.1(b), 4.1(c) or 4.1(d) then: |
(a) |
the Transaction Agreements shall be of no force or effect; |
|
(b) |
the Parties shall be restored as near as possible to the positions in which they would have been had this Agreement not been entered into; and |
|
(c) |
no Party shall have any claim against the others in terms of the Transaction Agreements. |
5. |
UNDERTAKING |
5.1 |
The Parties shall do all such things, sign all such documents and take all such steps to procure that the New MOI has been filed at the Companies and Intellectual Property Commission in the manner and form prescribed in the Companies Act. |
5.2 |
If any Party fails to act in accordance with clause 5.1, or in any manner exhibits any intention to not so act in accordance with clause 5.1 (" Recalcitrant Party "), then each of the other Parties is hereby irrevocably authorised by the Recalcitrant Party to, acting alone in each instance, do all such things, sign all such documents and take all such steps to procure that the New MOI has been filed at the Companies and Intellectual Property Commission in the manner and form prescribed in the Companies Act, in the Recalcitrant Party's place and stead. |
6. |
WAIVER OF PRE-EMPTIVE RIGHTS |
Insofar as may be necessary, the Existing Shareholders hereby irrevocably and unconditionally waive: |
|
6.1 |
any pre-emptive rights which they may have in terms of any shareholders agreement in force in respect of the Company as well as the memorandum of incorporation of the Company, the Companies Act or otherwise, to the sale of shares by Gain, in terms of the Gain Sale of Shares Agreement; and |
10
6.2 |
any statutory pre-emptive rights they may have in terms of section 39 of the Companies Act or otherwise in terms of the memorandum of incorporation of the Company, any shareholders agreement in force in respect of the Company or otherwise, insofar as the subscription for, and allotment and issue of, the Subscription Shares and the Additional Subscription Share, as contemplated in the Subscription Agreement and Additional Subscription Agreement, respectively, are concerned. |
GENERAL WARRANTIES
7.1 |
Each of the Parties hereby warrants to and in favour of the others that: |
(a) |
it has the legal capacity and has taken all necessary corporate action required to empower and authorise it to enter into this Agreement and, to the extent applicable, the Transaction Agreements; |
||
(b) |
it has the legal, operational and financial capacity to fulfil its obligations in terms of this Agreement and, ultimately, the Transaction Agreements; |
||
(c) |
this Agreement and the Transaction Agreements constitute agreements valid and binding on it and enforceable against it in accordance with its terms; and |
||
(d) |
the execution of this Agreement and the Transaction Agreements and the performance of its obligations in terms thereof does not and shall not |
||
(i) |
contravene any law or regulation to which that Party is subject; |
||
(ii) |
contravene any provision of that Party's constitutional documents; or |
||
(iii) |
conflict with, or constitute a breach of any of the provisions of any other agreement, obligation, restriction or undertaking which is binding on it. |
7.2 |
Each of the representations and warranties given by the Parties in terms of clause 7.1, shall |
(a) |
be a separate warranty and will in no way be limited or restricted by inference from the terms of any other warranty or by any other words in this Agreement and the Transaction Agreements; |
|
(b) |
continue and remain in force notwithstanding the completion of any or all the transactions contemplated in this Agreement; and |
|
(c) |
prime facie be deemed to be material and to be a material representation inducing the other Party to enter into this Agreement and the Transaction Agreements. |
COOPERATION
The Parties undertake, to the extent that it is within their control, at all times to do all such things, perform all such actions and take all such steps and to procure the doing of all such things, the performance of all such actions and the taking of all such steps as may be available to them and necessary for or incidental to the putting into effect or maintenance of the terms, objectives and/or import of this Agreement and the Transaction Agreements.
11
CONFIDENTIALITY
Notwithstanding the cancellation or termination of this Agreement or any of the Transaction Agreements, no Party ( Receiving Party ) shall, at any time after the conclusion of this Agreement and the Transaction Agreements, disclose to any person or use in any manner whatever any information which may be proprietary and/or confidential information belonging to any of the other Parties ( Confidential Information ), or the existence and contents of this Agreement or the Transaction Agreements; provided that:
9.1 |
any Party may disclose the existence and contents of this Agreement and the Transaction Agreements to the extent required by any rules of any stock exchange by which that Party is bound; provided further that no such disclosure shall be made unless the other Party has first given its written approval for the form thereof, which approval may not be withheld unreasonably; |
9.2 |
the Receiving Party may disclose another Party's Confidential Information and the existence and contents of this Agreement or the Transaction Agreements: |
(a) |
to the extent required by law (other than in terms of a contractual obligation of the Receiving Party); |
|
(b) |
to, and permit the use thereof by, its employees, representatives and professional advisers to the extent strictly necessary for the purpose of implementing or enforcing this Agreement or the Transaction Agreements or obtaining professional advice or conducting its business, it being specifically agreed that any disclosure or use by any such employee, representative or adviser of such confidential or other information for any other purpose shall constitute a breach of this 0 by the Receiving Party; and |
9.3 |
the provisions of this 0 shall cease to apply to any Confidential Information of a Party which: |
(a) |
is or becomes generally available to the public other than as a result of a breach by the Receiving Party of its obligations in terms of this 0; |
|
(b) |
is also received by the Receiving Party from a Third Party who did not acquire such Confidential Information subject to any duty of confidentiality in favour of another Party; or |
|
(c) |
was known to the Receiving Party prior to receiving it from another Party. |
CONFLICT
To the extent that the provisions of this Agreement are inconsistent with the provisions of any of the Transaction Agreements, this Agreement shall, to the extent of any such inconsistency take precedence over the Transaction Agreements. If however, the provisions of the Transaction Agreements merely supplement, but are not inconsistent with this Agreement, then those supplementary provisions of the Transaction Agreements shall be given effect to by the Parties.
DOMICILIUM AND NOTICES
11.1 |
The Parties choose domicilium citandi et executandi ( Domicilium ) for all purposes relating to this Agreement and the Transaction Agreements, including the giving of any notice or the serving of any process, as follows: |
(a) |
Net 1 |
Physical: | 6 th Floor President Place |
12
Corner of Jan Smuts Avenue & Bolton Road | ||
Rosebank | ||
2121 | ||
E-mail: | hermank@net1.com | |
Marked for the attention of: | Chief Executive Officer |
(b) |
the Company: |
Physical: | ||
23/25 Commerce Crescent, | ||
Kramerville, 2031 | ||
E-mail: | andrew@richmark.co.za | |
Marked for the attention of: | Andrew Dunn |
(c) |
Gain: |
Physical: | 22 Ilchester Place | |
London, W14 8AA | ||
United Kingdom | ||
E-mail: | petergain@me.com | |
Marked for the attention of: | Peter Gain |
(d) |
AJD Holdings |
Physical: | 5th Floor, Capital Hill | |
6 Benmore Road, | ||
Sandton, 2196. | ||
E-mail: | andrew@richmark.co.za | |
Marked for the attention of: | Andrew Dunn |
(e) |
Richmark |
Physical: | 5th Floor, Capital Hill | |
6 Benmore Road, |
13
Sandton, 2196. | ||
E-mail: | andrew@richmark.co.za | |
Marked for the attention of: | Andrew Dunn |
11.2 |
Any Party shall be entitled from time to time, by giving written notice to the others, to vary its physical Domicilium to any other physical address within the RSA. |
11.3 |
Any notice given or payment made by a Party to another ( Addressee ) which is delivered by hand between the hours of 09:00 and 17:00 on any Business Day to the Addressee's physical Domicilium for the time being shall be deemed to have been received by the Addressee(s) at the time of delivery. |
11.4 |
Any notice given by any Party to the others which is successfully transmitted by e-mail to the Addressee's e-mail Domicilium for the time being shall be deemed (unless the contrary is proved by the Addressee) to have been received by the Addressee on the day immediately succeeding the date of successful transmission thereof. |
11.5 |
This 0 shall not operate so as to invalidate the giving or receipt of any written notice, which is actually received by the Addressees other than by a method referred to in 11.1. |
11.6 |
Any notice in terms of or in connection with this Agreement or the Transaction Agreements shall be valid and effective only if in writing and if received or deemed to be received by the Addressee(s). |
BREACH |
|
12.1 |
Should any Party (the Defaulting Party ) breach any of its obligations in terms hereof (other than those which contain their own remedies or limit the remedies in the event of a breach thereof) or in terms of the Transaction Agreements, and fail to remedy such breach within 21 (twenty one) days of receipt of written notice requiring it to do so, then any other Party (the Aggrieved Party ) shall be entitled without notice, in addition to any other remedy available to it at law, under this Agreement or the Transaction Agreements, including obtaining an interdict, to cancel this Agreement or the Transaction Agreements or to claim specific performance of any obligation then due, in either event without prejudice to the Aggrieved Party's right to claim damages, provided that notwithstanding anything to the contrary contained in this Agreement or the Transaction Agreements and subject to 12.2 below, no Party shall be entitled to cancel or terminate this Agreement or the Transaction Agreements unless the breach is a breach of a material term of this Agreement or the Transaction Agreements. |
12.2 |
Notwithstanding the aforegoing, after implementation of the Initial Transaction on the Effective Date (save for the issue of the Subscription Shares which will be implemented on the Issue Date) and in accordance with the terms of this Agreement and the Transaction Agreements (save for the Additional Subscription Agreement, which will not be implemented on the Effective Date), no Party will have the right to cancel this Agreement or the Transaction Agreements as a result of breach thereof, save for Net 1's right to terminate the Subscription Agreement in accordance with clause 10 thereof, and a Party's recourse shall be limited to specific performance and/or a claim for damages. |
12.3 |
All costs, charges and expenses of whatsoever nature which may be incurred by any Party in enforcing its rights in terms hereof including, without limitation, legal costs on the scale as between attorney and own client and collection commission, irrespective of whether any action has been instituted shall be recoverable from the Party against which such rights are successfully enforced. |
14
ARBITRATION
13.1 |
Any disputes arising from or in connection with this Agreement or the Transaction Agreements shall, if so required by any Party by giving written notice to that effect to the other parties, finally be resolved in accordance with the rules of the Arbitration Foundation of Southern Africa ( AFSA ) by an arbitrator or arbitrators appointed by AFSA, which arbitrator's findings shall, save for manifest error, be final and binding on the parties and may be made an order of court. There shall be a right of appeal as provided for in article 22 of the aforesaid rules. |
13.2 |
Each Party - |
(a) |
expressly consents to any arbitration in terms of the aforesaid rules being conducted as a matter of urgency; and |
|
(b) |
irrevocably authorises the other parties to apply, on behalf of the Parties to such dispute, in writing, to the secretariat of AFSA in terms of article 23(1) of the aforesaid rules for any such arbitration to be conducted on an urgent basis. |
13.3 |
Notwithstanding clauses 13.1 and 13.2 any Party shall be entitled to approach a competent court for urgent interim relief, subject to any final orders, determinations and/or awards being made by the arbitrator as provided for in this clause 0. |
13.4 |
Any costs orders made by the arbitrator or the court shall be permitted to be made on an attorney and client scale. |
GENERAL
14.1 |
This Agreement, its annexures, and the Transaction Agreements attached hereto constitute the sole record of the agreement between the Parties in relation to the Proposed Transaction. |
14.2 |
No Party shall be bound by any representation, warranty, promise or the like not recorded in this Agreement or the Transaction Agreements. |
14.3 |
No addition to, variation, or agreed cancellation of this Agreement or any of the Transaction Agreements shall be of any force or effect unless in writing and signed by or on behalf of the Parties. |
14.4 |
This Agreement and the Transaction Agreements shall be interpreted and governed in all respects by the laws of the RSA. |
14.5 |
The signature by any Party of a counterpart of this Agreement or the Transaction Agreements shall be as effective as if that Party had signed the same document as all of the other Parties. |
14.6 |
No Party shall be entitled to cede any of its rights or delegate any of its obligations in terms of any of this Agreement or the Transaction Agreements without the prior written consent of the other Parties. |
COSTS
Each Party shall bear its own costs of and incidental to the negotiation, preparation and drawing of this Agreement and the Transaction Agreements contemplated herein as well as all legal and secretarial work pertaining to the implementation of this Agreement and the Transaction Agreements and the fulfilment of the conditions precedent contained in this Agreement and the Transaction Agreements.
15
SIGNATURE
16.1 |
This Agreement is signed by the Parties on the dates and at the places indicated below. |
16.2 |
This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same Agreement as at the date of signature of the Party last signing one of the counterparts. |
16
Signed at Rosebank on 23 June 2017
Net 1 Applied Technologies South Africa | |
Proprietary Limited | |
/s/ Herman Kotzé | |
who warrants that he is duly | |
authorised hereto | |
Name: Herman Kotzé | |
Capacity: Director |
17
Signed at Sandton on 23 June 2017
DNI - 4PL Contracts Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
18
Signed at London on 23 June 2017
Peter Kennedy Gain | |
/s/ Peter Kennedy Gain |
19
Signed at Sandton on 23 June 2017
AJD Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: Director |
20
Signed at Sandton on 23 June 2017
Richmark Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
21
Exhibit 10.68
SHAREHOLDERS' AGREEMENT | ||
dated
23 JUNE 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED
and
AJD HOLDINGS PROPRIETARY LIMITED
and
RICHMARK HOLDINGS PROPRIETARY LIMITED
in relation to, and including as a party
DNI - 4PL CONTRACTS PROPRIETARY LIMITED
Baker & McKenzie
1 Commerce Square
39 Rivonia Road
Sandhurst, Sandton
Johannesburg
South Africa
www.bakermckenzie.com
Table of contents
i
SHAREHOLDERS' AGREEMENT
This Agreement is dated 23 June 2017
Among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED ;
AJD HOLDINGS PROPRIETARY LIMITED ; and
RICHMARK HOLDINGS PROPRIETARY LIMITED,
in relation to, and including as a party
DNI - 4PL CONTRACTS PROPRIETARY LIMITED .
INTERPRETATION
In this Agreement clause headings are inserted for convenience only and shall not be used in its interpretation and, unless the context clearly indicates a contrary intention,
1.1 |
an expression which denotes - |
|
(a) |
any gender includes the other gender; |
|
(b) |
a natural person includes a juristic person and vice versa; |
|
(c) |
the singular includes the plural and vice versa; |
|
1.2 |
the following expressions shall bear the meanings assigned to them below and cognate expressions bear corresponding meanings |
|
(a) |
Agreement this shareholders' agreement together with its annexures; |
|
(b) |
AJD Holdings - AJD Holdings Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 1975/004328/07; |
|
(c) |
Blue Label - Blue Label Telecoms Limited, a limited liability public company duly incorporated in accordance with the laws of the RSA with registration number 2006/002679/06; |
|
(d) |
Board - the board of Directors of the Company, from time to time; |
|
(e) |
Budget and Business Plan - means the budget and business plan of the Company approved by the Board prior to the Effective Date, for the period 1 March 2017 to 28 February 2022, and as disclosed on the DVD; |
|
(f) |
Business Day any day other than a Saturday, Sunday or official public holiday in the RSA; |
|
(g) |
Companies Act the Companies Act, 71 of 2008, as amended from time to time; |
|
(h) |
Company DNI - 4PL Contracts Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2005/040937/07; |
|
(i) |
Control - means, in relation to a juristic Person, the ability of another Person, directly or indirectly, to ensure that the activities and business of that juristic Person are conducted in accordance with the wishes of the latter Person, and the latter Person shall be deemed to so control the juristic Person if the latter Person owns, directly or indirectly, the majority of the issued share capital, members' interest or equivalent equity and/or holds, directly or indirectly, the majority of the voting rights in the juristic Person and " Controlling " and " Controlled " shall be construed accordingly; |
2
(j) |
Directors the directors of the Company from time to time; |
|
(k) |
Dispose to sell, transfer, make over, give, donate, exchange, dispose of, unbundle, distribute or otherwise alienate and "Disposal" has a corresponding meaning; |
|
(l) |
Effective Date shall bear the meaning ascribed thereto in the Framework Agreement; |
|
(m) |
Encumber to mortgage, pledge, cede, assign, confer security, hypothecate, create a lien or security interest, preferential right or trust arrangement or other agreement or arrangement, the effect of which is to create any security or encumbrance and " Encumbrance " has a corresponding meaning; |
|
(n) |
Extraordinary Items - material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the Company or any of its subsidiaries, being non-recurring and non-trading items, including (for the avoidance of doubt) income, expenditure items accounted for during the financial year under review in respect of any prior financial year and which shall further include any profit or loss made on the disposal or acquisition of any fixed assets, or operations or business or investments and any operations and/or business which have been discontinued or sold; |
|
(o) |
Fair Value the fair value as between a willing buyer and a willing seller, which fair value shall, in the absence of a written agreement between the relevant Parties, be determined by an Independent Expert as contemplated in 0; |
|
(p) |
Framework Agreement - the framework agreement entered into among Net 1, Peter Kennedy Gain, AJD Holdings, Richmark and the Company on the Signature Date; |
|
(q) |
Group - the Company and its subsidiaries, and " Group Company " shall mean any of them; |
|
(r) |
Guarantee any guarantee, suretyship, indemnity or other similar form of security; |
|
(s) |
Independent Expert shall have the meaning ascribed thereto in 0; |
|
(t) |
Loan Account any claim by a Shareholder in respect of amounts lent by that Shareholder to the Company, including any claim for the payment of interest thereon; |
|
(u) |
Measurement Period - the period commencing on 1 July 2017 and ending 30 June 2019 |
|
(v) |
MOI a Memorandum of Incorporation of the Company as defined in the Companies Act; |
|
(w) |
Net 1 - Net 1 Applied Technologies South Africa Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2002/031446/07; |
|
(x) |
Ordinary "A" Shares - means an "A" ordinary no par value Share in the share capital of the Company, having the rights and privileges set out in the MOI of the Company; |
3
(y) |
Participation Interest the rights which a Shareholder has to generally participate in distributions made by the Company (on account of the shares held by a Shareholder in the Company from time to time and having regard to all shares in the Company then in issue) expressed as a percentage; |
|
(z) |
Parties collectively, Net 1, AJD Holdings and Richmark and where the context so indicates or requires, includes the Company, and "Party" shall mean any one of the Parties as the context may indicate; |
|
(aa) |
PAT - the attributable profit after tax of the Company in respect of the applicable period, calculated in accordance with IFRS, and otherwise in accordance with past practice and methodology; |
|
(bb) |
Person - shall bear the meaning ascribed thereto in section 1 of the Companies Act; |
|
(cc) |
PBT means the attributable profit before tax of the Company, as determined in accordance with IFRS, and otherwise in accordance with past practice and methodology, provided that for purposes of determining such PBT: |
(i) |
the PBT shall be normalised to exclude: |
||
(A) |
any Extraordinary Items, before any tax affects; |
||
(B) |
the Company's share of profits and losses from its shareholding in International Tower Corporation Proprietary Limited; and |
||
(ii) |
the PBT shall be normalised to include: |
||
(A) |
up to 50% of the profits or losses, as the case may be, generated by Evercomm Proprietary Limited shall be included in the calculation; |
||
(B) |
100% of the profit before tax of The Starterpack Company Proprietary Limited, |
as determined by the Independent Expert, acting as experts and not as arbitrators, in the event of a dispute;
(dd) |
Prime Rate - the publicly quoted basic rate of interest (percent per annum, calculated daily, compounded monthly in arrear and calculated on a 365 day year) from time to time published by Investec Bank Limited as its prime overdraft lending rate, as certified by any manager of such bank, or his delegee, whose appointment and designation need not be provided, which shall in the absence of manifest or clerical error be prima facie proof thereof; |
|
(ee) |
Richmark - Richmark Holdings Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2000/013818/07; |
|
(ff) |
Regulatory Approvals - means any applicable approvals required to be given by any Regulatory Authority in terms of any legislation and/or any regulations having the force of law in the RSA from time to time; |
|
(gg) |
Regulatory Authorities - means any one or more relevant regulatory authority in the RSA, as the circumstances may require; |
|
(hh) |
RSA the Republic of South Africa; |
4
(ii) |
Second Additional Subscription - shall bear the meaning ascribed thereto in clause 15.8; |
||
(jj) |
Share an ordinary share in the Company and " Shares " shall have a corresponding meaning; |
||
(kk) |
Shareholders the holders of Shares or Ordinary "A" Shares from time to time; |
||
(ll) |
Signature Date the date of signature of this Agreement by the last of its signatories; |
||
(mm) |
Subscription Agreement - the subscription agreement, entered into between Net 1, the Company, Richmark and AJD Holdings in terms of which Net 1 will acquire an approximate 45% Participation Interest; |
||
(nn) |
ZAR South African Rand, being the legal currency of the RSA; |
||
(oo) |
2018 Audit Date the date on which the complete, signed (by the Board and auditors) 2018 Financial Statements are delivered to Shareholders; |
||
(pp) |
2018 Financial Statements the consolidated annual financial statements of the Company in respect of the financial year commencing on 1 July 2017 and ending on 30 June 2018; |
||
(qq) |
2019 Audit Date the date on which the complete, signed (by the Board and auditors) 2019 Financial Statements are delivered to Shareholders; |
||
(rr) |
2019 PBT PBT determined with reference to the 2019 Financial Statements; |
||
(ss) |
2019 Financial Statements the consolidated annual financial statements of the Company in respect of the financial year commencing on 1 July 2018 and ending on 30 June 2019; |
||
1.3 |
any reference to any legislation is to such legislation as at the Signature Date and as amended or re-enacted from time to time; |
1.4 |
if any provision in a definition is a substantive provision conferring any right or imposing any obligation on any Party, then notwithstanding that it is only in the interpretation clause, effect shall be given to it as if it were a substantive provision in this Agreement; |
1.5 |
when any number of days is prescribed such number shall exclude the first and include the last day unless the last day falls on a day which is not a Business Day, in which case the last day shall be the next succeeding day which is a Business Day; |
1.6 |
unless any annexure provides otherwise, any annexure to this Agreement shall be deemed to be incorporated in and form part of this Agreement; |
1.7 |
any reference to days (other than a reference to Business Days) months or years shall be a reference to calendar days, months or years, as the case may be; |
1.8 |
the use of the words " including ", " includes " and " include " followed by a specific example/s shall not be construed as limiting the meaning of the general wording preceding it and the rule of interpretation to the contrary shall not be applied in the interpretation of such general wording or such specific example/s; |
1.9 |
where any term is defined within the context of any particular clause in this Agreement, the terms so defined, unless it is clear from the clause in question that the term has limited application to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this Agreement, notwithstanding that that term has not been defined in this interpretation clause; |
5
1.10 |
where figures are referred to in numerals and words, if there is any conflict between the two, the words shall prevail; |
1.11 |
the terms of this Agreement having been negotiated, the rule of interpretation to the effect that the Agreement shall be interpreted against the party responsible for its drafting shall not be applied in the interpretation of this Agreement; and |
1.12 |
the expiration or termination of this Agreement shall not affect any such provisions of this Agreement that expressly provide that they shall operate after such expiration or termination or which of necessity must continue to have effect after such expiration or termination, notwithstanding that the clauses themselves do not expressly provide for this. |
INTRODUCTION
2.1 |
As at the Signature Date, the issued shares of the Company are held as follows: |
|
(a) |
AJD Holdings - 25 shares, constituting 20% of the issued shares in the Company; |
|
(b) |
Gain - 25 shares, constituting 20% of the issued shares in the Company; and |
|
(c) |
Richmark - 75 shares, constituting 60% of the issued shares in the Company. |
|
2.2 |
As at the date on which the Ordinary "A" Shares are issued to Net 1, the issued shares of the Company shall be held as follows: |
|
(a) |
Net 1 44,999,999 Ordinary "A" Shares, constituting a 45% Participation Interest; |
|
(b) |
AJD Holdings - 32 ordinary shares, constituting a 14.08% Participation Interest; |
|
(c) |
Richmark - 93 ordinary shares, constituting a 40.92% Participation Interest, |
|
2.3 |
This Agreement supersedes and replaces all prior agreements, whether oral or written, concluded between the Parties with regards to the subject matter hereof. |
|
3. |
CONDITION PRECEDENT |
|
3.1 |
This Agreement (other than the provisions of clause 0, this clause 3 and clauses 0 to 0, by which the Parties shall be bound and remain bound from the Signature Date) is subject to the fulfilment of the condition precedent, that on or before 30 September 2017, the Framework Agreement has been entered into and become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional). |
|
3.2 |
If the Condition Precedent is not fulfilled on or before the date prescribed for fulfilment thereof in 3.1 (or such later date or dates as may be agreed in writing between the Parties) then: |
|
(a) |
this whole Agreement (other than the provisions of clause 0, this clause 3 and clauses 0 to 0, by which the Parties shall remain bound) shall be of no force or effect; |
|
(b) |
the Parties shall be restored as near as possible to the positions in which they would have been had this Agreement not been entered into; and |
|
(c) |
no Party shall have any claim against the others in terms of this Agreement. |
6
BUSINESS OF THE COMPANY
The main purpose and object of the Company is to conduct the Business for the benefit of the Shareholders.
MEMORANDUM OF INCORPORATION
5.1 |
To the extent that the provisions of the MOI of the Company are inconsistent with the provisions of this Agreement, the MOI of the Company shall, to the extent of any such inconsistency and to the extent required by the Companies Act, take precedence over this Agreement until the MOI of the Company is amended in accordance with 5.2. If however, the provisions of this Agreement merely supplement, but are not inconsistent with the MOI of the Company, then those supplementary provisions of this Agreement shall be given effect to by the Parties. |
|
5.2 |
Any Shareholder shall be entitled, by giving written notice to that effect to the Company and the other Shareholders, to require the MOI of the Company to be amended, to the extent permissible in terms of the Companies Act, so as to be consistent with this Agreement or to record the supplementary provisions of this Agreement. Upon receipt of that notice: |
|
(a) |
the Company shall procure that a general meeting of the Shareholders of the Company is called as soon as practically possible; and |
|
(b) |
the Shareholders shall exercise all votes which they may have to vote in favour of or procure the adoption of all resolutions of the Company necessary to amend the MOI of the Company in terms of this 5.2. |
FUNDING
6.1 |
Any funding required by the Company in order to finance its capital expenditure and/or working capital, shall first be provided from the Company's own resources. |
|
6.2 |
Should the Company fail to meet the funding requirements from its own resources as provided for in 6.1, the Company shall endeavour to obtain funding from third party financiers based on its own creditworthiness. |
|
6.3 |
Should the Company fail to procure funding as provided for in 6.1 and 6.2 above, the Shareholders shall lend such required funds to the Company on Loan Account, pro rata to its Participation Interest, subject to 6.4. |
|
6.4 |
The following terms are applicable to Shareholders' Loan Account: |
|
(a) |
The Board shall determine the Company's working capital and other funding requirements from time to time and shall, upon determining the Company's funding requirements, give written notice to each Shareholder of (i) the amount of funding required, (ii) the purpose for which the funding is required and (iii) the date by which the Shareholders are required to contribute their respective funding contributions pro rata to their Participation Interest (a Cash Call ), provided that such decision by the Board to make a Cash Call shall be unanimous. |
|
(b) |
Each Shareholder shall, by no later than the date specified in the Cash Call (which date shall not be less than 6 months from the date of the Cash Call) make payment of its Participation Interest of the total funding requirements set out in the Cash Call, in cash, without deduction or set-off, into the Company's bank account. |
7
(c) |
All amounts advanced by the Shareholders to the Company pursuant to Cash Calls shall constitute a loan on Loan Account which loan shall (i) be subordinate to any bank indebtedness if so required by the applicable bank, and (ii) bear simple interest at the rate equal to the Prime Rate. |
|
(d) |
Each Shareholder loan shall be in proportion to the Shareholders' respective Participation Interest at the time or in such other proportions as agreed in writing between the Shareholders ( Proportionate Claims ), and such Proportionate Claims will, unless otherwise agreed in writing be: |
(i) |
unsecured; |
|
(ii) |
advanced simultaneously to the Company; |
|
(iii) |
repayable to the Shareholders simultaneously and proportionately; |
|
(iv) |
repaid prior to the declaration of any dividends or other distributions to the Shareholders, but after repayment to the Shareholders of any Disproportionate Claims (as defined in 6.4(f)); and |
|
(v) |
be repaid by no later than 10 years after the date on which such funding was advanced or on such earlier date as determined by the Board, provided that the Proportionate Claims will immediately become due and payable in the event that: |
(A) |
the Company is placed in liquidation, whether provisional or final and/ or under business rescue; or |
|
(B) |
the Company enters into a compromise or other similar arrangement with its creditors generally. |
(e) |
Each Shareholder shall use its corporate structures to procure the funding of its Shareholder loans, and shall not be entitled to use the assets of the Company as collateral in respect thereof. |
||
(f) |
Should any Shareholder fail to provide its pro rata portion of any funding to the Company ( Recalcitrant Shareholder ) and the remaining Shareholder(s) ( Non- Recalcitrant Shareholder(s) ) elect to fund such pro rata portion, the disproportionate portion of the claims ( Disproportionate Claims ) will be subject to the same terms and conditions as the Proportionate Claims, save that: |
||
(i) |
they will attract simple interest at a rate equal to the Prime Rate plus 5%, which interest shall be paid on a quarterly basis in arrear; |
||
(ii) |
they will rank ahead of the Proportionate Claims in respect of the repayment and will be repaid prior to the repayment of the Proportionate Claims and the Company's other payment obligations, subject to the approval of third party financiers; |
||
(iii) |
amounts owed by the Company in respect of the Disproportionate Claims shall be assigned to, assumed and settled by the Recalcitrant Shareholder for and on behalf of the Company, as soon as the funding becomes available; |
||
(iv) |
the Non-Recalcitrant Shareholder(s) shall be entitled to recover any costs of raising additional funding, over and above the recovery of interest, in respect of the Disproportionate Claim from the Recalcitrant Shareholder; |
8
(v) |
the Recalcitrant Shareholder shall be required to provide the Non-Recalcitrant Shareholder(s) with a monthly report on the last day of each month, outlining the progress made as to the sourcing of funding; and |
|
(vi) |
the Disproportionate Claim and any interest thereon shall be repaid as soon as the Recalcitrant Shareholder obtains the necessary funding. |
6.5 |
The Parties hereby record and agree that there shall be no capitalisation of any Disproportionate Claim into shares by the Non-Recalcitrant Shareholder. |
|
SURETYSHIPS AND GUARANTEES |
||
7.1 |
No Shareholder will be required or obliged to issue any guarantee, suretyship or indemnity to third parties for the obligations of the Company and/or its subsidiaries unless previously agreed by all of the Shareholders in writing, including the Shareholder who is required to give such guarantee, suretyship or indemnity. |
|
7.2 |
Should any of the Shareholders issue any guarantees, suretyships or indemnities in accordance with the written approval of all of the Shareholders as aforesaid, all the Shareholders shall bear any loss or damage arising out of any such guarantee, suretyship or indemnity strictly pro rata to their respective shareholdings in the Company at the time the guarantee, suretyship or indemnity was given, and the Shareholders hereby indemnify each other accordingly. |
|
DIRECTORS AND MEETINGS OF DIRECTORS AND SHAREHOLDERS |
||
8.1 |
Appointment and removal of Directors |
|
(a) |
Each Shareholder undertakes to co-operate to procure the election and/or removal, as the case may be, of any person nominated by any other Shareholder, in compliance with this 8.1, and, for this purpose, shall vote in favour of or sign any resolution of Shareholders which is required to effect such election in terms of section 68 of the Companies Act, or removal, in terms of section 71 of the Companies Act. |
|
(b) |
It is agreed that - |
(i) |
the Company shall have a minimum of 3 Directors. |
|
(ii) |
each Shareholder shall be entitled, by giving written notice to that effect to the Company from time to time, to: |
(A) |
nominate one Director to the candidate pool for election as Directors. It is recorded that the Director nominated by AJD Holdings is Andrew Dunn and that he is the designated chief executive officer of the Company. |
|
(B) |
nominate for election one or more alternate(s) to the Directors nominated by it; and |
|
(C) |
request that the Company call a shareholders' meeting to elect the persons nominated by it or to remove any Director (or alternate) nominated by it and elected to serve on the Board, in terms of section 71 of the Companies Act; |
(iii) |
no Shareholder shall nominate any person to the candidate pool for election as a Director: |
||
(A) |
unless pursuant to consultation with the other Shareholders; or |
9
(B) |
if that person's directorship will contravene this Agreement or the Companies Act. |
(c) |
Each person appointed as a Director or alternate shall, prior to his appointment becoming effective, but save to the extent otherwise agreed in writing by the Company, execute a written acknowledgement in which he: |
||
(i) |
acknowledges and agrees that he will not have any claims against the Company for remuneration or compensation for services rendered to the Company or for reimbursement of expenses incurred in the business of the Board other than such remuneration or reimbursement, if any, as may be approved by the Board; and |
||
(ii) |
furnishes the Company with a postal address and e-mail address at which notice of meetings shall be given to him. |
||
(d) |
Any Shareholder which has nominated a Director to the candidate pool for election in terms of 8.1(b)(ii) shall: |
||
(i) |
procure the resignation of that Director as soon as |
(A) |
that Shareholder ceases to be entitled to nominate that Director in terms of 8.1(b), whether as a result of that Shareholder ceasing to be a Shareholder or otherwise; or |
|
(B) |
the continued directorship of that Director would contravene this Agreement or the Companies Act; and |
(ii) |
indemnify the Company against any loss, liability, damage, cost or expense which may be suffered or incurred by the Company as a result of any removal or resignation of such Director from the Board. |
8.2 |
Voting at meetings |
(a) |
Board meetings: |
||
(i) |
Subject to 8.7(a), resolutions of the Board shall be passed by a majority of the votes of the Directors cast at quorate meetings on the basis that each Director at quorate meetings of the Board shall have that percentage of the total votes of all Directors which corresponds with the Participation Interest in the Company held by the Shareholder which nominated such Director, divided by the number of Directors nominated by such Shareholder, who are present and voting at such meeting. Each Director who was not nominated by a particular Shareholder for election to the Board shall have 1 vote on a resolution of the Board. |
||
(ii) |
Any Director who is absent from any meeting may nominate any other Director to act as his alternate and to attend, speak and vote in his place at the meeting. Such vote of the Director so nominated as an alternate to the absent Director shall be in addition to any vote he may have as a Director himself. |
||
(b) |
Shareholder meetings: |
||
(i) |
At meetings of Shareholders, each Shareholder shall have a proportion of the votes corresponding to that Shareholder's Participation Interest. |
10
(ii) |
Subject to the Companies Act and any other provision of this Agreement, all resolutions of Shareholders at general meetings of Shareholders shall be passed by majority vote at a quorate meeting of Shareholders. |
|
(iii) |
Each Shareholder undertakes in favour of the other Shareholders to exercise all voting rights attaching to any Shares held by it to implement and observe the provisions of this Agreement. |
8.3 |
Quorate meetings |
(a) |
Subject to 8.3(b), a quorum for the meeting of: |
||
(i) |
the Board, shall be one Board representative of each Shareholder; and |
||
(ii) |
Shareholders, shall be one representative of each Shareholder. |
||
(b) |
Notwithstanding 8.3(a), if no quorum is present at any duly convened meeting of the Board or Shareholders within 30 minutes after the scheduled time for commencement of that meeting, the meeting shall be adjourned to be resumed at the same time and venue on the seventh day thereafter, or if that day is not a Business Day to the next succeeding Business Day. If at such adjourned meeting a quorum is not present within 30 minutes after the scheduled time for commencement of that meeting, the Directors or Shareholders, as the case may be, present shall, constitute a quorum. Written notice of each adjournment specifying the business to be dealt with at the adjourned meeting shall be given by the Company to each of the Directors or Shareholders, as the case may be, forthwith after such adjournment. No business shall be transacted at the resumption of any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. |
8.4 |
Chairman |
(a) |
AJD Holdings and Richmark shall (for so long as they between them hold the majority of the Participation Interest) jointly elect a chairman from among the Board who shall- |
||
(i) |
chair and determine the procedures to be followed at all meetings of the Board and Shareholders; and |
||
(ii) |
not have a deliberative or casting vote, in the event of a deadlock. |
||
(b) |
In the event that the chairman is absent from any given board meeting, the chairman shall appoint a proxy to vote in his/her stead at the relevant board meeting. |
8.5 |
Convening of Board meetings |
Any Director, or the company secretary (if one is appointed) may convene a meeting of Directors at any time by giving not less than seven days (or such lesser period as may be reasonable in the circumstances) written notice of such meeting to the other Directors and the Company. |
|
8.6 |
Meetings may be held with the aid of communications equipment |
Without limiting the discretion of the Directors or Shareholders to regulate their meetings, Directors or Shareholders of the Company, as the case may be, may participate in and act at any meeting of |
(a) |
Directors, as provided for in section 73(3) of the Companies Act; or |
11
(b) |
Shareholders as provided for in section 63(2) of the Companies Act. |
8.7 |
Written resolution |
(a) |
Subject to the Companies Act, a written resolution of Shareholders or Directors of the Company which has been signed by the majority of the Shareholders or Directors (or their alternates), as the case may be, and upon which the requisite majority of Shareholders or Directors indicate their approval of the resolution, shall be as valid and effective as if it had been adopted by a duly convened meeting of Shareholders or Directors, as the case may be. |
|
(b) |
Unless the contrary is stated therein, any such resolution shall be deemed to have been passed on the date on which it was signed by or on behalf of the Shareholder or Director, as the case may be, who signed it last. The resolution may consist of one or more documents each signed by one or more Shareholders or Directors (or their alternates), as the case may be. |
|
(c) |
A scanned copy of the resolution shall be sufficient evidence that such resolution has been signed by the Shareholder or Director whose signature appears thereon. |
RESERVED MATTERS
9.1 |
The approval of the Shareholders holding at least 75% of the Participation Interest shall be required for those matters, as set out in section 65(11) of the Companies Act and the undermentioned matters (and notwithstanding anything to the contrary contained in this Agreement, the powers of the Board shall accordingly be limited in regard to the matters set out below until the Shareholders have voted on and approved a particular matter: |
|
(a) |
the disposal or transfer (whether directly or through a subsidiary or other vehicle) of any business, share, asset or other investment (in the case of an asset otherwise than in the ordinary course of business of the Company); |
|
(b) |
the establishment, acquisition or purchase of any business, share, asset or other investment (in the case of an asset otherwise than in the ordinary course of business of the Company); |
|
(c) |
the Encumbering of any assets of the Company in any manner whatsoever; |
|
(d) |
any change in the basis of accounting or accounting policies from those used during the immediately preceding financial year otherwise than in accordance with IFRS; |
|
(e) |
any agreement between the Company and any Shareholder or any holding company or subsidiary of any Shareholder or any person holding at least 5% of the total Participation Interest of any Shareholder; |
|
(f) |
the revaluation of any material asset; |
|
(g) |
any decision to cover or not to cover forward any amounts receivable or payable in a currency other than ZAR; |
|
(h) |
any decision not to insure (or to insure for a lesser amount) against such risks as may be recommended by the Company's insurance brokers; |
|
(i) |
any termination of or amendment to the Company's retirement or medical aid funding; |
|
(j) |
any amendment to the Company's MOI; |
12
(k) |
any increase in, alteration or reduction or conversion of the Company's authorised or issued share capital; |
|
(l) |
any variation of any of the rights attaching to any Shares or class of Shares in the Company; |
|
(m) |
the issue or allotment by the Company of any shares of whatsoever class, bonus Shares, share options, share warrants or debentures, in each case other than as expressly provided for in this Agreement; |
|
(n) |
the repurchase of any of the Company's issued Shares; |
|
(o) |
the liquidation or winding-up or the discontinuance of the business activities of the Company; |
|
(p) |
any matter relating to the financing or capital or borrowings of the Company which would have the effect of directly or indirectly reducing the proportionate shareholding of any Shareholder; |
|
(q) |
any re-structuring of the Company, merger of the Company and any other entity and any joint venture agreements; |
|
(r) |
any material change in the nature of the business of the Company; |
|
(s) |
any appointment and removal of auditors to the Company; |
|
(t) |
the listing of any Shares or share options on any recognised stock exchange; |
|
(u) |
the incurring of any direct indebtedness (other than trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(v) |
the issue of guarantees, suretyships, letters of comfort or other similar undertakings (other than to secure trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(w) |
the incurring of any direct indebtedness (other than trade debt in the ordinary course of business) plus guarantees, suretyships, letters of comfort or other similar undertakings (other than to secure trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(x) |
the authorisation of foreign exchange commitments, unless such commitments are contemplated in the Budget and Business Plan; |
|
(y) |
the instituting of any material litigation or settlement of any material claim or any such claim or settlement which is strategic in nature and falls outside of the ordinary course of business (regardless of materiality), but specifically excluding the institution of any legal proceedings against any Shareholder or Director; and |
|
(z) |
and the aforegoing shall apply, mutatis mutandis , in relation to any Group Company. |
9.2 |
This entire clause 0 shall automatically fall away and be of no further force and effect on the earlier to occur of the implementation of the option contained in clause 0 or 0. |
DIVIDEND POLICY |
|
10.1 |
The dividend policy of the Company shall be determined by the Board from time to time having regard to the needs, expenditure and requirements (including working capital requirements) of the Company, and subject to the provision set out below. |
13
10.2 |
Without limiting the generality of 10.1, it as agreed that the dividends to be declared and paid by the Company to its shareholders shall be determined by the Board having regard to - |
(a) |
the solvency and liquidity requirements as set out in section 46(1) of the Company as envisaged in the Companies Act; |
|
(b) |
the requirements of the Company to meet its capital expenditure, debt servicing and normal working capital requirements, including as contained/provided for in the Company's applicable budget approved by the Board from time to time. |
10.3 |
In the event that the Board elects to declare dividends, subject to 10.2, the distributable profits of the Company shall be paid to the Shareholders as a dividend as soon as reasonably possible, pro rata to their Participation Interest for the time being, unless the Shareholders unanimously resolve to establish other reserves or carry forward or retain all or a portion of the profits into the next fiscal year. |
10.4 |
The Company shall pay any dividend referred to in this 0 as soon as practically possible after they have been declared. |
10.5 |
Notwithstanding the aforegoing, and save as provided for in 10.6 no dividend shall be paid: |
(a) |
until all the Disproportionate Claims (if any) and Loan Accounts (if any), and any interest which accrued thereon, have been repaid in full, save that any loan arising pursuant to the provisions of clause 11.2 of the Subscription Agreement in respect of funding the purchase of The Starter Pack Company shall not be repayable in priority to any dividend payment; and |
|
(b) |
out of the proceeds of any borrowing. |
10.6 |
Notwithstanding the provisions of clause 10.5 and subject to any Regulatory Approvals, the holders of the Ordinary Shares shall be entitled to any dividends declared in accordance with clauses 0, clause 0, the Subscription Agreement, the Additional Subscription Agreement and the Second Additional Subscription Agreement in priority to the repayment of any Disproportionate Claims and Loan Accounts. |
MANAGEMENT |
|
11.1 |
Control of and responsibility for the management, administration and operations of the business of the Company shall vest in the Board. |
11.2 |
The Board shall conduct the Business in the ordinary course and in a manner that is consistent with past practice and in accordance with the Budget and Business Plan of the Company, it being agreed that the day to day management of the Company shall be delegated to the CEO. |
11.3 |
In the event that: (i) the majority of the voting rights exercisable by the Board vests in Net 1, and (ii) that Board takes any decision which requires the CEO to conduct the Business in a manner which would require a material deviation from the Budget and Business Plan at any time during the Measurement Period (" Deviation Event "), then, subject to compliance in full with the remaining provisions of this clause 0, the CEO (on behalf of the Company) shall be entitled (bot not obliged) to give written notice (" Acceleration Notice ") to Net 1 to accelerate its subscription under the Additional Subscription Agreement, and the Second Additional Subscription. On receipt of a valid Acceleration Notice, Net 1's obligation to subscribe for (and the Company's corresponding obligation to allot and issue): |
(a) |
the additional Ordinary A Share on the Subscription Date (as defined in the Additional Subscription Agreement); and |
|
(b) |
the additional Ordinary A Share in terms of the Second Additional Subscription, shall be deemed to be the date 5 Business Days following the date of the Acceleration Notice and the provisions relating to payment in the Additional Subscription Agreement and the Second Additional Subscription shall apply in relation thereto, mutatis mutandis save that the (i) subscription price shall be ZAR 360,000,000 for each Ordinary A Share and capped at ZAR 720,000,000, being the maximum subscription price payable for both the Additional Subscription Agreement and the Second Additional Subscription (subject to the remaining provisions of this clause 0). |
14
11.4 |
In the event that the CEO wishes to deliver an Acceleration Notice to Net 1, the CEO shall first be required to refer the Deviation Event to the " Panel of Expert s" (as constituted below) in order for the Panel of Experts to confirm, that the events complained of by the CEO in fact constitutes a Deviation Event which should therefore entitle the CEO to trigger an Acceleration Notice. Net 1 and the CEO shall be afforded a reasonable opportunity to make representations to the Panel of Experts in person. The Panel of Experts decision shall be final and binding (in the absence of manifest error). |
11.5 |
The Panel of Experts shall be comprised of 1 non-executive director of Net 1 and one non- executive director of Blue Label. The representatives, on consultation with the CEO, shall appoint a reputable, independent, appropriately qualified third person to the panel. Notwithstanding the aforegoing, the appointment of the third qualified person to the panel shall be the sole discretion of the representatives. The decision of the Panel of Experts shall be made by way of a majority vote. |
RESTRICTIONS ON TRANSFERS AND ENCUMBRANCE OF SHARES |
|
12.1 |
Subject to 12.2, any Shareholder (solely after the Measurement Period) may only Dispose of or Encumber any Shares held by it in the Company in terms of this 0, 0 and any other provision of this Agreement specifically providing for Disposal and/or Encumbrance. |
12.2 |
Notwithstanding anything to the contrary contained herein or in the Company's MOI, unless otherwise agreed by the Shareholders in writing: |
(a) |
for the duration of the Measurement Period, no Party shall be entitled to sell or in any other way Dispose of its Shares in the Company to a third party, unless the other Parties have waived, in writing, their pre-emptive rights to be offered such Shares in terms of 0; |
|
(b) |
after the expiry of the Measurement Period, no Party shall be entitled to sell or in any other way Dispose of its Shares in the Company to a third party, other than as expressly permitted in terms of this Agreement; and |
|
(c) |
no Shareholder (other than (i) Net 1, which shall be entitled to Encumber its shares in favour of Rand Merchant Bank, and (ii) AJD Holdings and Richmark, each of which shall be entitled to Encumber their shares in favour of Peter Gain to facilitate the implementation of the transactions contemplated in the Framework Agreement) shall be entitled to Encumber its Shares without the prior written consent of the other Shareholders. |
12.3 |
Subject to 12.1, 12.2 and 0, notwithstanding anything to the contrary in the MOI for the time being, but save as specifically otherwise agreed to in writing by all of the Shareholders or specifically permitted by this Agreement, a Shareholder may only Dispose of any of its Shares in the Company if, in one and the same transaction it also Disposes of that portion of its Loan Account (if any) ( Corresponding Loan Account ) which bears the same proportion to its entire Loan Account (if any) as the number of Shares so Disposed of bear to the Participation Interest held by that Shareholder. |
15
PRE-EMPTIVE RIGHTS
13.1 |
Subject to 0, if, following the expiry of the Measurement Period, any Shareholder ( Offeror ), wishes to Dispose or receives an offer for the purchase of any of its Shares in the Company, as the case may be, it shall first offer those Shares and its claims in respect of the Corresponding Loan Account to the remaining Shareholders ( Offeree ). |
13.2 |
Such offer contemplated in 13.1 ( Offer ) shall: |
(a) |
be in writing; |
|
(b) |
be irrevocable and open for acceptance by the Offeree/s for a period of 30 days following the date of receipt of the Offer by the Offeree/s ( First Period ); |
|
(c) |
stipulate a cash price (which shall be expressed and payable in ZAR) at which the Offeror is prepared to Dispose of its Shares and claims in respect of the Corresponding Loan Account or at which the Offeror has received an offer for the purchase of the Shares concerned and its claims in respect of the Corresponding Loan Account. Such purchase price shall be |
(i) |
payable free of deduction or set-off at the Company's registered office against delivery of the Shares in negotiable form and cession of the claims in respect of the Corresponding Loan Account to the Offerees; |
|
(ii) |
be capable of acceptance in whole or in part; and |
|
(iii) |
not be subject to any other term or condition. |
13.3 |
If any of the Offeree/s do not accept the Offer or accept the Offer in part for the Shares and claims in respect of the Corresponding Loan Account offered to it ( Declining Offeree ), the Offeree/s who have accepted the Offer ( Accepting Offerees ) shall be entitled, within seven days after either the Declining Offeree has stated in writing that it does not accept the Offer (whether in whole or in part) or the expiry of the First Period, whichever is the earlier, to accept the Offer in respect of the Shares and claims in respect of the Corresponding Loan Account offered to the Declining Offeree and not accepted by it ( Declined Offer ) at the price and on the same terms and conditions, mutatis mutandis , stated in the Offer rateably in proportion to their respective Participation Interests having regard to the total Participation Interest held between them (or in such other proportions as may be agreed upon between them) and this procedure shall be repeated as often as is necessary until the Shares and claims in respect of the Corresponding Loan Account offered have been acquired or until no Accepting Offeree remains who is willing to accept the Declined Offer in whole or in part. |
13.4 |
If the procedure in 13.2 and 13.3 is completed and no Accepting Offeree remains who is willing to accept the Declined Offer in whole or in part, then the Offeror shall be entitled within 30 days after such non-acceptance, to offer in writing ( Outside Offer ) to Dispose of and transfer all of its Shares and claims in respect of the Corresponding Loan Account which formed the subject matter of the Offer and in respect of which the Offer was not accepted to any bona fide person ( Third Party ) at a price not lower and on terms and conditions not more favourable to the Third Party than those at which the Offeree/s were entitled to purchase those Shares and claims in respect of the Corresponding Loan Account in terms of the Offer; provided that the whole (and not part) of the Outside Offer shall be accepted by the Third Party. |
13.5 |
Transfer of the Offeror's Shares to the Third Party shall thereafter be registered as soon as possible, provided that - |
16
(a) |
the identity of the Third Party will have been approved by the Board by way of resolution, which approval may not be unreasonably withheld; |
|
(b) |
the Third Party will have agreed in writing to be bound, mutatis mutandis , in place of the Offeror to this Agreement and any other agreement for the time being subsisting between the Parties to the extent to which such agreement regulates their relationship inter se as Shareholders. |
DEEMED OFFER
14.1 |
Trigger events |
(a) |
A " Trigger Event " shall occur in relation to any Shareholder ( Deemed Offeror ) if - |
||
(i) |
the Deemed Offeror becomes (whether voluntarily or otherwise) makes application for or otherwise becomes subject to any provisional or final order for its liquidation, sequestration, winding up, judicial management or is made subject to any similar disability (including the commencement of business rescue proceedings) or is deregistered; or |
||
(ii) |
such Shareholder ( Controlled Entity ) undergoes a change of control, such that the Controlling member or Controlling shareholder ( Controlling Party ) of the Controlled Entity transfers its shares or other interest in the Controlled Entity to any third party (other than between or among shareholders or members of the Controlled Entity) and such transfer results in the Controlled Entity ceasing to be ultimately Controlled, directly or indirectly, by all or some of the Controlling Parties of the Controlled Entity, provided that in respect of Net 1 it shall not include any change of Control in Net 1 UEPS Technologies, Inc.; |
||
(iii) |
the Deemed Offeror compromises or offers to compromise with its creditors generally. |
||
(b) |
The Company (or any Director) shall give written notice to each Shareholder as soon as it becomes aware that any Trigger Event has occurred and each Shareholder which becomes aware that any Trigger Event has occurred shall, if the Company has not already given such a notice in respect of that Trigger Event, give the Company written notice of such Trigger Event. |
14.2 |
Deemed Offers: |
(a) |
If a Trigger Event has occurred, then the Deemed Offeror shall be deemed, on the day ( Offer Date ) prior to the occurrence of such Trigger Event, to have offered ( Deemed Offer ) to sell all of its Shares and Corresponding Loan Account (if any) in the Company ( Offered Interest ), to the remaining Shareholders ( Deemed Offeree(s) ). |
||
(b) |
The Deemed Offer shall be on the following terms and conditions: |
||
(i) |
the Deemed Offer shall be deemed to have been made to all the Deemed Offeree(s) pro rata to their holdings of Participation Interest as at the Offer Date inter se; |
||
(ii) |
the Deemed Offeree(s) shall each be entitled (but not obliged), by giving the Deemed Offeror and the Company written notice to that effect ( Sale Notice ), within the Deemed Offer Period to purchase from the Deemed Offeror, any portion of the Offered Interest that has been deemed to be offered to them (the Offered Interest so purchased is herein referred to as Sale Interest ). In addition, the Deemed Offeree(s) may in the Sale Notice accept the Deemed Offer of the Offered Interest to any other Deemed Offeree. The date of receipt by the Company of the Sale Notice is referred to as the " Sale Date ". The " Deemed Offer Period " for each Deemed Offeree shall mean the period expiring twenty one days after the later of: |
17
(A) |
the date on which he receives the Sale Notice referred to in 14.2(b); or |
|
(B) |
the date on which the Sale Price is determined as referred to in 14.2(b)(iv). |
(iii) |
if: |
(A) |
a Deemed Offeree ( Further Offeree ) accepts the entire Deemed Offer to it and in such acceptance also accepts to any extent ( Further Acceptance ) the Deemed Offer of the Offered Interest to any other Deemed Offeree; and |
|
(B) |
any other Deemed Offeree does not accept the Deemed Offer to him in respect of certain of the Offered Interest ( Available Interest ), |
then the Available Interest shall be deemed on the expiry of the Deemed Offer Period to have been offered to the Further Offeree(s) pro rata to their respective holdings of shares inter se at the time of the Deemed Offer and shall, to the extent of their Further Acceptances, be deemed to have been accepted by the Further Offeree(s). The Available Interest so purchased will form part of the Sale Interest. If, after that Deemed Offer and acceptance, there remains any Available Interest in respect of which the Deemed Offer has not been deemed to be accepted, then the Deemed Offer and acceptance provided for in this 0 shall be repeated as many times as is necessary to ensure that either there is no Available Interest in respect of which the Deemed Offer has not been accepted or there is no remaining Further Acceptance which could (in terms of this 0) result in an Available Interest being sold to a Further Offeree, whichever occurs sooner. The Company shall give written notice of the circumstances referred to in 14.2(b)(ii) to all the Deemed Offeree(s);
(iv) |
the price for all the Sale Interest ( Sale Price ) shall be the: |
(A) |
Fair Value of the Shares forming the subject of the Deemed Offer; plus; |
|
(B) |
face value (unless the Fair Value thereof would be lower, in which case the Fair Value shall apply) of the Corresponding Loan Account, |
as at the date of the Deemed Offer.
(v) |
The sale of the Sale Interest shall be subject to the suspensive condition that all regulatory approvals (if any) which are necessary for the implementation of that sale, are granted unconditionally (or subject to such conditions as may be approved in writing by the Parties affected thereby) as soon as reasonably possible after acceptance of the Deemed Offer; provided that the Deemed Offeror and that Deemed Offeree(s) shall be obliged to use all reasonable endeavours to procure that all such regulatory approvals are obtained as expeditiously as possible; |
18
(vi) |
the Deemed Offeree(s) who accepts the Deemed Offer shall pay the Sale Price to the Deemed Offeror on the seventh day after the Sale Date or, if applicable, the date on which the Independent Experts advises the Parties in writing of its determination of the Sale Price in terms of 14.2(b)(iv) ( Delivery Date ), against delivery of the share certificates in respect of the Shares included in the Sale Interest together with duly signed transfer forms (left blank as to the transferee) in respect thereof and a written cession of the Loan Account (if any) included in the Sale Interest. Those Deemed Offeree(s) shall also pay any securities transfer taxes payable in respect of such sale; |
|
(vii) |
the Deemed Offeror shall be deemed to warrant to each Deemed Offeree who accepts the Deemed Offer that as at the Delivery Date: |
(A) |
the Deemed Offeror will be the sole beneficial owner of the Sale Interest; |
|
(B) |
the Deemed Offeror will be entitled and able to give free and unencumbered title to the Sale Interest to the accepting Offerees; |
|
(C) |
save as provided for in this Agreement, no person will have any existing or future right (including an option or right of first refusal) to acquire any of the Sale Interest; and |
(viii) |
all rights and obligations of the Deemed Offeree(s) who accept the Deemed Offer shall be several (and not joint and not joint and several). |
INITIAL NET 1 OPTION TO SUBSCRIBE FOR ORDINARY "A" SHARE
15.1 |
In the event that the Company has not already allotted and issued all of the remaining Ordinary "A" Shares in the Company (other than the 1 Ordinary "A" Share being subject to the Additional Subscription Agreement and the 1 Ordinary "A" Share being subject to the Second Additional Subscription) to Blue Label after the Effective Date but prior to the first anniversary of the Effective Date, Net 1 shall have the irrevocable right and option to subscribe for, and be allotted and issued, all of the authorised but unissued Ordinary "A" Shares (other than the 1 Ordinary "A" Share being subject to the Additional Subscription Agreement and the 1 Ordinary "A" Share being subject to the Second Additional Subscription ) in terms of the provisions of this clause 0, subject to any Regulatory Approval that may be required, as contemplated in 0. |
15.2 |
Net 1 shall be entitled, at any time within a period of 20 Business Days after the 2018 Audit Date, to exercise its option contained in this clause 0 by giving written notice thereof to the Company. |
15.3 |
The subscription price at which the Ordinary "A" Shares will be issued shall be the same as the subscription price paid per Ordinary "A" Share under the Subscription Agreement (plus an amount equal to 45% of the PAT of the Company determined with reference to the 2018 Financial Statements less 45% of all distributions received by holders of ordinary shares in the Company during the same financial year) ( Subscription Price ). |
15.4 |
The Shareholders agree to do all things necessary, including signing any document and passing the required ordinary resolution in terms of section 41(3) of the Companies Act, to give effect to the issue of the Ordinary "A" Shares, as envisaged in terms of 15.1. Should a Shareholder fail to so do anything to give effect to the issue of the Ordinary "A" Shares, that Shareholder hereby appoints the any Director nominated by Net 1 as its attorney and agent in rem suam , in its name, place and stead to do all such things and sign all such documents on its behalf. |
19
15.5 |
The Company shall, as soon as reasonably possible, confirm that: (i) any and all Regulatory Approvals have been obtained, and (ii) any and all required board and shareholder resolutions have been passed, and the Company shall together with such confirmations provide to Net 1 pro forma copies of those documents which, upon the issuance of the Ordinary "A" Shares, will evidence Net 1 as the lawful and beneficial holder thereof (comprising a pro forma unsigned copy of a share of the share certificate and an excerpt of the securities register reflecting all changes to be made). Against compliance in full by the Company with the aforegoing, Net 1 shall pay the full subscription price in cash into an account nominated by the Company in writing and the Company shall immediately against receipt of the full subscription price deliver the duly signed share certificates and copy of the updated securities register evidencing Net 1 as the holder of the Ordinary "A" Shares. |
15.6 |
The company warrants to and in favour of Net 1 that the Ordinary "A" Shares which are subject to the option contained in this clause 0 will be validly issued and held by Net 1 and will confer on Net 1 as the holder thereof not less than a 45% Participation Interest. |
15.7 |
An amount equal to the Subscription Price (less any taxes and/or withholding taxes, to the extent applicable) shall be distributed by the Company to AJD Holdings and Richmark, as holders of the ordinary Shares, in accordance with their terms, subject to compliance with Applicable Law. |
15.8 |
In the event that Net 1 exercises its option in terms of this 0, the Parties agree that Net 1 shall subscribe for a further Ordinary "A" Share in the Company, on the same terms and conditions as contained in the Additional Subscription Agreement mutatis mutandis ( Second Additional Subscription ). |
SUBSEQUENT NET 1 OPTION TO SUBSCRIBE FOR ORDINARY "A" SHARES |
|
16.1 |
To the extent that Net 1 has not exercised the option contained in clause 0, Net 1 shall have the irrevocable right and option ( Net 1 Option ), to subscribe for, and be allotted and issued, all of the Ordinary "A" Shares (other than the 1 Ordinary "A" Share being subject to the Additional Subscription Agreement) in terms of the provisions of this clause 16, subject to any Regulatory Approval that may be required, as contemplated in 0. |
16.2 |
Net 1 shall be entitled, at any time within a period of 20 Business Days after the 2019 Audit Date, to exercise its option contained in this clause 0 by giving written notice thereof to the Company. |
16.3 |
The subscription price at which the Ordinary "A" Shares will be issued shall be determined by solving for "A" in the following formula: |
A = B x C x D + E
where:
B means the 2019 PBT;
C means 6.93
D means 0.45
E means an amount equal to 45% of the PAT of the Company determined in terms of the 2019 Financial Statements less 45% of all distributions made to Shareholders in the Company during the same financial year.
16.4 |
The Shareholders agree to do all things necessary, including signing any document and passing the required ordinary resolution in terms of section 41(3) of the Companies Act, to give effect to the issue of the Ordinary "A" Shares, as envisaged in terms of 16.1. Should a Shareholder fail to so do anything to give effect to the issue of the Ordinary "A" Shares, that Shareholder hereby appoints the any Director nominated by Net 1 as its attorney and agent in rem suam , in its name, place and stead to do all such things and sign all such documents on its behalf. |
20
16.5 |
The Company shall, as soon as reasonably possible, confirm that: (i) any and all Regulatory Approvals have been obtained, and (ii) any and all required board and shareholder resolutions have been passed, and the Company shall together with such confirmations provide to Net 1 pro forma copies of those documents which, upon the issuance of the Ordinary "A" Shares, will evidence Net 1 as the lawful and beneficial holder thereof (comprising a pro forma unsigned copy of a share of the share certificate and an excerpt of the securities register reflecting all changes to be made). Against compliance in full by the Company with the aforegoing, Net 1 shall pay the full subscription price in cash into an account nominated by the Company in writing and the Company shall immediately against receipt of the full subscription price deliver the duly signed share certificates and copy of the updated securities register evidencing Net 1 as the holder of the Ordinary "A" Shares. |
|
16.6 |
The company warrants to and in favour of Net 1 that the Ordinary "A" Shares which are subject to the option contained in this clause 0 will be validly issued and held by Net 1 and will confer on Net 1 as the holder thereof not less than a 45% Participation Interest. |
|
16.7 |
An amount equal to the Subscription Price (less any taxes and/or withholding taxes, to the extent applicable) shall be distributed by the Company to AJD Holdings and Richmark, as holders of the ordinary Shares, in accordance with their terms, subject to compliance with applicable law. |
|
AJD HOLDINGS AND RICHMARK PUT OPTION |
||
17.1 |
Net 1 hereby grants in favour of AJD Holdings and Richmark ( Existing Shareholders ), the irrevocable right and option ( Put Option ), to put the entire shareholding in the Company held by the Existing Shareholders ( Put Shares ) and all Corresponding Loan Accounts to Net 1, within 20 Business Days following the period provided for in 16.2 in the event of: |
|
(a) |
Blue Label Technologies Limited subscribing for a 45% Participation Interest in the Company within one year from the Effective Date; or |
|
(b) |
Net 1 exercising its option in terms of 0 and 0 above. |
|
17.2 |
The Existing Shareholders shall be entitled, but not obliged, to exercise the Put Option, by giving Net 1 written notice ( Put Notice ) of their intention to exercise the Put Option, within in the time period provided for in 17.1. |
|
17.3 |
With effect from the date of the receipt by Net 1 of the Put Notice ( Put Sale Date ), the Existing Shareholders, who having exercised the Put Option, shall sell to Net 1, the Put Shares and the Corresponding Loan Accounts. |
|
17.4 |
The purchase price payable by Net 1 to the Existing Shareholders for the Put Shares and Corresponding Loan Account in terms of the above shall be the sum of: |
(a) |
the 2019 PBT x 6.93 x 0.10 + (0.10 x PAT determined with reference to the 2019 Financial Statements less 10% of all distributions received by holders of ordinary share in the Company during the same financial year); and |
|
(b) |
the face value of the Corresponding Loan Account (minus the amount provided by the Existing Shareholders to the Company on Loan account pursuant to clause 11.2 of the Subscription Agreement for the purchase of The Starter Pack Company) |
21
( Put Price ).
17.5 |
The Parties shall use their reasonable commercial endevours to ensure that all Regulatory Approvals have been obtained. Net 1 shall pay the Put Price as a once off lump sum payment within 21 Business Days of the later to occur of the date upon which (i) the Put Price has been determined, and (ii) the date upon which any and all Regulatory Approvals are obtained on terms reasonably acceptable to Net 1, AJD Holdings and Richmark ( Payment Date ). |
17.6 |
The Existing Shareholders shall, on the Payment Date deliver the share certificate(s) for the Put Shares, together with a signed share transfer form recording Net 1 as the transferee and a written cession of the Corresponding Loan Account. |
17.7 |
The exercise and/or implementation of the Put Option, as the case may be, shall be subject to the Existing Shareholders procuring the resignation of their appointed Directors from the Board on receipt of the Put Price. |
NET 1 CALL OPTION |
|
18.1 |
Following the second anniversary of the Effective Date, in the event that: |
(a) |
Blue Label Technologies Limited subscribes for a 45% Participation Interest in the Company within one year from the Effective Date; or |
|
(b) |
Net 1 exercises its option in terms of 0 and 0 above, |
Net 1 shall have the irrevocable right and option ( Net 1 Option ), to acquire the all of the shares and Corresponding Loan Accounts in the issued share capital of the Company held by the Existing Shareholders ( Net 1 Option Shares ) within 20 Business Days following the period provided for in 16.2 ( Net 1 Option Period ), unless mutually agreed between the Parties.
18.2 |
Subject any Regulatory Approvals as provided for in 0, the Net 1 Option shall be exercisable by delivering a written notice of such exercise to the Existing Shareholders ( Net 1 Option Call Notice ), within the time period provided for in 18.1 ( Net 1 Option Call Date ). |
18.3 |
Upon receipt of the Net 1 Call Notice, the Existing Shareholders shall be obliged to sell the Net 1 Option Shares and any Corresponding Loan Account to Net 1. |
18.4 |
The purchase price payable by Net 1 to the Existing Shareholders for the Net 1 Option Shares and Corresponding Loan Account in terms of the above shall be the sum of: |
(a) |
the 2019 PBT x 6.93 x 0.10 + (0.10 x PAT determined with reference to the 2019 Financial Statements less 10% of all distributions received by holders of ordinary share in the Company during the same financial year); and |
|
(b) |
the face value of the Corresponding Loan Account (minus the amount provided by the Existing Shareholders to the Company on Loan account pursuant to clause 11.2 of the Subscription Agreement for the purchase of The Starter Pack Company) |
( Call Price ).
18.5 |
The Parties shall use their reasonable commercial endevours to ensure that all Regulatory Approvals have been obtained. Net 1 shall pay the Call Price as a once off lump sum payment within 21 Business Days of the later to occur of the date upon which (i) the Call Price has been determined, and (ii) the date upon which any and all Regulatory Approvals are obtained on terms reasonably acceptable to Net 1, AJD Holdings and Richmark ( Payment Date ). |
22
18.6 |
Net 1 shall pay the Call Price to the Existing Shareholders timeously by way of electronic bank transfer into a bank account nominated by the Existing Shareholders in writing. |
18.7 |
The Existing Shareholders shall procure the resignation of its appointed Directors from the Board upon payment of the Call Price. |
REGULATORY APPROVALS
If any Regulatory Approvals of any relevant Regulatory Authority are required for any transaction contemplated in this Agreement, the Parties shall co-operate with each other in order to present the necessary application or filing to the relevant Regulatory Authorities as soon as reasonably possible and to the extent that any time periods have been imposed in this Agreement for the completion of the particular transaction, which are inappropriate having regard to the time period permitted to the relevant Regulatory Authorities to consider the matter, the time periods in question in this Agreement shall be extended sufficiently so as to enable the requisite application or filing to be made with the relevant Regulatory Authorities and for the relevant Regulatory Authorities to respond.
MAJORITY TAG ALONG
Following the expiration of the Measurement Period, if a bona fide third party offers to purchase Shares held by a Shareholder(s) consisting at least 40% of the issued Shares, then notwithstanding that such Shareholder(s) has complied with the provisions of 0 and 0, such Shareholder(s) shall not be entitled to sell such Shares to such third party if any of the remaining Shareholders indicate in writing in response to the offer in terms of clause 0 that it wishes to dispose of the same pro rata portion of its Shares, unless the same pro rata offer to acquire such portion of the Shares of the remaining Shareholder(s) is made by such third party also to the remaining Shareholders concerned.
AJD TAG ALONG
Following the expiration of the Measurement Period, if a bona fide third party offers to purchase Shares held by AJD Holdings, then notwithstanding that such Shareholder(s) has complied with the provisions of 0 and 0, AJD Holdings shall not be entitled to sell such Shares to such third party if any of the remaining Shareholders indicate in writing in response to the offer in terms of clause 0 that it wishes to dispose of the same pro rata portion of its Shares, unless the same pro rata offer to acquire such portion of the Shares of the remaining Shareholder(s) is made by such third party also to the remaining Shareholders concerned.
COME ALONG
Following the expiration of the Measurement Period, if a bona fide third party offers to purchase all of the Shares of the Shareholders and all of the claims of the Shareholders on loan account against the Company on identical terms, then provided that Shareholders holding at least 40% of the issued shares accept such offer in respect of their Shares and claims on loan account (after first having complied with the provision of 0 and 0 and the remaining Shareholders having refused the offer made to them), then the remaining Shareholders shall be obliged to and shall be deemed to have accepted the offer of the third party in respect of all of their Shares in and claims on loan account. Each of the Shareholders irrevocable and in rem suam hereby appoints any of the Shareholders at the time as it attorney and agent to do all such things as may be necessary to comply with the provisions of this 0.
FAIR VALUE
23.1 |
Should: |
23
(a) |
the Deemed Offeree(s) who accept the Deemed Offer and the Deemed Offeror be unable to agree the Fair Value of the Shares comprising the Sale Interest within a period of ten days of the Sale Date for the purposes of 0; or |
|
(b) |
the Parties are unable to agree the Fair Value of the Corresponding Loan Account within a period of ten days of the relevant option date for the purposes of 17 or 0, |
then any Party concerned ( Relevant Party ) shall be entitled, by written notice to the other(s) ( Fair Value Notice ), to require that the determination of the Fair Value be referred for determination to an independent investment bank or one of the "big four" audit firms agreed upon between the Relevant Parties within ten days of expiry of the aforementioned ten day period, failing such agreement, to be nominated by the chairperson or like officeholder for the time being of the South African Institute of Chartered Accountants, or its successor-in-title or, failing that body, by the Arbitration Foundation of South Africa.
23.2 |
The expert shall act as an expert and not as an arbitrator ( Independent Expert ), shall endeavour to determine the Fair Value within a period of 30 days of the matter having been referred to it for determination and its decision shall, save for manifest error, be final and binding. The Independent Expert shall, in determining the Fair Value: |
(a) |
be obliged to call upon the Relevant Parties to furnish it with their respective written suggestions as to what the proper method should be followed in valuing the Shares, which written suggestions must be delivered to the Independent Expert within seven days after it has requested such suggestions, where after the Independent Expert shall decide upon the method to be applied; and |
|
(b) |
value all ordinary Shares equally and without reference to whether the Shares in question constitute a majority holding or a minority holding in the Company. |
23.3 |
All Relevant Parties shall forthwith be informed of the valuation of the Shares valued by the Independent Expert, which valuation shall be final and binding on the Relevant Parties, and the Independent Expert shall be obliged to specify in writing to the Relevant Parties the basis of the valuation and the reasons therefor. |
23.4 |
The costs of the Independent Expert shall be borne by the Relevant Parties pro rata to their shareholding in the Company for the time being. |
RELATIONSHIPS BETWEEN THE COMPANY AND ITS SHAREHOLDERS |
|
24.1 |
None of the Parties shall be entitled or empowered to represent or hold out to any third party that the relationship between the Parties is that of a partnership, joint venture or the like. |
24.2 |
Except to the extent required by applicable laws, the only obligations and duties between the Parties are as set out in this Agreement. |
CONFIDENTIALITY |
|
25.1 |
Notwithstanding the cancellation or termination of this Agreement, no Party ( Receiving Party ) shall, at any time after the conclusion of this Agreement, disclose to any person or use in any manner, whatever any information which may be proprietary and/or confidential information belonging to either of the other Parties ( Confidential Information ), or the existence and contents of this Agreement; provided that: |
(a) |
any Party may disclose the existence and contents of this Agreement to the extent required by any rules of any stock exchange by which that Party is bound; provided further that no such disclosure shall be made unless the other Party has first given its written approval for the form thereof, which approval may not be withheld unreasonably; |
24
(b) |
the Receiving Party may disclose another Party's Confidential Information and the existence and contents of this Agreement - |
(i) |
to the extent required by law (other than in terms of a contractual obligation of the Receiving Party); |
|
(ii) |
to, and permit the use thereof by, its employees, representatives and professional advisers to the extent strictly necessary for the purpose of implementing or enforcing this Agreement or obtaining professional advice or conducting its business, it being specifically agreed that any disclosure or use by any such employee, representative or adviser of such confidential or other information for any other purpose shall constitute a breach of this 0 by the Receiving Party; and |
(c) |
the provisions of this 0 shall cease to apply to any Confidential Information of a Party which: |
(i) |
is or becomes generally available to the public other than as a result of a breach by the Receiving Party of its obligations in terms of this 0; |
|
(ii) |
is also received by the Receiving Party from a third party who did not acquire such Confidential Information subject to any duty of confidentiality in favour of another Party; or |
|
(iii) |
was known to the Receiving Party prior to receiving it from another Party. |
DOMICILIUM AND NOTICES
26.1 |
The Parties choose domicilium citandi et executandi ( Domicilium ) for all purposes relating to this Agreement, including the giving of any notice or the serving of any process, as follows: |
(a) |
Company |
Physical: | 23/25 Commerce Crescent, | |
Kramerville, 2031 | ||
E-mail: | andrew@richmark.co.za | |
Marked for attention | Andrew Dunn |
(b) |
Net 1 |
Physical: | 6 th Floor President Place | |
Corner of Jan Smuts Avenue & Bolton Road | ||
Rosebank, 2121 | ||
email: | hermank@net1.com | |
Marked for the attention of | Chief Executive Officer |
25
(c) |
AJD Holdings |
26.2 |
Either Party shall be entitled from time to time, by giving written notice to the others, to vary its physical Domicilium to any other physical address (not being a post office box or poste restante) within the RSA, and to vary its email Domicilium to any other email address. |
26.3 |
Any notice given or payment made by a Party to the other ( Addressee ) which is delivered by hand between the hours of 09:00 and 17:00 on any Business Day to the Addressee's physical Domicilium for the time being shall be deemed to have been received by the Addressees at the time of delivery. |
26.4 |
Any notice given by any Party to the others which is successfully transmitted by e-mail to the Addressees' e-mail Domicilium for the time being shall be deemed (unless the contrary is proved by the Addressee) to have been received by the Addressee on the day immediately succeeding the date of successful transmission thereof. This 0 shall not operate so as to invalidate the giving or receipt of any written notice, which is actually received by the Addressee other than by a method referred to in 26.1. |
26.5 |
This 0 shall not operate so as to invalidate the giving or receipt of any written notice, which is actually received by the Addressees other than by a method referred to in 26.1. |
BREACH |
|
27.1 |
Should any Party (the Defaulting Party ) breach any of its obligations in terms hereof (other than those which contain their own remedies or limit the remedies in the event of a breach thereof) and fail to remedy such breach within 21 days of receipt of written notice requiring it to do so, then any other Party (the Aggrieved Party ) shall be entitled without notice, in addition to any other remedy available to it at law or under this Agreement, including obtaining an interdict, to cancel this Agreement or to claim specific performance of any obligation then due, in either event without prejudice to the Aggrieved Party's right to claim damages, provided that notwithstanding anything to the contrary contained in this Agreement and subject to clause 27.2 below, no Party shall be entitled to cancel or terminate this Agreement unless the breach is a breach of a material term of this Agreement. |
26
27.2 |
Notwithstanding the aforegoing, following the Effective Date, no Party will have the right to cancel this Agreement as a result of breach thereof. |
27.3 |
All costs, charges and expenses of whatsoever nature which may be incurred by any Party in enforcing its rights in terms hereof including, without limitation, legal costs on the scale as between attorney and own client and collection commission, irrespective of whether any action has been instituted shall be recoverable from the Party against which such rights are successfully enforced. |
ARBITRATION |
|
28.1 |
Any disputes arising from or in connection with this Agreement shall, if so required by any Party by giving written notice to that effect to the other, finally be resolved in accordance with the rules of the Arbitration Foundation of Southern Africa ( AFSA ) by an arbitrator or arbitrators appointed by AFSA, which arbitrator's findings shall, save for manifest error, be final and binding on the Parties and may be made an order of court. There shall be a right of appeal as provided for in article 22 of the aforesaid rules. |
28.2 |
Each Party - |
(a) |
expressly consents to any arbitration in terms of the aforesaid rules being conducted as a matter of urgency; and |
|
(b) |
irrevocably authorises the other to apply, on behalf of both Parties to such dispute, in writing, to the secretariat of AFSA in terms of article 23(1) of the aforesaid rules for any such arbitration to be conducted on an urgent basis. |
28.3 |
Notwithstanding 28.1 and 28.2 any Party shall be entitled to approach a competent court for urgent interim, subject to any final orders, determinations and/or awards being made by the arbitrator as provided for in this 0. |
GENERAL |
|
29.1 |
This Agreement and its annexures constitute the sole record of the agreement between the Parties in relation to the subject matter hereof. |
29.2 |
No Party shall be bound by any representation, warranty, promise or the like not recorded in this Agreement. |
29.3 |
No addition to, variation, or agreed cancellation of this Agreement shall be of any force or effect unless in writing and signed by or on behalf of the Parties. |
29.4 |
This Agreement shall be interpreted in accordance with and governed in all respects by the laws of the RSA. |
29.5 |
Each provision of this Agreement is, notwithstanding the grammatical relationship between that provision and the other provisions of this Agreement, severable from the other provisions of this Agreement. Any provision of this Agreement which is or becomes invalid, unenforceable or unlawful in any jurisdiction shall, in such jurisdiction only, be treated as pro non scripto to the extent that it is so invalid, unenforceable or unlawful, without invalidating or affecting the other provisions of this Agreement which shall remain of full force and effect. The Parties declare that it is their intention that this Agreement would be executed without such invalid, unenforceable or unlawful provision if they were aware of such invalidity, unenforceability or unlawfulness at the time of execution of this Agreement. |
29.6 |
The signature by any Party of a counterpart of this Agreement shall be as effective as if that Party had signed the same document as the other Party. |
27
29.7 |
No Party shall be entitled to cede any of its rights or delegate any of its obligations without the prior written consent of the other Party. |
COSTS |
|
Each Party shall bear its own costs of and incidental to the negotiation, preparation and drawing of this Agreement and all agreements contemplated herein as well as all legal and secretarial work pertaining to the implementation of this Agreement. |
28
Signed at Rosebank on 23 June 2017
Net 1 Applied Technologies South Africa | |
Proprietary Limited | |
/s/ H.G. Kotzé | |
who warrants that he is duly | |
authorised hereto | |
Name: H.G. Kotzé | |
Capacity: Director |
29
Signed at Sandton on 23 June 2017
AJD Holdings Proprietary Limited | |
/s/ A.J Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: Director |
30
Signed at Sandton on 23 June 2017
Richmark Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
31
Signed at Sandton on 23 June 2017
DNI - 4PL Contracts Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
32
Exhibit 10.69
SUBSCRIPTION AGREEMENT |
dated
23 JUNE 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED
and
AJD HOLDINGS PROPRIETARY LIMITED
and
RICHMARK HOLDINGS PROPRIETARY LIMITED
in relation to and including as a party,
DNI - 4PL CONTRACTS PROPRIETARY LIMITED
Baker & McKenzie
1 Commerce Square
39 Rivonia
Road
Sandhurst, Sandton
Johannesburg
South Africa
www.bakermckenzie.com
Table of contents
2
SUBSCRIPTION AGREEMENT
This Agreement is dated 23 June 2017
among
NET 1 APPLIED TECHNOLOGIES SOUTH AFRICA PROPRIETARY LIMITED ;
DNI - 4PL CONTRACTS PROPRIETARY LIMITED ;
AJD HOLDINGS PROPRIETARY LIMITED ; and
RICHMARK HOLDING PROPRIETARY LIMITED
1. |
INTERPRETATION |
1.1 |
This Agreement shall be interpreted in accordance with clause 1 of the Framework Agreement (as defined below). |
1.2 |
Any defined terms in this Agreement not defined in clause 1.3 below shall bear the meaning assigned to them in clause 1.2 of the Framework Agreement. |
1.3 |
In this Agreement, the following terms shall bear the meanings assigned to them below and cognate expressions shall bear corresponding meanings: |
(a) |
Adverse Consequences - all adverse consequences of whatever description including, but not limited to, all actions, applications, suits, proceedings, damages, penalties, fines, costs, reasonable amounts paid in settlement, liabilities, obligations, tax, liens, losses, compensation (including compensation paid or payable to any employee), expenses and fees, including reasonable fees and expenses of attorneys, counsel, accountants, consultants and experts; |
|
(b) |
Agreement this subscription agreement together with its annexures; |
|
(c) |
Audited Accounts - the consolidated audited annual financial statements of the Company as at and in respect of the 12 month period ended on 28 February 2016 and annexed hereto marked Annexure C ; |
|
(d) |
Auditors - the auditors of the Company; |
|
(e) |
Business - the business carried on by the Group as at the Signature Date, including the business of operating as a distributor of mobile cellular products in the informal and formal markets of RSA; |
|
(f) |
Capacity and Authority Warranties - those warranties as set out in clause 2 of Annexure A , which Warranties are given by the Warrantors separately and individually (and not jointly and not jointly and severally); |
|
(g) |
Condition Precedent - the suspensive condition set out in clause 3.1; |
|
(h) |
Designated Distribution shall bear the meaning ascribed thereto in clause 7.3(a)(i); |
|
(i) |
Designated Period the period commencing on 1 March 2017 and ending on 30 June 2017; |
|
(j) |
Disclosure Schedule - the disclosure schedule attached hereto as Annexure B ; |
|
(k) |
Effective Date shall bear the meaning ascribed thereto in the Framework Agreement; |
3
(l) |
Extraordinary Items - material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the Company or any of its subsidiaries, being non-recurring and non-trading items, including (for the avoidance of doubt) income, expenditure items accounted for during the financial year under review in respect of any prior financial year and which shall further include any profit or loss made on the disposal or acquisition of any fixed assets, or operations or business or investments and any operations and/or business which have been discontinued or sold; |
|
(m) |
Fairly Disclosed - means disclosed in such a manner and in such detail as would enable a prospective subscriber, acting reasonably and in good faith, to make an informed assessment of the matter concerned and to establish what the consequences thereof would be; |
|
(n) |
Framework Agreement - the framework agreement entered into among Net 1, Gain, AJD Holdings, Richmark and the Company on the Signature Date; |
|
(o) |
Financial Warranties - those warranties pertaining to the Warranted Accounts and the incurrence of liabilities, as set out in clause 6(a) of Annexure A ; |
|
(p) |
Gain - Peter Kennedy Gain, identity number xxx; |
|
(q) |
Group the Company and its subsidiaries, and " Group Company " shall mean any of them; |
|
(r) |
IFRS - International Financial Reporting Standards as issued by the Board of the International Accounting Standards Committee from time to time; |
|
(s) |
Interim Period - the period extending from 1 June 2017 up to the Issue Date; |
|
(t) |
Issue Date the later to occur of the following dates |
(i) |
the Effective Date; and |
|
(ii) |
the 1 st (first) Business Day after the date on which the memorandum of incorporation referred to in clause 4.1(a)(v) of the Framework Agreement has been filed at the Companies and Intellectual Property Commission in the manner and form prescribed in the Companies Act; |
(u) |
Leakage means - |
(i) |
any dividend, bonus or other distribution of capital or income declared, paid or made (whether in cash or in specie) or any repurchase, redemption, repayment or return of share or loan capital (or any other relevant securities) by the Group to or for the benefit of any Warrantor or Warrantor's Related Persons; |
|
(ii) |
any payments made by the Group to (or assets transferred to or liabilities assumed, indemnified, or incurred by the Group for the benefit of) any Warrantor or Warrantor's Related Persons; and/or |
|
(iii) |
the waiver by the Group of any economic benefit or amount owed to the Group by any Warrantor or Warrantor's Related Persons, |
other than Permitted Leakage;
4
(v) |
Net 1 - Net 1 Applied Technologies South Africa Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2002/031446/07; |
|
(w) |
Net Working Capital Warranty - the warranty pertaining to the net working capital of the Company as set out in clause 7 of Annexure A; |
|
(x) |
Ordinary Course of Business - the usual and ordinary course of the Business as carried out in accordance with policies and practices applied in the 12 months immediately preceding the Signature Date; |
|
(y) |
PAT - the attributable net income after tax of the Company in respect of the applicable period as set out in the 2017 Financial Statements, calculated in accordance with IFRS, and otherwise consistent with past practice and methodology; |
|
(z) |
PAT Determination Date the date on which the amount of the PAT has been agreed to by Net 1 in terms of clause 8.6 or finally determined in terms of clause 8.9, as the case may be; |
|
(aa) |
Prime Rate - the publicly quoted basic rate of interest (percent per annum, calculate daily, compounded monthly in arrear and calculated on a 365 day year) from time to time published by Investec Bank Limited as its prime overdraft lending rate, as certified by any manager of such bank, or his delegee, whose appointment and designation need not be provided, which shall in the absence of manifest or clerical error be prima facie proof thereof; |
|
(bb) |
Permitted Leakage - means: |
(i) |
salaries and other remuneration paid to employees of the Group in the ordinary course (excluding for the avoidance of doubt bonuses and other payments outside of the ordinary course); and/or |
|
(ii) |
any cash dividend declared and paid by the board of directors of the Company as contemplated in 7.3; |
|
(iii) |
any payments made by the Group to a Related Person (A) in the Ordinary Course of Business and provided that such payment has been Fairly Disclosed in the Disclosure Schedule; and/or (B) in respect of which there is a liability, accrual or provision made in the Warranted Accounts; |
(cc) |
Related Person a "related" person as such terms is defined in section 2 of the Companies Act or an "inter-related" persons as such terms is defined in the Companies Act; |
|
(dd) |
Signature Date the date of signature of this Agreement by the last of the Parties; |
|
(ee) |
Signature Date Accounts the unaudited, consolidated and internally prepared management accounts of the Group for the period between 1 March 2016 and 31 May 2017, attached hereto as Annexure D ; |
|
(ff) |
Starter Pack Co - the Starterpack Company Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2007/010809/07; |
|
(gg) |
Subscription Price - means ZAR 944,999,979 being the subscription price payable by Net 1 to the Company for the Subscription Shares, to be discharged as set out in clause 4; |
5
(hh) |
Subscription Shares - means, the 44,999,999 ordinary A shares, to be issued by the Company to Net 1, and a description of such rights are set out in Annexure C ; |
|
(ii) |
Tax - means all income tax, capital gains tax, secondary tax on companies (or any similar tax replacing or substituting it), dividend tax, value-added tax, stamp duty, securities transfer tax, uncertificated securities tax, PAYE, levies, assessments, imposts, deductions, charges and withholdings whatsoever in terms of any tax legislation, and includes all penalties and interest payable as a consequence of any failure or delay in paying any taxes; |
|
(jj) |
Tax Warranties - means those warranties pertaining to tax set out in clause 7 of Annexure A ; |
|
(kk) |
Title Warranties - those warranties pertaining to the validity of the issuance of the Subscription Shares under this Agreement as set out in clause [3] of Annexure A , which Warranties are given by the Warrantors separately and individually (and not jointly and not jointly and severally); |
|
(ll) |
Warranted Accounts the Audited Accounts and the Signature Date Accounts; |
|
(mm) |
Warranties - the warranties given by the Warrantors in respect of the Group and contained in this Agreement, including those contained in Annexure A hereto; |
|
(nn) |
Warrantors Richmark and AJD Holdings, or any of them, as the context may require; |
|
(oo) |
Warrantors' Proportions means, in respect of - |
(i) |
AJD Holdings - 25.6%; and |
|
(ii) |
Richmark 74.4%; |
(pp) |
2017 Financial Statements - the consolidated, audited, annual financial statements of the Company in respect of the financial year commencing on 1 March 2017 and ending on 30 June 2017. |
2. |
IMPLEMENTATION |
This Agreement constitutes Step 2 of the Proposed Transaction, as provided for in clause 2.2(b) of the Framework Agreement. |
|
3. |
CONDITION PRECEDENT |
3.1 |
This Agreement (other than the provisions of clause 1, this clause 3, clause 7, clause 8, clause 10 and clauses 15 to 21, by which the Parties shall be bound and remain bound from the Signature Date) is subject to the fulfilment of the condition precedent, that on or before 30 September 2017, the Framework Agreement has been entered into and become unconditional in accordance with its terms (other than in respect of any condition which requires this Agreement to become unconditional). |
3.2 |
If the Condition Precedent is not fulfilled on or before the date prescribed for fulfilment thereof in 3.1 (or such later date or dates as may be agreed in writing between the Parties) then: |
(a) |
this whole Agreement (other than the provisions of clause 1, clause 3 and clauses 16 to 21, by which the Parties shall remain bound) shall be of no force or effect; |
6
(b) |
the Parties shall be restored as near as possible to the positions in which they would have been had this Agreement not been entered into; and |
|
(c) |
no Party shall have any claim against the others in terms of this Agreement. |
4. |
SUBSCRIPTION AND SETTLEMENT BY NET 1 |
4.1 |
On the Effective Date, and in accordance with the sequence of transaction steps provided for in the Framework Agreement, Net 1 hereby subscribes for the Subscription Shares, at the Subscription Price. |
4.2 |
The Subscription Price shall be settled in full by Net 1 in cash on the Effective Date as provided for in 5.1 below. |
4.3 |
It is hereby recorded that the Subscription Price was negotiated and ultimately agreed to with reference to the earnings of the Company. |
4.4 |
On the Issue Date, all risk in and benefits attaching to the Subscription Shares shall vest in Net 1. |
5. |
PAYMENT |
5.1 |
Net 1 shall make payment of the Subscription Price by way of an electronic transfer into a bank account nominated by the Company for this purpose in writing, which payment shall be in full and final settlement of Net 1's obligations to make payment of the Subscription Price to the Company. |
5.2 |
Upon receipt of the Subscription Price, subject to section 46 of the Companies Act, the Company shall distribute dividends in an amount of ZAR 944,999,979 to AJD Holdings and Richmark, as follows: |
(a) |
AJD Holdings ZAR 241,919,994.62; and |
|
(b) |
Richmark ZAR 703,079,984.38, |
as holders of ordinary shares in the Company.
5.3 |
If for whatsoever reason Net 1 fails and/or neglects to pay on the Effective Date, the whole or any portion of the Subscription Price, taking into account interest and other adjustments thereto under this Agreement, then and in such event, in addition to any other remedies to which the aggrieved Party is entitled, penalty interest shall accrue thereon at the Prime Rate plus 2% per annum, calculated from its due date for payment, to date of actual payment. |
5.4 |
Any payments made by Net 1 shall first be applied towards the payment of the Subscription Price. |
6. |
ADJUSTMENT FOR LEAKAGE |
6.1 |
Notwithstanding anything to the contrary contained in this Agreement, it is recorded that the Subscription Price has been determined and agreed on the basis that, during the Interim Period, no Leakage has occurred or will occur. |
6.2 |
As such to the extent that Net 1 advises the Warrantors of Leakage or Net 1 otherwise becomes aware of any such Leakage prior to the Issue Date or after the Issue Date, Net 1 shall have a claim against the Warrantors for an amount equal to 45% of the Leakage provided that Net 1 notifies the Warrantors of the Leakage within a period of 6 months from the Issue Date. The Leakage shall become payable by the Warrantors in the Warrantor Proportions to Net 1 within 5 Business Days of delivery by Net 1 of written notice, which sets out in reasonable detail, the calculation of the amount of the Leakage to the Warrantors ( Leakage Repayment ). |
7
6.3 |
In the event that the Warrantors dispute the determination of the Leakage Repayment: |
(a) |
the Warrantors shall raise such dispute by means of written notice to Net 1 within a period of 5 Business Days after delivery of the written demand contemplated in clause 6.2, setting out the basis of the objection; and |
|
(b) |
that dispute will be referred to independent auditors for determination, who shall act as experts and not as arbitrators. For purposes hereof, independent auditors shall mean such independent auditors as may be agreed in writing between the Warrantors and Net 1, or failing agreement within 10 Business Days from the date of a written request by any such Party for such agreement, appointed by the Executive President, or failing him for any reason, then by the most senior officer for the time being of the South African Institute of Chartered Accountants from one of the 6 largest (based on number of partners or shareholders or directors) independent firms of auditors in the RSA at the time. |
7. |
INTERIM PERIOD |
7.1 |
The Warrantors shall procure that during the Interim Period, the Business will be carried on in substantially the Ordinary Course of Business other than as Fairly Disclosed in the Disclosure Schedule, and the Group shall not enter into any contract or commitment or do anything which, in any such case, is out of the Ordinary Course of Business. In particular, but without limitation to the generality of the aforegoing, the Warrantors and the Company undertake that during the Interim Period the Group will not (other than as Fairly Disclosed in the Disclosure Schedule) |
(a) |
alter the existing nature or scope of the Business; |
|
(b) |
manage the Business otherwise than in accordance with its business and trading policies and practices up to the Signature Date, except as may be necessary to comply with any statutory changes; |
|
(c) |
alter any of the rights attaching to the shares in any Group Company; |
|
(d) |
increase, alter, reduce or convert the authorised or issued shares of any Group Company other than as contemplated in the Transaction Agreements; |
|
(e) |
issue or allot any shares, capitalisation shares, bonus shares, share options, share warrants, debentures or any securities in any Group Company other than as contemplated in the Transaction Agreements; |
|
(f) |
approve or permit the transfer of any issued shares in any Group Company other than as contemplated in the Transaction Agreements. Notwithstanding the aforegoing, minority shareholders of any Group Company shall be entitled to transfer any issued shares held by that minority shareholder in the Group Company to a related party of that minority shareholder, in accordance with the terms of the relevant shareholders agreement or memorandum of incorporation of that Group Company (as the case may be); |
|
(g) |
repurchase any issued shares of any Group Company; |
|
(h) |
enter into any agreement or arrangement or permit any action whereby any other company becomes its subsidiary; |
8
(i) |
enter into any transaction other than on arms'-length terms and for full and proper consideration; |
|
(j) |
acquire or enter into any agreement to acquire (whether by one transaction or a series of transactions) the whole or a substantial or material part of the business, undertaking or assets of any other persons; |
|
(k) |
dispose of or enter into any agreement to dispose of (whether by one transaction or by a series of transactions) the whole or any substantial or material part of the Business; |
|
(l) |
incur or agree to incur any capital expenditure other than in the normal and Ordinary Course of Business; |
|
(m) |
take or agree to take any loans, borrowings or other forms of funding or financial facilities or assistance, or enter into or agree to enter into any foreign exchange transactions (which are not in the Ordinary Course of Business), guarantees or other similar agreements; |
|
(n) |
grant or agree to grant any loans or other financial facilities or assistance to or any guarantees or indemnities for the benefit of any person or create any mortgage, charge or other encumbrance over the whole or any part of its undertakings or assets; |
|
(o) |
enter into or agree to enter into any joint venture, partnership or agreement or other venture for the sharing of profits or assets; |
|
(p) |
enter into or agree to enter into any death, retirement, profit-sharing, bonus, share option, share incentive or other scheme for the benefit of any of its employees or make any variation (including, but without limitation, any increase in the rates of contribution) to any such existing scheme or effect any keyman insurance; |
|
(q) |
commence, compromise or discontinue any legal, administrative, regulatory or arbitration proceedings other than |
(i) |
routine debt collection in the Ordinary Course of Business; or |
|
(ii) |
any proceedings reasonably necessary to secure or preserve any right of the Group (including, but not limited to, the interruption of prescription or the obtaining of an interdict or mandamus) and in respect of which proceedings the Company undertakes to consult with Net 1; |
(r) |
repay or prepay any loans of whatsoever nature and amount, any borrowings or any other financial facility or assistance made available to it (excluding amounts payable in the normal and Ordinary Course of Business); |
|
(s) |
terminate the employment or office of any of its senior employees or appoint any new director, officer or senior employee or consultant or materially alter the terms of employment or engagement of any of the employees (whether senior or junior), consultants, directors or officers including increasing employees' or directors' compensation or benefits, except in the normal and Ordinary Course of Business and consistent with past practices; |
|
(t) |
make or agree to any amendment, variation, deletion, addition, renewal or extension to or of, terminate or give any notice or intimation of termination of or breach or fail to comply with the terms of any contract or arrangement with third parties; |
|
(u) |
make any changes to its accounting policies and procedures; or |
|
(v) |
permit the occurrence of any Leakage. |
9
7.2 |
The Warrantors shall procure that the Company shall, during the Interim Period: |
(a) |
change the financial year end of the Company to June as soon as possible after the Signature Date; |
|
(b) |
keep Net 1 appraised of all and any material decisions which the Group intends to make in respect of the Business, it being specifically recorded and agreed that nothing in this clause 7 shall entitle Net 1 to determine and/or materially to influence any such material decision or to manage and/or control the Group in any way; |
|
(c) |
prepare monthly management accounts as soon as possible after each month end but in any event by not later than 30 days thereafter and circulate such management accounts to Net 1 as soon as they have been prepared; |
|
(d) |
permit representatives of Net 1 to have full access at all reasonable times, and in a manner so as not unreasonably to interfere with the normal business operations of the Group, to all premises, properties, personnel, books, records (including tax records), contracts, and documents of or pertaining to the Group and/or the Business; |
|
(e) |
keep the Business and the assets of the Group used in respect of the Business ( Business Assets ) substantially intact, including the present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers and the employees; and |
|
(f) |
give prompt notice to the Net 1 of any adverse development causing a breach or which is likely to cause a breach of any of the Warranties; provided that no disclosure by any Party in terms of this clause 7.2 shall be regarded as amending or supplementing the Disclosure Schedule or shall prevent or cure any misrepresentation, breach of Warranty or breach of any undertaking. |
7.3 |
Notwithstanding anything to the contrary contained herein and subject to (i) Companies Act; and (ii) the discretion of the board of directors of the Company, it is: |
(a) |
recorded that: |
(i) |
the holders of Ordinary Shares will be entitled to a distribution to be declared by the Company as soon as reasonably possible after the Effective Date (" Designated Distribution "), provided that: |
(A) |
the amount of the Designated Distribution shall be equal to the PAT in respect of the Designated Period. For the avoidance of doubt, the Designated Distribution shall (if applicable) be paid less any dividends tax which shall be withheld by the Company, prior to distribution; |
|
(B) |
the record date for determining the shareholders of the Company who are entitled to participate in the Designated Distribution shall be the first Business Day after the Effective Date; |
|
(C) |
the Warrantors have delivered to Net 1 written notice of such proposed Designated Distribution by no later than 5 Business Days after the PAT Determination Date ( Notice Date ) which: (i) sets out in reasonable detail, the calculation of the amount of such Designated Distribution; and (ii) encloses a copy of written resolution by the Company's board of directors approving the Designated Distribution; and |
10
(D) |
Net 1 has given its prior written consent to such proposed Designated Distribution (which consent may not be unreasonably withheld), within 5 Business Days of the Notice Date; and |
(ii) |
the Designated Distribution shall be paid out of the available free cash of the Company to the holders of Ordinary Shares, in the Warrantors Proportions, in one or more payments after the Notice Date, having regard to the cash flow and working capital requirements of the Company at the time. Notwithstanding the aforegoing, the Designated Distribution shall be paid in full to the Warrantors within 6 months of the Notice Date; |
(b) |
agreed that the Designated Distribution shall constitute a Permitted Leakage. |
7.4 |
The Warrantors shall procure that: |
(a) |
the board of directors of the Company considers the terms of the proposed Designated Distribution in terms of the Companies Act; |
|
(b) |
to the extent required, the Warrantors approve the terms of the proposed Designated Distribution; and |
|
(c) |
the Warrantors deliver the notice contemplated in clause 7.3(a)(i)(C) to Net 1 by not later than the time period specified in 7.3(a)(i)(C). |
7.5 |
In the event that Net 1 disputes any of the terms of the Designated Distribution: |
(a) |
Net 1 shall raise such dispute by means of written notice to the Warrantors within a period of 5 business days after the Notice Date, setting out the basis of the objection; and |
|
(b) |
that dispute will be referred to independent auditors for determination, who shall act as experts and not as arbitrators. For purposes hereof, independent auditors shall mean such independent auditors as may be agreed in writing between the Warrantors and Net 1, or failing agreement within 10 Business Days from the date of a written request by any such Party for such agreement, appointed by the Executive President, or failing him for any reason, then by the most senior officer for the time being of the South African Institute of Chartered Accountants from one of the 6 largest (based on number of partners or shareholders or directors) independent firms of auditors in the RSA at the time. |
7.6 |
In the event that Net 1 does not consent to the Designated Distribution in writing within the period contemplated in clause 7.3(a)(i)(D) for whatever reason, then the terms of the Designated Distribution will be referred to independent auditors for determination, and the provisions of clause 7.5(b) shall apply mutatis mutandis . |
8. |
2017 FINANCIAL STATEMENTS |
8.1 |
The Company shall procure the preparation of the 2017 Financial Statements and the audit thereof by the Auditors as soon as reasonably possible after the Signature Date. In addition, the Company shall procure that the Auditors extract or calculate the PAT from the 2017 Financial Statements. |
8.2 |
The Company shall deliver the 2017 Financial Statements to Net 1 as soon as they are available. |
8.3 |
The Company shall use all reasonable endeavours to procure that the Auditors prepare the 2017 Financial Statements: |
11
(a) |
in conformity with the requirements of the Companies Act and in accordance with IFRS; and |
|
(b) |
save as expressly stated therein as to method and effect, on a basis consistent with the basis upon which previous consolidated audited financial statements of the Group were prepared. |
8.4 |
Net 1 shall, within 10 Business Days after delivery of the 2017 Financial Statements ( Objection Period ), review same in conjunction with its professional advisors and notify the Company in writing if it accepts the 2017 Financial Statements and the calculation of the PAT (in which case the provisions of clause 8.6 shall apply) or if it wishes to raise an objection (in which case the provisions of clause 8.5 and clauses 8.7 to 8.9 (both inclusive) shall apply). |
8.5 |
During the Objection Period, the Company shall ensure that Net 1 and its professional advisors are provided with access to the Auditors for the purposes of reviewing and discussing the audit work papers of the Auditors in preparing the 2017 Financial Statements and the extraction or calculation of the PAT. |
8.6 |
In the event that Net 1 advises the Company that it accepts the 2017 Financial Statements and the calculation of the PAT, the 2017 Financial Statements and the calculation of the PAT shall be final and binding on the Parties for all purposes under this Agreement. |
8.7 |
Should any objection be raised by Net 1 in respect of the 2017 Financial Statements and/or the calculation of PAT, by way of a written notice to that effect to the Company ( Dispute Notice ) within the Objection Period, then the difference or dispute shall be submitted for determination as follows |
(a) |
the difference or dispute shall be decided on by an independent investment bank or one of KPMG, Deloitte, PricewaterhouseCoopers or Ernst & Young, agreed upon between the Parties within 10 days after the Dispute Notice is delivered, failing such agreement, to be nominated by the chairperson or like officeholder for the time being of the South African Institute of Chartered Accountants, or its successor-in-title or, failing that body, by the Arbitration Foundation of South Africa ( Expert ); |
|
(b) |
the Expert shall: |
(i) |
in making his determination, act as an expert and not as an arbitrator. However, the Company and Net 1 will be afforded a reasonable opportunity to make representations to the Expert and shall provide such information as may be required by the Expert in accordance with the procedures, and within the time periods, determined by the Expert, provided that the Expert shall be entitled to make his decision whether or not such representations were submitted to him; and |
|
(ii) |
hear the matter informally and as soon as possible, it being agreed that the Parties shall use their commercially reasonable endeavours to procure that the Expert makes his determination within 30 days after the date upon which the matter was referred to the Expert; |
|
(iii) |
the Expert's decision as to any matter referred to him for determination shall, in the absence of manifest error, be final and binding in all respects on the Parties; and |
|
(iv) |
the fees and expenses of the Expert shall be borne and paid as the Expert shall direct (or in the absence of any such direction, shall be paid by the Company). |
12
8.8 |
If: |
(a) |
all of Net 1 objections are rejected by the Expert, then the 2017 Financial Statements and the PAT as submitted to the Expert shall be final and binding on the Parties for all purposes of this Agreement (save for any manifest error in calculation); or |
|
(b) |
any of Net 1's objections are accepted by the Expert, then the 2017 Financial Statements and PAT, as amended by the Expert in response to the objections, shall be final and binding on the Parties for all purposes of this Agreement (save for any manifest error in calculation). |
8.9 |
Once the Expert has given his ruling on all matters raised in the Dispute Notice, the 2017 Financial Statements and the PAT shall, to the extent necessary, be amended by the Expert as part of his ruling to reflect all matters included in that ruling and shall then be regarded as agreed for all purposes of this Agreement. |
9. |
CLOSING |
9.1 |
On the Issue Date, representatives of the Parties shall meet at Richmark's offices, Capital Hill Building, 6 Benmore Road, Sandton, 2196 or such other date and/or time as may be agreed by the Parties in writing. |
9.2 |
At that meeting, and in respect of the subscription as herein contemplated: |
(a) |
in the event that the Issue Date coincides with the Effective Date, Net 1 shall discharge its obligations in terms of the Subscription Price, as provided for in clause 4 above; |
|
(b) |
the Company shall, on receipt of the proof of payment of the Subscription Price as contemplated in clause 5: |
(i) |
allot and issue the Subscription Shares to Net 1 as fully paid and deliver share certificates in respect of the Subscription Shares to Net 1; |
|
(ii) |
procure that Net 1 is recorded as a shareholder in the securities register of the Company and deliver an extract of the securities register of the Company to Net 1 updated to reflect Net 1 as the holder of the Subscription Shares; and |
|
(iii) |
deliver to Net 1: |
(A) |
to the extent necessary and applicable, the written resignation of each director appointed by the Warrantors, save for the directors appointed by Richmark and AJD Holdings in accordance with clause 8.1(b) of the Shareholders' Agreement, with effect from the Issue Date and confirming that such director waives all claims, whether in contract or delict, actual or contingent, that he may have against the Company; |
|
(B) |
notices from each of the remaining directors of the Company, with effect from the Issue Date, confirming that such director waives all claims, whether in contract or delict, actual or contingent, that he may have against the Company; and |
|
(C) |
a written resolution of the shareholders of the Company, appointing the nominated directors of Net 1, in accordance with clause 8.1(b) of the shareholders agreement to be entered into between Net 1, Richmark, AJD Holdings and the Company, contemporaneously with this Agreement; |
13
9.3 |
The Parties may however dispense with a formal meeting as contemplated in this clause 9 and instead arrange for completion of such matters in such manner as may be specifically agreed, in writing (including email), to be convenient. |
10. |
FILING OF NEW MOI |
Should the New MOI not be filed in the manner and form prescribed by the Companies Act (read with the Companies Regulations, 2011) with the Companies and Intellectual Property Commission within a period of 120 days from the Signature Date, Net 1 shall be entitled (but not obliged) to terminate the Agreement by way of written notice to the Company and the Warrantors, in which event, the Company shall repay, and the Warrantors shall procure the Company repays, immediately to Net 1 the Subscription Price together with interest thereon accrued at the Prime Rate from the Subscription Date up to the date of actual repayment by the Company under this clause 10. |
|
11. |
STARTER PACK CO |
11.1 |
The Warrantors shall procure that, subject to regulatory approvals and as soon as reasonably possible following the Effective Date but in any event prior to the first anniversary of the Effective Date: |
(a) |
the Company acquires 100% of the issued shares in the Starter Pack Co for ZAR 203,000,000, on terms and conditions that Net 1 has confirmed in writing as being acceptable to Net 1 (acting reasonably and in good faith); and |
|
(b) |
the Company and Starter Pack Co shall enter into a management services agreement, in terms of which, the Company shall be responsible for the management of Starter Pack Co, for the duration of the Measurement Period, on terms and conditions that Net 1 has confirmed in writing as being acceptable to Net 1 (acting reasonably and in good faith). |
11.2 |
The Warrantors shall provide the Company with the necessary funding, to allow it to meet its obligations in terms of the clause 11.1 above in the Warrantors Proportions. |
11.3 |
Notwithstanding the aforegoing, in the event that the Company is unable to acquire 100% of the issued shares in the Starter Pack Co, for whatever reason, the Warrantors shall procure that the Company is placed in the same economic position as it would have been, had the Warrantors complied with their obligations contemplated 11.1(a). |
12. |
WARRANTIES |
The Warrantors, jointly in the Warrantors' Proportions (and not jointly and severally) (except where it is expressly stated in this Agreement that a warranty is given separately and individually), give to Net 1 the Warranties, on the basis that: |
|
12.1 |
insofar as any Warranty is promissory or relates to a future event, it shall be deemed to have been given as at the due date for fulfilment of the promise or the happening of the event; |
12.2 |
save where any Warranty is expressly limited to a particular date, is given as at the Signature Date, the Effective Date and the Issue Date, and all periods between those dates; |
12.3 |
be deemed to be material and to be a material representation inducing Net 1 to enter into this Agreement; |
12.4 |
each Warranty shall be a separate warranty and in no way be limited or restricted by reference to or inference from the terms of any other Warranty; and |
14
12.5 |
the Warranties shall remain in force notwithstanding completion of the matters provided for in this Agreement. |
13. |
LIMITATION OF LIABILITY |
13.1 |
The Warranties are limited and qualified by (and as a result no liability shall attach to the Warrantors and/or the Company to the extent that) anything Fairly Disclosed in: |
(a) |
any document contained in the DVD; |
|
(b) |
the Disclosure Schedule; and |
|
(c) |
information (including any fact, matter, circumstance and/or risk) which is, as at the Signature Date and the Effective Date, within the actual knowledge of Chris Seabrooke or any executive director of Net 1 (the Subscriber Representatives ). |
13.2 |
No warranties or representations (whether made negligently or innocently), express or implied or tacit whether by law, contract or otherwise and whether they induced the contract or not, which are not set forth in this Agreement shall be binding on the Warrantors and/or the Company, but excluding, for the avoidance of doubt, any fraudulent or intentional misrepresentation. |
13.3 |
For the avoidance of doubt and notwithstanding anything to the contrary contained in this Agreement - |
(a) |
the Warrantors shall not be liable for any forward-looking statements and/or representations, regarding the future financial position, performance or business strategy of the Group. Accordingly, the actual performance of the Company or any subsidiary of the Company may accordingly differ from forward-looking statements and/or representations made by the Warrantors; and |
|
(b) |
Net 1 shall not be entitled to make any Claim (as described below) against the Warrantors in respect of and/or in connection with any breach of the Warranties or any other provision of this Agreement, if that Claim would result in Net 1 being compensated more than once for the same damage or loss. Accordingly, a Claim by Net 1 arising out of a breach of any one or more Warranties and/or other relevant provision of this Agreement, shall not entitle Net 1 to make a Claim against the Warrantors in respect of more than one Warranty or other claim arising from or which is attributable to the same cause of action. |
13.4 |
For the purposes of clause 12, this clause 13 " Claims " means any claim by Net 1 against the Warrantors of any nature whatsoever and howsoever arising out of or in connection with a breach of any Warranties and/or any indemnities but only to the extent that clause 14 expressly provides that such indemnities will be made subject to the provisions of this clause 13. |
13.5 |
Notwithstanding the Warranties, representations and indemnifications given by the Warrantors, no liability shall attach to a Warrantor in relation to Claims: |
(a) |
which are less than ZAR 15,000,000 in aggregate, and the applicable Warrantors' Proportion of ZAR 15,000,000 in respect of a Warrantor, provided that: (i) when such aggregate or individual claims or loss exceed the said amount, the Warrantors shall, subject to clause 13.5(b) and clause 13.5(c), be liable for the full amount of such claim/s and/or loss and/or liabilities and not only for the amount in excess of the said amount; (ii) regard shall only be had to individual claims and/or losses which exceed ZAR 250,000 per individual claim and/or loss in determining whether the aforementioned ZAR 15,000,000 threshold has been reached; (iii) the aforegoing restrictions shall not apply to any Claims relating to the Title Warranties, the Capacity and Authority Warranties, the Financial Warranties and the Net Working Capital Warranty; |
15
(b) |
if Net 1 has not issued summons against a Warrantor for recovery of such Claims, or made a demand for arbitration in regard thereto within 30 calendar months (ignoring any portion of a calendar month should the Issue Date not coincide with the first day of a calendar month) of the Issue Date provided that the aforegoing restriction shall not apply to any Claims relating to the Tax Warranties (in which case summons or demand must be made within 5 years of the most recent date of assessment of the applicable Group Company to which the Claim relates); or |
|
(c) |
which in aggregate exceed an amount equal to ZAR 112,500,000 on the basis that the aggregate amount recoverable from a Warrantor, exclusive of interest and costs, from whatever cause arising, shall be limited to the Warrantor's Proportion of the Subscription Price, provided that the aforegoing restriction shall not apply to any Claims relating to the Title Warranties, the Capacity and Authority Warranties, the Tax Warranties, the Financial Warranties and the Net Working Capital Warranty (in respect of which the maximum amount shall be the Subscription Price). |
13.6 |
Notwithstanding anything to the contrary contained herein, the Warrantors shall only be liable for claims in terms of this clause 13 in the Warrantors' Proportions (save for any claims in relation to the breach of any Warranties which are given separately and individually in terms of this Agreement). |
13.7 |
The aggregate damages that Net 1 suffers as a result of a Claim shall be reduced (at a maximum, to ZAR 0) by the aggregate of |
(a) |
an amount equal to 45% of any assessed Tax benefit (including without limitation any reduction in the Taxes due, deductibility of the damages suffered by the Group or the incurral of a capital loss that may be used to reduce capital gains in the future) as and when such Tax benefit accrues to the Group as a direct result thereof; |
|
(b) |
45% of any amount actually recovered by the Group from any third party in respect thereof (including, but not limited to any insurer); |
|
(c) |
the amount of any reduction in the subscription price payable in terms of the Additional Subscription Agreement which is directly attributable to the effect of the facts giving rise to such Claim on the calculation of PBT (as defined in the Additional Subscription Agreement); |
|
(d) |
any amount by which the subject matter of the Claims has been or is made good or otherwise compensated for, less any cost thereof to Net 1 and/or the Group, |
and any amount refunded to the Warrantors by Net 1 or any reduction in damages in terms of this clause 13.7 shall be regarded as never having been claimed from the Warrantors and/or the Company for purposes of clause 13.5.
13.8 |
Notwithstanding anything to the contrary contained in this Agreement, no liability shall attach to the Warrantors and/or the Company in respect of any Claim to the extent that: |
(a) |
the Claim is for any indirect, special or consequential damages (including loss of profit) of whatsoever nature suffered by any subsidiary of the Company and/or Net 1; |
|
(b) |
the Claim or the events giving rise to the Claim would not have arisen but for an act, omission or transaction of any of the Subscriber Representatives, or any employee of Net 1 who participated in or was involved in the Due Diligence Investigation; |
16
(c) |
the Claim is based upon a liability which is contingent only, unless and until such contingent liability becomes an actual liability or until the same is finally adjudicated; |
|
(d) |
allowance, provision or reserve in respect of the matter giving rise to the Claim shall have been made in the Warranted Accounts; and/or |
|
(e) |
the Claim occurs wholly or partly out of or the amount thereof is increased as a result of any change in law, regulation, guideline, codes of conduct, and the like or in their interpretation or administration by the South African courts, or by any other fiscal, monetary or regulatory authority, whether or not having the force of law, after the Issue Date. |
(a) |
within 10 Business Days inform the Warrantors and/or the Company in writing of any fact, matter, event or circumstance which comes to its notice or to the notice of its holding or subsidiary companies whereby it appears that the Warrantors and/or the Company is or may be liable to make any payment in respect of any Claim; |
|
(b) |
thereafter keep the Warrantors and/or the Company fully informed of all developments in relation thereto; and |
|
(c) |
provide access to its personnel and premises and give all such information and documentation (no matter how it is recorded or stored) as the Warrantors and/or the Company shall request in connection therewith. |
13.11 |
Nothing in this Agreement shall or shall be deemed to relieve Net 1 or any of their shareholders or subsidiary companies of any common law or other duty to mitigate any loss or damage incurred by them. |
13.12 |
In the event of a Claim, the Warrantors shall cede their respective rights to claim from Gain under any corresponding breach in terms of the Gain Sale of Shares Agreement to Net 1, on such terms as Net 1 may agree to in writing (acting reasonably and in good faith). The provisions of clause 13.7 shall apply mutatis mutandis to any amount recovered by Net 1 from Gain pursuant to such cession. |
13.13 |
Notwithstanding anything to the contrary contained in this Agreement, the Title Warranties and the Capacity and Authority Warranties shall not be limited or qualified in any respect whatsoever, and no disclosure (regardless of whether a fact or circumstance is Fairly Disclosed) shall be regarded as amending or supplementing the Disclosure Schedule or shall prevent or cure any misrepresentation or breach of a Title Warranty and/or Capacity and Authority Warranty, as the case may be. |
17
14. |
INDEMNITIES BY THE WARRANTORS |
14.1 |
Without prejudice to any rights of Net 1 arising from any other provision of this Agreement and to the extent that such liability is not fully provided for or reflected as a liability in the Warranted Accounts, the Warrantors hereby jointly in the Warrantors' Proportions agree to indemnify and hold Net 1 harmless from and against the entirety of any Adverse Consequences which Net 1 may suffer (whether directly or indirectly) resulting from, arising out of, or relating to |
(a) |
a failure of any of the Warranties or any undertakings contained in this Agreement to be true and correct; and/or |
|
(b) |
any liability for tax not fully provided for in the Warranted Accounts for all periods prior to the Issue Date. |
14.2 |
The indemnification provisions in this clause 14 are in addition to, and do not in any way derogate from, any statutory or common law remedy Net 1 may have for breach of this Agreement, including breach of any representation or Warranty. |
14.3 |
The indemnities provided for in clause 14.1(a) shall be limited as provided for in clause 13 above, mutatis mutandis , provided that none of the indemnities in relation to liability for Tax (whether arising out of a breach of the provisions of clause 14.1(a) or 14.1(b)) shall be limited by any provision of clause 13. |
14.4 |
Defence of Claims: |
(a) |
Upon a third party threatening or bringing a Claim in respect of which the Warrantors have given an indemnity, pursuant to this 14: |
(i) |
the Company will notify the Warrantors as soon as reasonably possible upon becoming aware of the Claim provided, however, that no delay on the part of the Company in so notifying the Warrantors shall relieve the Warrantors from any obligation hereunder unless (and then solely to the extent that) the Warrantors are thereby prejudiced; and |
|
(ii) |
the Warrantors will elect whether or not to defend the Claim, in accordance with clause 14.4(b) and 14.4 below. |
(b) |
The Warrantors may elect, by giving written notice signed by all Warrantors, and nominating and appointing one Warrantor to act on behalf of all Warrantors in all respects, within 14 Business Days following receipt of the notice provided for in 14.4 or, if earlier, 7 Business Days prior to the first date when a response to the Claim is due, to assume control of the defence and settlement of the Claim, in which case: |
(i) |
the Warrantors will, at their own expense, defend the Claim and have control of the conduct of the defence and settlement of the Claim, provided however that Net 1 will have the right to: |
(A) |
participate in any defence and settlement, such participation to be at its own cost where it is not pursuant to a request for participation from the Warrantors; |
|
(B) |
join the Warrantors as a defendant in legal proceedings arising out of the Claim; |
(ii) |
Net 1 will: |
18
(A) |
not make admissions (except under compulsion of law), agree to any settlement or otherwise compromise the defence or settlement of the Claim without prior written approval of the Warrantors, which will not be unreasonably withheld; |
|
(B) |
give, at the Warrantors' request and cost, all reasonable assistance in connection with the defence and settlement of the Claim. |
15. |
NET 1'S RIGHT TO TERMINATE |
Notwithstanding anything to the contrary contained in this Agreement (including the fulfilment or waiver, as the case may be, of the Condition Precedent), Net 1 shall be entitled to cancel this Agreement by means of written notice to the other Parties at any time prior to the Effective Date, in the event that |
|
15.1 |
Net 1 becomes aware that any Warranty is not true and correct in all respects and/or that the Company or a Warrantor is in breach of any Warranty which exceeds the threshold under clause 13.5(a) or will be so in breach on or at any time after the Effective Date; |
15.2 |
a Warrantor or any Group Company is sequestrated, liquidated or placed under judicial management, whether provisionally or finally (or any application is launched in that regard); |
15.3 |
business rescue proceedings in terms of the Companies Act are commenced against a Warrantor or any Group Company, whether by way of board resolution or court order; or |
15.4 |
any interdict, judgment or other order or action of any court or governmental body restraining, prohibiting or rendering illegal the implementation of the transactions contemplated in this Agreement is in effect, or any legal proceeding has been instituted by any person (including any governmental body) seeking to prohibit, restrict or delay, declare illegal or to enjoin the implementation of the transactions contemplated herein. |
16. |
CONFIDENTIALITY |
This Agreement is subject to the confidentiality provisions provided in clause 9 of the Framework Agreement. |
|
17. |
DOMICILIUM AND NOTICES |
The Parties have provided for domicilium citandi et executandi for all purposes of this Agreement in terms of clause 11 of the Framework Agreement. |
|
18. |
BREACH |
This Agreement is subject to the breach provisions provided in clause 12 of the Framework Agreement. |
|
19. |
ARBITRATION |
Any dispute arising from or in connection with this Agreement shall be resolved in accordance with clause 13 of the Framework Agreement. |
|
20. |
GENERAL |
This Agreement shall be subject to the general provisions provided in clause 14 of the Framework Agreement. |
19
21. |
COSTS |
Any costs relating to the negotiation, preparation and drawing of this Agreement shall be dealt with in terms of clause 15 of the Framework Agreement. |
20
Execution
Signed at Rosebank on 23 June 2017 | |
Net 1 Applied Technologies Proprietary Limited | |
/s/ H.G. Kotzé | |
who warrants that he/she is duly | |
authorised hereto | |
Name: H.G. Kotzé | |
Capacity: Director |
21
Signed at Sandton on 23 June 2017 | |
DNI - 4PL Contracts Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
22
Signed at Sandton on 23 June 2017 | |
AJD Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: Director |
23
Signed at Sandon on 23 June 2017 | |
Richmark Holdings Proprietary Limited | |
/s/ A.J. Dunn | |
who warrants that he/she is duly | |
authorised hereto | |
Name: A.J. Dunn | |
Capacity: CEO |
24
ANNEXURE A - WARRANTIES
1. |
INTRODUCTION |
(a) |
Interpretation |
Expressions defined in the subscription agreement to which this is attached as Annexure A ( Agreement ) shall bear the same meaning in this Annexure A as that assigned to them in the Agreement. In addition, the following words and phrases shall have the meaning attributed to them as follows:
(i) |
Aware - the knowledge, after having made necessary and diligent enquiries, of any of the Warrantors and/or any executive director or senior manager of any Group Company as disclosed on the DVD, being: |
(A) |
Andrew Dunn; |
|
(B) |
David Smaldon; |
|
(C) |
Graham Bryson |
|
(D) |
Tony Strike |
|
(E) |
Georgina Midgley |
|
(F) |
Andy Payne; |
(ii) |
Commissioner - the Commissioner for the South African Revenue Service (or his successor in title) for purposes of the Income Tax Act, including his lawful representative and including any other authority entitled to administer any taxes in South Africa; |
|
(iii) |
Encumbrance - in relation to any shares, includes any pledge, charge, hypothecation, lien, subordination, mortgage, option over, right of retention or any other encumbrance whatsoever, or any form of hedging or similar derivative instrument of any nature whatsoever of or over those shares, or any lending of shares, and the words Encumber , Encumbered and Encumbering shall have corresponding meanings; |
|
(iv) |
Income Tax Act - the Income Tax Act, No. 58 of 1962, as amended; |
|
(v) |
Insolvency Act - the Insolvency Act, No. 24 of 1936, as amended; |
|
(vi) |
Intellectual Property Rights - in relation to a person, any registered or unregistered trademark, patent, design or rights of copyright as well as other intellectual property rights (including any application in relation to any of the aforegoing) and all rights in any trade secrets, know-how or confidential information, used by that person in the conduct of its business; |
|
(vii) |
Labour Relations Act - the Labour Relations Act, No. 65 of 1995, as amended; |
|
(viii) |
National Credit Act - the National Credit Act, No. 34 of 2005, as amended; |
25
(ix) |
Net Working Capital - means, in respect of the Company, the attributable accounts receivable, plus attributable cash-on-hand, plus attributable inventory, less the attributable accounts payable, as at the Issue Date; |
|
(x) |
Subsidiary - a subsidiary company as defined in the Companies Act and subsidiaries shall have a corresponding meaning. |
(b) |
To the extent that the Warranties are given on a date which results in the use of any tense being inappropriate, the warranties set out below shall be read in the appropriate tense. |
|
(c) |
The Warranties set out below are given by the Warrantors, on the basis set out in clause 12, and by the Company. |
|
(d) |
All the Warranties given by the Warrantors in this annexure are given subject to the limitations and qualifications set out in clauses 12 and 13 of the Agreement (or any other relevant provision of the Agreement). |
2. |
CAPACITY AND AUTHORITY (which Warranties are being given separately and individually) |
(a) |
Incorporation and Existence |
(i) |
The Company is a company duly incorporated and registered under South African law and has been in continuous existence since incorporation. |
|
(ii) |
Each Group Company is a private company duly incorporated and registered under South African law and has been in continuous existence since incorporation. |
|
(iii) |
The Company has an authorised share capital as at the Signature Date of 1,000 ordinary shares of which 125 ordinary shares are issued and held by the Warrantors and Gain in the proportions as set out in clause 2.1 of the Framework Agreement. |
|
(iv) |
The Group's corporate structure is as follows: |
(G) |
the Company holds 51% of all of the shares in International Tower Company Proprietary Limited; |
|
(H) |
the Company holds 50% of all of the shares in Specpack Proprietary Limited; |
|
(I) |
the Company holds 100% of all of the shares in DNI Retail Proprietary Limited; |
|
(J) |
the Company holds 51.2% of all of the shares in M4J Proprietary Limited, which in turn holds 100% of all of the shares in M4Y Proprietary Limited; and |
|
(K) |
100% of all of the shares in DNI 4PL Contracts Proprietary Limited are held as follows: |
1. |
AJD Holdings holds 25 ordinary shares in the Company constituting 20% of all of the shares of the Company; |
|
2. |
Gain holds 25 ordinary shares in the Company constituting 20% of all of the shares of the Company; and |
26
3. |
Richmark holds 75 ordinary shares in the Company constituting 60% of all of the shares of the Company. |
(v) |
Save as provided for above, the Company has no other direct or indirect shareholding in another company. |
(b) |
Right, Power, Authority and Action |
(i) |
The Company has the right, power and authority to conduct its business. |
|
(ii) |
Each Group Company has the right, power and authority to conduct the businesses conducted by them. |
|
(iii) |
The Company has the right, power and authority, and has taken all action necessary, to execute, deliver and exercise its rights, and perform its obligations, under this Agreement. |
(c) |
Binding Agreements |
(i) |
The Company's obligations under this Agreement and each document to be executed at or before the Signature Date are, or when the relevant document is executed will be, enforceable against the Company in accordance with their terms. |
|
(ii) |
The entry into this Agreement by the Company, and the performance by it of its obligations under this Agreement, does not, and will not: |
(A) |
as at the Issue Date, result in any present or future material indebtedness of any Group Company becoming due or capable of being declared due and payable prior to its stated maturity; |
|
(B) |
contravene, conflict with, or result in a violation of, any applicable laws; or |
|
(C) |
as at the Issue Date, contravene, conflict with, or result in a breach or default of, the terms of, or give any person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify, any agreement, indenture, mortgage or other instrument of any kind to which it/he is a party, that has not been waived or consented to in writing by that person prior to the Signature Date. |
3. |
SHARES |
(a) |
The Shares |
(i) |
The Subscription Shares will, upon issue and following the Issue Date, confer on Net 1: (i) 45% of the total voting rights exercisable in the Company, (ii) 45% of the rights to any and all distributions by the Company, and (iii) upon the Company's liquidation, 45% of the net assets of the Company. |
|
(ii) |
Save as contemplated in the Transaction Agreements or as Fairly Disclosed in the Disclosure Schedule, as at the Signature Date and the Issue Date, there is no Encumbrance, and there is no agreement, arrangement or obligation to create or give an Encumbrance, in relation to any shares in the Company (including the allotment and issue of the Subscription Shares). As far as the Warrantors and the Company are Aware, no person has claimed to be entitled to an Encumbrance in relation to any of the shares in the Company. |
27
(iii) |
As at the Issue Date, there is no agreement, arrangement or obligation requiring the creation, allotment, issue, transfer, redemption or repayment of, or the grant to a person of the right (conditional or not) to require the allotment, issue, transfer, redemption or repayment of, a share in the capital of the Company or any Group Company (including, without limitation, an option or right of pre-emption or conversion), in terms of which such creation, allotment, issue, transfer, redemption or repayment must still occur. |
|
(iv) |
As at the Issue Date, save as contemplated in the Proposed Transaction, neither the Company nor any Group Company is and will not be under any obligation (whether contingently upon the exercise of any right or otherwise), and no resolution shall have been passed, requiring the Company or any Group Company to increase or to reduce its authorised or issued share capital, or to vary any of the rights attaching to any of its shares, or to buyback any of its shares, or to make any payment(s) to its shareholder. |
|
(v) |
As at the Issue Date, no person (other than Blue Label or Net 1) has any right, actual or contingent, (including, inter alia, any option or right of first refusal) to subscribe for any shares or any other Securities in the authorised capital of any Group Company. |
|
(vi) |
No person is entitled to participate in, or to a commission on the dividends or profits of, any Group Company, except as a shareholder. |
|
(vii) |
As at the Issue Date, no Group Company is obliged to cancel any of the shares in its capital or to create or issue any debentures or any derivatives. |
(b) |
Securities Register |
(i) |
The securities register of the Company contains true and accurate records of the holders of securities from time to time issued by the Company and the Company does not know of any facts or circumstances which may give rise to a rectification of the securities register of the Company. |
|
(ii) |
No person has any right to obtain an order for the rectification of the securities register of any Group Company. |
4. |
RECEIVABLES |
As at the Issue Date:
(a) |
the receivables book will be in the name of the Company or relevant Group Company; |
|
(b) |
security relating to the receivables book will be documented to reflect the terms of the security and all such documents are in the possession, or under the control of the Company; |
|
(c) |
the provision by the Company for bad or doubtful debt of the Group is adequate; |
|
(d) |
the contracts with customers forming part of the receivables book and all documents ancillary thereto will be in the possession, and under the control, of the Company; and |
|
(e) |
the receivables book has accurately recorded the principle and material terms of these contracts (including the sum outstanding and the payment/repayment dates). |
28
(f) |
all accounts receivable will be fully recovered save to the extent specifically provided against in the Warranted Accounts. |
5. |
RECORDS |
Each Group Company complies in all material respects with all record keeping requirements imposed by applicable laws and all such records (including the books, registers, accounts, ledgers and accounting records) of that Group Company:
(a) |
are up-to-date in all material respects; |
|
(b) |
are in its possession or under its control; |
|
(c) |
give and reflect a true and fair view of that Group Company concerned and are not misleading in any material way; and |
|
(d) |
are properly completed on a basis consistent with the accounting records of the 3 most recent financial years of the Group Company concerned (unless otherwise stated therein) and in accordance with the Companies Act, IFRS (to the extent applicable) and the law of, and applicable standards, principles and practices generally accepted in South Africa. |
6. |
FINANCIAL STATEMENTS |
(a) |
No Undisclosed Liabilities |
(i) |
The Group has no liabilities, which would be regarded as material by an auditor, of any kind (including, for the avoidance of doubt, off statement of financial position liabilities) that would have been required to be reflected in, reserved against or otherwise described on the Warranted Accounts or in the notes thereto in accordance with IFRS and were not so reflected, reserved against or described, other than (i) liabilities incurred in the Ordinary Course of Business after the Issue Date, and (ii) liabilities incurred in connection with the transactions contemplated hereby, other than as reflected and Fairly Disclosed in the Warranted Accounts. |
|
(ii) |
No shareholder of the Company or any Related Person to any such person has any claims against any Group Company whether on loan account, current account or otherwise. |
|
(iii) |
The Group has paid its creditors which would be regarded as material creditors by an auditor, within the time limits agreed with such creditors save where a creditors claim is disputed or as may be otherwise indicated and Fairly Disclosed in the Warranted Accounts. |
|
(iv) |
No report has been furnished to any Group Company by its auditor concerning a material irregularity as contemplated in the Auditing Professions Act No. 26 of 2005 (as amended), or any similar predecessor section, or any analogous legislation in a relevant jurisdiction. |
|
(v) |
Between the Signature Date and the Issue Date, the Group's Business will be operated in the usual way so as to maintain it as a going concern. |
|
(vi) |
The Audited Accounts |
(A) |
comply with the requirements of the Companies Act; |
29
(B) |
have been prepared in accordance with IFRS for SMEs; |
|
(C) |
fairly present the financial position, operations and results of the Group as at the close of business at the end of the financial period to which they relate; |
|
(D) |
save as noted therein, reflect no change in any of the bases of accounting or accounting principles used in respect of any material item; |
|
(E) |
reflect or disclose all liabilities, actual or contingent, at their full amount; |
|
(F) |
adequately provide for bad and doubtful debts as well as for any and all accrued liabilities including accrued leave pay, accrued holiday pay, pensions, bonuses or other similar payments or liabilities to employees; |
|
(G) |
have been reported on by the auditors of the Group without any qualification other than in respect of post-balance sheet events; and |
|
(H) |
have been approved and signed by the directors of the Company. |
(vii) |
All provisions contained or brought to account are adequate and sufficient in respect of the matters to which they relate, including but not limited to foreign exchange commitments. |
|
(viii) |
As at the Signature Date, the financial year end of the Company is February. Notwithstanding the aforegoing, as soon as reasonably possible after the Signature Date, the financial year end of the Company will be changed to June. |
|
(ix) |
The Signature Date Accounts |
(A) |
fairly present the financial position, operations and results of the Group as at the close of business at the end of the financial period to which they relate; |
|
(B) |
save as noted therein, reflect no change in any of the bases of accounting or accounting principles used in the preparation of the Audited Accounts and have been prepared consistent with past practice; |
|
(C) |
reflect or disclose all liabilities, actual or contingent, at their full amount; and |
|
(D) |
adequately provide for bad and doubtful debts as well as for any and all accrued liabilities including accrued leave pay, accrued holiday pay, pensions, bonuses or other similar payments or liabilities to employees. |
(b) |
Minute Books |
As at the Signature Date and the Issue Date, the minute book of each Group Company contains all material resolutions passed by the directors and members thereof, save for resolutions required to give effect to the provisions of this Agreement.
30
(c) |
Specific |
Since 1 March 2017:
(i) |
no Group Company has, other than in the ordinary course of its business: |
(A) |
acquired or disposed of, or agreed to acquire or dispose of, an asset which an auditor would regard as material; or |
|
(B) |
assumed or incurred, or agreed to assume or incur, a liability, obligation or expense (actual or contingent) that an auditor would regard as material; |
(ii) |
the Groups business has not been materially and adversely affected by the termination of, or a change in the terms of, any licence, an agreement or by the loss of a customer or supplier or by an abnormal factor not affecting similar businesses; |
|
(iii) |
the Company has not declared, paid or made a dividend or distribution (including, without limitation, a distribution within the meaning of the Income Tax Act), except as provided for in the Audited Accounts; |
|
(iv) |
no Group Company has changed its financial year end or its auditors. |
7. |
NET WORKING CAPITAL |
The Net Working Capital will be sufficient to conduct the Business in the Ordinary Course of Business.
8. |
TAX |
(a) |
Each Group Company shall at all times have complied in all material respects with the provisions of the Income Tax Act, the Value-added Tax Act, No. 89 of 1991 ( VAT Act ) and all Tax returns (including without limitation employees tax returns and specifically including all returns and information that relate to reportable arrangements as contemplated in Part B of Chapter 4 (sections 34 to 39 of the Tax Administration Act, No. 28 of 2011 or sections 80M to 80T of the Income Tax Act) and declarations required to be returned shall have been made by it in respect of the 4 financial years immediately preceding the Issue Date and shall have accurately disclosed all information properly required to be disclosed to the Commissioner or other appropriate authorities, and all provisional and other Taxes shall have been paid as at the due date thereof in material compliance with the provisions of the Income Tax Act. |
(b) |
Each Group Company has paid and discharged when due, all Taxes payable by it from the date of its incorporation to the Issue Date, including any Tax in respect of: |
(i) |
its assets, income or profits; |
|
(ii) |
any transactions concluded by the Group Company concerned; |
|
(iii) |
the declaration and payment of dividends and/or deemed dividends by the Group Company concerned. |
(c) |
All assessments for Tax raised in respect of the Group where the due date for payment of the Tax arises on or before the Issue Date or which relate to the period prior to the Issue Date or as otherwise provided in the Signature Date Accounts shall have been paid in full by the Issue Date, unless disputed by the Company in good faith. |
31
(d) |
In respect of any Tax of the Group which is due for payment after the Issue Date, adequate provision therefor shall have been made in the financial statements of the relevant Group Company; |
|
(e) |
Final assessments have been issued for all Tax periods in respect of which the Group Company has submitted Tax returns and no Warrantor is aware of any intention by the Commissioner to re-open any such assessment. |
|
(f) |
As far as the Company is Aware, no Group Company is liable to pay any penalty, late payment penalty, administrative non-compliance penalty, understatement penalty, fine or interest in connection with any Tax. |
|
(g) |
As far as the Company is Aware, no Group Company is party to any transactions in respect of which the Tax authority may lawfully substitute, for purposes of Tax, a different consideration for the actual consideration given or received by the Group. |
|
(h) |
The wear and tear, depreciation or capital allowances applied in the past to the Groups fixed or other assets for Tax purposes shall conform in all material respects to, and shall not exceed, those permitted in terms of the Income Tax Act. |
|
(i) |
All financing costs incurred to date (including any interest or similar expenses) in relation to any financing entered into by the Group before Closing have been and will be deductible on an accruals basis. |
|
(j) |
As far as the Company is Aware, no facts or circumstances exist which could cause a revenue authority to disallow any existing assessable/accumulated tax losses or the carrying forward of such losses. |
|
(k) |
The current and deferred Tax provisions and/or assets that will be included in the Audited Accounts have been properly provided for in accordance with the IFRS. |
|
(l) |
Where required, a Group Company has duly registered as a VAT vendor in terms of the VAT Act, has complied in all material respects with all statutory provisions and regulations relating to VAT and has duly paid or provided for all amounts of VAT which have become due and payable or for which that Group Company is liable; and is not operating any special arrangement or scheme relating to VAT nor has it agreed any special method of accounting for VAT. |
|
(m) |
Except as otherwise Fairly Disclosed in the Disclosure Schedule, no Group Company has, at any time since the date of its incorporation: |
(iv) |
entered into any transaction as contemplated in sections 41 to 47 of the Income Tax Act; |
|
(v) |
issued any "hybrid equity instrument", as contemplated in section 8E of the Income Tax Act, or any "third-party backed share", as contemplated in section 8EA of the Income Tax Act; |
|
(vi) |
issued any "hybrid debt instrument" as contemplated in section 8F of the Income Tax Act; |
|
(vii) |
incurred "hybrid interest" as contemplated in section 8FA of the Income Tax Act. |
(n) |
The Company is: |
(i) |
a resident for South African Tax purposes and has not ceased such residence since the date of its incorporation; and |
32
(ii) |
is not treated as resident or liable to Tax in any other jurisdiction for any Tax purpose (including for the purposes of any double taxation agreement); and |
|
(iii) |
not subject to the interest-limitation provisions contained in sections 23M or 23N of the Income Tax Act. |
(o) |
The Company shall not at any time or times have been party to any company formation transaction, share-for-share transaction, amalgamation transaction, intra-group transaction, unbundling transaction or liquidation, winding-up or deregistration transaction all as contemplated in Part III of the Income Tax Act, or any other transaction which might be so classified. |
|
(p) |
As at the Signature Date, there are no material queries, notices, suits, proceedings, investigations or inspections pending against any Group Company by the Commissioner or any Tax authority relating to any claim for any additional Tax or assessment, or any material matters under discussion with the Commissioner or any Tax authority relating to any claim for any Tax or assessment, nor is there any pending Tax objection or appeal by any Group Company. |
|
(q) |
As far as the Warrantors are Aware, the Tax files and records of the Group contain complete, full and accurate details in all material respects of all communications with the Commissioner and Tax advisors, respectively, for the 3 (three) year period prior to the Issue Date. |
|
(r) |
As far as the Warrantors are Aware, to the extent that any Group Company claimed Tax allowances or deductions prior to the Issue Date (including, without limitation, in respect of leasehold improvements) it was, insofar as it was Aware, entitled to do so in accordance with the provisions of the Income Tax Act. |
9. |
BUSINESS OF THE COMPANY |
(a) |
The sole business of the Company is the Business which the Company conducts as a going concern solely in South Africa. |
|
(b) |
No Group Company is bound by any restraint of trade agreement and no Group Company has committed (whether actually or contingently) to entering into any restraint of trade agreement by which it may be so bound. |
|
(c) |
The Warrantors are not Aware of anything, which will prevent the Company from carrying on the Business nor any Group Company carrying on its business. |
10. |
ASSETS |
(a) |
Title and Condition |
(i) |
Each asset included in the Signature Date Accounts or acquired by the Group since the Signature Date Accounts (other than stock disposed of in the Ordinary Course of Business or leased assets) is: |
(A) |
legally and beneficially owned solely by the Group; and |
|
(B) |
where capable of possession, in the possession or under the control of the Group. |
(ii) |
Unless otherwise Fairly Disclosed in Annexure B, all the material assets of the Group included in the Signature Date Accounts or acquired by the Group since the Audited Accounts, whether movable, immovable, fixed or of whatever nature or description will be owned by the Group in full, free and unencumbered ownership, and none of them will be subject to: |
33
(A) |
any credit agreement, credit transaction, instalment sale transaction or leasing transaction; |
|
(B) |
any other credit agreement, instalment sale agreement, hire-purchase or suspensive sale agreement, lease or any like agreement whatever its form, save for motor vehicle leases in the Ordinary Course of Business; |
|
(C) |
any pledge, mortgage bond, lien or notarial bond; |
|
(D) |
any other right in favour of any third person; or |
|
(E) |
any arrangement for the payment of a premium or like consideration to or by the Group for the use of the asset concerned. |
(iii) |
As far as the Warrantors are Aware, no Person has or will have any right (including any option or right of first refusal) to acquire or claim delivery, ownership or transfer or the use, occupation, possession or enjoyment of, any of the assets of any Group Company, other than in the ordinary course of its business. |
|
(iv) |
There has been no exercise, purported exercise or claim for any Encumbrance over any of the assets of any Group Company, and there is no dispute directly or indirectly relating to any such assets. |
|
(v) |
Each Group Company has the legal capacity and power to own its assets and carry on its business as it is presently being conducted. |
|
(vi) |
No Group Company has stopped or suspended payment of a material portion of its debts, or otherwise become unable to pay its debts or otherwise become insolvent in any relevant jurisdiction. |
11. |
INTELLECTUAL PROPERTY |
(a) |
Each of the Intellectual Property Rights owned or licensed by the Group and material to the conduct of the Business is: |
(i) |
valid and enforceable and nothing has been done or omitted to be done by any Group Company by which it may cease to be valid and enforceable; |
|
(ii) |
legally and beneficially owned by the Group alone, or legally licensed by the Group; and |
|
(iii) |
as far as the Warrantors are Aware, not the subject of a claim or opposition from a person (including, without limitation, an employee of the Group) as to title, validity, enforceability, entitlement or otherwise. |
(b) |
As far as the Warrantors are Aware, no Group Company has infringed any third partys Intellectual Property Rights or rendered any Group Company liable to an action in respect of the infringement of any Intellectual Property Rights belonging to a third party, provided that the aforesaid Warranty does not apply to instances where any infringement occurs or may have occurred as a result of any Intellectual Property Rights not having been licensed to the Company validly by a licensor purporting to do so. There is and during the 2 years ending on the Signature Date has been, no civil, criminal, arbitration, administrative or other proceeding or dispute in any jurisdiction by or against any Group Company concerning any of the Intellectual Property Rights. The Warrantors are not Aware of any civil, criminal, arbitration, administrative or other proceeding or dispute concerning any of the Intellectual Property Rights being pending or threatened against it or any Group Company. |
34
(c) |
The Group is entitled to use the Intellectual Property Rights and prohibiting its use of any Intellectual Property Rights and computer systems or other similar property licensed to the Group and used by the Company at present in connection with or for the Business operations of the Group. |
12. |
INSURANCE |
(a) |
Status of the Policies |
(i) |
As far as the Warrantors are Aware, each of the current insurance and indemnity policies in respect of which the Group has an interest (including any active historic policies which provide cover on a losses occurring basis) ( Policies ) is valid and enforceable. |
|
(ii) |
As far as the Warrantors are Aware, no Group Company has done or omitted to do anything which: |
(A) |
makes any of the Policies unenforceable; or |
|
(B) |
prejudices the ability to effect insurance on the same or better terms in the future. |
(iii) |
No insurer under any of the Policies has disputed, or given any indication that they intend to dispute, the validity of any of the Policies on any grounds. |
(b) |
Insurance of Assets |
(i) |
All Policies are and remain in full force and effect. |
|
(ii) |
All Policies are adequate in respect of the assets to which such Policies relate. |
(c) |
Claims |
As far as the Warrantors are Aware:
(i) |
no material claims have been made under any Policy (other than claims made in the Ordinary Course of Business); |
|
(ii) |
no claim is outstanding; |
|
(iii) |
there exists no fact or circumstance which will give rise to a material claim under any of the Policies; |
|
(iv) |
no event, act or omission has occurred which requires notification under any of the Policies the failure of which would have a material adverse effect on the Business of the Company; |
|
(v) |
no insurer under any of the Policies has refused, or given any indication to the Company that it intends to refuse, indemnity in whole or in part in the Ordinary Course of Business in respect of any material claims under the Policies; and |
35
(vi) |
nothing has been done or omitted to be done by the Group, which will entitle the insurers under any of the Policies to refuse indemnity in whole or in part in respect of any material claims under the Policies. |
(d) |
Premiums |
(i) |
All premiums which are due under the Policies have been paid. |
|
(ii) |
The Warrantors are not Aware that the Company has done anything or omitted to do anything (other than to submit claims in the Ordinary Course of Business of the Company) which will result in a material increase in the premium payable under any of the Policies (excluding annual increases of premiums in the ordinary course). |
13. |
PROPERTY |
(a) |
Immovable Property |
The Group owns no immovable property.
(b) |
Leasehold Property used by the Group |
(i) |
The warranties in paragraphs 13(b)(ii) to 13(b)(vii) (inclusive) are given only to the extent that a breach thereof would have a material adverse financial effect on the Group as a whole. |
|
(ii) |
No person (including, without limitation, the landlord) may bring the term of any lease agreement to which any Group Company is a party as a lessee to an end before the expiry of the term of the relevant lease agreement by effluxion of time (except by forfeiture). |
|
(iii) |
As far as the Warrantors are Aware, there is no fact or circumstance which will restrict or terminate the Group's continued and uninterrupted possession or occupation of any of its premises, where such restriction or termination will have a material adverse effect on the Business. |
|
(iv) |
The Group has the right to conduct the Business from the premises from which it trades in the ordinary course thereof. |
|
(v) |
No Group Company has any obligation to alter, renovate or improve the premises from which it trades, save as otherwise provided in any lease agreement and in such an event such obligation will not have a material adverse effect on the Business. |
|
(vi) |
Rent payable in respect of the Groups premises is not being reviewed and cannot be reviewed before the Issue Date, save for reviews in the ordinary course as provided for in the relevant lease agreements. |
|
(vii) |
No Group Company is in breach of any lease agreement to which it is a party. |
14. |
AGREEMENTS |
(a) |
Validity of Agreements |
(i) |
As at the Issue Date, the Warrantors are not Aware, of the existence of any fact or circumstance which will invalidate or give rise to a ground for termination, avoidance or repudiation of an agreement or arrangement to which any Group Company is a party which would have a material adverse effect on the Business. As far as the Warrantors are Aware,, no party with whom any Group Company has entered into a material agreement or arrangement has given notice of its intention to terminate, or has sought to repudiate or disclaim, the agreement or arrangement. |
36
(ii) |
No Group Company is in breach of any agreement, arrangement or obligation entered into by any Group Company and which is material to the business of the Group; |
|
(iii) |
As far as the Warrantors are Aware: |
(A) |
no party with whom any Group Company has entered into an agreement, arrangement or obligations which is material to the business of the Group is in breach of the agreement, arrangement or obligation; and |
|
(B) |
there exists no fact or circumstance which will give rise to a breach of this type which would have a material adverse effect on the Business. |
(iv) |
No Group Company is party to any agreement of a material nature which has not been entered into: (i) on an arms'-length basis; and (ii) on terms which are normal having regard to the nature of its business. |
(b) |
Effect of Transaction |
As far as the Warrantors are Aware:
(i) |
the execution or the performance of this Agreement will not result in any Group Company losing the benefit of a material asset, grant, subsidy, right or privilege which it enjoys at the Signature Date which would have a material adverse effect on the Business. |
|
(ii) |
neither the execution nor the performance of this Agreement will conflict with, result in a breach of, give rise to an event of default under, require the consent of a person under, enable a person to terminate, or relieve a person from an obligation under any material agreement or arrangement to which any Group Company is a party which would have a material adverse effect on the Business of the Company. |
15. |
EMPLOYEES |
(a) |
General |
(i) |
Save as specifically disclosed in Annexure B, the Group owes no amount to a present or former director, other officer or employee of the Group (or his dependant) other than (i) for accrued remuneration or reimbursement of business expenses in the Ordinary Course of Business; and (ii) as disclosed in the Disclosure Schedule. |
|
(ii) |
There is no agreement or arrangement between any Group Company and an employee or former employee with respect to his employment, his ceasing to be employed or his retirement which is not included in the written terms of his employment or previous employment. The Group has not provided, nor agreed to provide, a gratuitous payment or benefit to a director, officer or employee or to any of their dependants. |
|
(iii) |
The Group has maintained in all material respects up-to-date, full and accurate records regarding the employment of each of its employees (including, without limitation, details of terms of employment, payments of statutory sick pay and statutory maternity pay, income tax and social security contributions, disciplinary and health and safety matters) and termination of employment. |
37
(iv) |
No executive employee of any Group Company, being an employee of the Group and with annual cost to company in excess of R1,000,000 ( Employee ), is entitled to any exceptional benefits in relation to leave privileges, accumulated leave in excess of 30 days, pension or the like, other than provided for by the documented policies of the Group as at the Signature Date. |
|
(v) |
Save for market-related annual wage and salary increases and salary increases attributable to Employee promotions in the Ordinary Course of Business, between the Signature Date and the Issue Date, no Group Company has in any way improved or undertaken to improve the terms of service of any of the Employees from those which prevailed at the Signature Date. |
(b) |
Payments to employees and consultants/independent contractors |
As far as the Warrantors are Aware:
(i) |
no material liability has been incurred by the Group, or may be incurred between the Signature Date and the Issue Date: |
(A) |
for breach of any contract of employment with any of its employees, or termination of an employment contract with any of its employees, including, without limitation, a severance (whether voluntary or otherwise) payment, protective award and/or compensation for wrongful, unlawful dismissal, unfair dismissal, unfair labour practice, unfair discrimination or any other form of compensation for sex, race or disability discrimination, reinstatement or re-employment and/or failure to comply with an order for the reinstatement or re- employment of an employee or former employee; or |
|
(B) |
whether arising in contract, statute, delict or otherwise, for breach or termination of a consultancy agreement; or |
(ii) |
the Group has not made or agreed to make a material payment or provided or agreed to provide a material benefit to a present or former director, other officer or employee of the Group or to any of their dependants in connection with the actual or proposed termination or suspension of employment or variation of an employment contract. |
(c) |
Compliance with Law and Disputes |
(i) |
As far as the Warrantors are Aware, there are no material claims or threatened material claims and/or investigations against the Group relating to: |
(A) |
the refusal by the Group to employ any person; |
|
(B) |
the employment by the Group of any person the terms and conditions of the employment relationship between them and/or the termination of such employment; or |
|
(C) |
any workplace related accident, injury, disease or illness suffered by any employee or former employee of the Group. |
38
(ii) |
Save in respect of those disputes Fairly Disclosed in the Disclosure Schedule, no Group Company is a party to any dispute (with a maximum claim against it exceeding ZAR 1,000,000) with any employee before any court or tribunal, whether under the Labour Relations Act, the Basic Conditions of Employment Act No. 75 of 1997 (as amended), the Employment Equity Act 55 of 1998, the Occupational Health and Safety Act 85 of 1983, the Compensation for Occupational Injuries and Diseases Act 130 of 1993, the Skills Development Act 97 of 1998, the Skills Development Levies Act 9 of 1999, the common law or otherwise, and the Company is not Aware of any facts or circumstances that may afford grounds or give rise to any such dispute. |
|
(iii) |
The Warrantors warrant that all statutory levies and contributions due in respect of any employee of the Group has been paid in all material respects and that it has no material undischarged liability to any government, regulatory authority or similar authority or any other person in respect of employees engaged in the Business. |
(d) |
Trade Unions |
|
The Group is not involved in, and is not Aware of a fact or circumstance, or demand from any employee, trade union or association of employees for any alterations to the terms of their employment including demands for increased remuneration which will give rise to, a dispute of any nature whatsoever with a trade union, works council, workplace forum, employee or staff association or other body representing any of its employees. |
16. |
LICENCES AND PERMITS |
(a) |
Each Group Company is in possession of all material approvals, consents, licences, permits and other authorities as are prescribed by applicable law for the lawful conduct of the business/es carried on by it, and, as far as the Warrantors are Aware, all such consents and licences are valid and subsisting and will not terminate or be terminable at the election of any person by virtue of the execution or implementation of this Agreement. |
|
(b) |
No Group Company is in breach of any of the terms or conditions of any such approvals, consents, licences, permits or other authorities which may lead to the termination of any licences critical to the operation of the Group. |
|
(c) |
As far as the Warrantors are Aware: |
(i) |
there are no circumstances, facts or matters that may give rise to all of the above approvals, consents, licences, permits and other authorities being cancelled or not being renewed in the future or only being renewed subject to the imposition of onerous terms. |
|
(ii) |
there are no outstanding requirements of any relevant authorities with which the Group is required to comply or has been called upon to comply before it may lawfully carry on or continue its Business generally, and the Warrantors' are not Aware of any contravention or breach by the Group of any such material requirements; and |
|
(iii) |
there exists no fact or circumstance which will or may prejudice the renewal of any authorisation or licence required by the Group to conduct its Business generally. |
39
(d) |
Each action required by the Group for the renewal or extension of each licence or permit to be issued by relevant authorities in order to enable the Group lawfully to carry on or continue its Business generally, has, as far as the Warrantors' are aware, been taken. |
17. |
INSOLVENCY AND WINDING UP |
No Group Company has taken any action, nor have any proceedings been served on or notified to any Group Company to commence business rescue proceedings in respect of any Group Company or for its winding up or dissolution or for the appointment of a liquidator, business rescue practitioner, curator or similar officer. As far as the Warrantors are Aware no execution or other similar process which has been commenced or undertaken or threatened in respect of the assets of the Group or in respect of any Group Company, nor are the Warrantors Aware of any unfulfilled or unsatisfied judgment or court order which is outstanding against the Company. No Group Company shall enter into any arrangement or composition for the benefit of creditors generally. |
(a) |
Payment of Debts and Acts of Insolvency |
|
The Group is not unable to pay its debts as they fall due, nor has the Group commenced negotiations with one or more of its creditors with a view to rescheduling or restructuring any of its indebtedness. No Group Company has committed an act of insolvency as defined in the Insolvency Act, which will have an impact on the Companys or Group's ability to continue its business as a going concern. |
||
(b) |
Removal from Register |
|
As far as the Warrantors are Aware, no steps are pending or threatened against any Group Company for its deregistration in terms of section 82 of the Companies Act. |
18. |
LITIGATION AND COMPLIANCE WITH LAW |
(a) |
Litigation |
(iv) |
Except as otherwise Fairly Disclosed in the Disclosure Schedule in Annexure B: |
(A) |
the Group is not involved, as at the Signature Date and as far as the Warrantors are Aware, will not be involved as at the Issue Date, in a civil, criminal, arbitration, administrative or other proceeding, which has, or will have, a material adverse effect on the Business; |
|
(B) |
no civil, criminal, arbitration, administrative or other proceeding is pending or threatened by or against the Group or any of its directors or officers, which will have a material adverse effect on the Business; |
|
(C) |
as far as the Warrantors are Aware, no person for whose acts or defaults the Group may be vicariously liable is involved, or has during the 2 years prior to the Signature Date been involved, in a civil, criminal, arbitration, administrative or other proceeding; |
|
(D) |
as far as the Warrantors are Aware, no civil, criminal, arbitration, administrative or other proceeding pending or threatened by or against a person for whose acts or defaults the Group may be vicariously liable. |
(v) |
As far as the Warrantors are Aware, there is no material outstanding judgment, order, decree, arbitral award or decision of a court, tribunal, arbitrator or governmental agency against any Group Company and the Warrantors are not aware of any outstanding judgment, order, decree, arbitral award or decision of a court, tribunal, arbitrator or governmental agency against a person for whose acts or defaults any Group Company may be vicariously liable. |
40
(b) |
Compliance with Law |
|
The Group has complied in all material respects with all laws and administrative requirements governing its assets and Business where the failure to do so would have a material adverse effect on its Business, and to the extent that the Group has contravened any such laws, administrative requirements or regulations in the past, those contraventions have been remedied in full and the Group has paid all penalties or fines imposed for those contraventions, or has provided therefor in the Warranted Accounts. |
||
(c) |
Investigations of a Material Nature |
|
All action formally requested by any regulatory authority has been taken (save where it has been agreed with any regulatory authority that no action need be taken) within any time limit specified and any request for action or activities to be discontinued has been complied with in a timely manner where failure would have a material adverse effect on the Business of the Company. |
||
(d) |
Unlawful Payments |
|
The Group has not, nor are the Warrantors Aware, that any person for whose acts or defaults the Group may be vicariously liable has: |
(i) |
induced a person to enter into an agreement or arrangement with the Group by means of an unlawful payment, contribution, gift or other inducement; |
|
(ii) |
offered or made an unlawful payment, contribution, gift or other inducement to a government official or employee; or |
|
(iii) |
made an unlawful contribution to a political activity. |
19. |
CONSTITUTION, REGISTERS AND RETURNS |
(a) |
Constitution |
|
The Group is operating and has always operated its business in all material respects in accordance with its Memoranda of Incorporation at the relevant time. |
||
(b) |
Returns |
|
All material returns, particulars, resolutions and other documents required to be delivered by the Group to the Companies and Intellectual Property Commission or another governmental or other authority or agency have been properly prepared and delivered. |
20. |
MONEY LAUNDERING |
Each Group Company has in all material respects complied with any know your customer and money laundering reporting laws and all laws for detecting and identifying money laundering, and detecting, identifying and reporting suspicions of money laundering to the appropriate regulators, in force in South Africa at the relevant time. |
41
21. |
ANTI-CORRUPTION LAWS |
(a) |
For the purposes of the Warranties given hereunder |
(i) |
" Anti-Corruption Laws " means any anti-corruption or bribery laws or regulations of any applicable jurisdiction, as amended from time to time, including |
(A) |
the Prevention and Combating of Corrupt Activities Act, No 12 of 2004; |
|
(B) |
the UK Bribery Act 2010; |
|
(C) |
the U.S. Foreign Corrupt Practices Act 1977; |
|
(D) |
any law, rule, or regulation promulgated to implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed on 17 December 1997; and |
|
(E) |
any other law of similar purpose and scope in any jurisdiction; |
(ii) |
" Associate " means, in relation to an organisation, a person (including an employee, agent or subsidiary) who performs or has performed services (including within the meaning of section 8 of the UK Bribery Act 2010) for that organisation or on its behalf and in respect of whose actions or inactions the organisation may be liable under Anti-Corruption Laws; |
|
(iii) |
" Designated Party " means any person or organisation |
(A) |
whose name is specified in any list issued pursuant to any resolution or legislation of the United Nations, South Africa, the United Kingdom or the United States relating to the designation of a person or organisation as a terrorist or terrorist organisation or blocking any assets of such person or organisation; or |
|
(B) |
in respect of whom a Party to this Agreement has received notice that all financial transactions involving the assets of such person have been, or are to be, blocked under legal authority; or |
|
(C) |
who is or was convicted, found guilty or against whom a judgment or order was entered in a court of competent jurisdiction in any proceedings for violating bribery, money laundering or terrorist financing laws; |
(iv) |
" Government Authority " means any government (or any subdivision thereof, whether federal, central, regional or local) of any country or jurisdiction or any agency, authority, board, bureau, commission, department, judicial or administrative body, regulatory authority, public enterprise or similar body or any court or tribunal or public international organisation; and |
(v) |
" Government Official " means |
(A) |
any official, officer, employee, director, principal, consultant, agent or representative of any government, ministry, body, department, agency, instrumentality or part thereof, or of any public international organisation (including the United Nations, the International Monetary Fund, the International Finance Corporation and the World Bank), any state-owned or state-controlled entity, agency or enterprise, or of any political party; |
42
(B) |
any person acting in an official capacity or exercising a public function for and on behalf of any of the foregoing; |
|
(C) |
any candidate for political office; and |
|
(D) |
where the UK Bribery Act 2010 applies, includes foreign public officials as defined in sections 6(5) and 6(6) of the UK Bribery Act 2010. |
(vi) |
The Warrantors and the Company acknowledge that failure to comply with applicable Anti-Corruption Laws could cause Net 1 and its affiliates to be in violation of such Anti-Corruption Laws. |
(b) |
Neither the Company nor any of its or its Associates' directors, officers, employees, agents or representatives have, in each case in connection with the business of the Company |
(i) |
breached or contravened any Anti-Corruption Laws or any applicable anti- money laundering law, rule or regulation; or |
|
(ii) |
been the subject of any investigation, inquiry, claim or enforcement proceedings by any Government Authority or any other regulatory authority or enforcement agency or any customer regarding any offence or alleged offence under any applicable Anti-Corruption Laws, and no such investigation, inquiry or proceedings have been threatened or are pending in connection with the business of the Company and there are no matters, facts or circumstances likely to give rise to any such investigation, inquiry or proceedings. |
(c) |
No bribe or other corrupt payment has ever been made by Company or any of its or its Associates' directors, officers, employees, agents or representatives to any Government Official or any other person during the course of the conduct of the business of the Company. |
|
(d) |
Books and records were made and kept which accurately and fairly reflect the transactions and dispositions of the assets of the Company. |
|
(e) |
Internal accounting controls have been established, maintained and followed by the Company that are and were sufficient to provide reasonable assurance that transactions were executed in accordance with managements general or specific authorisation and were recorded in accordance with generally accepted accounting practice. |
|
(f) |
The Company has, in respect of any Anti-Corruption Laws, put in place adequate procedures designed to prevent persons associated with the Company (including its or its Associates' directors, officers, employees, agents or representatives) from undertaking offences relating directly or indirectly to bribery. |
|
(g) |
There exists no relationship and there are no agreements or arrangements between, on the one hand, the shareholders of the Company or any of its Associates, and any Government Official or an Associate of any Government Official on the other, where such relationship, agreement or arrangement may or may reasonably be considered to have an influence on the Company's performance of its obligations thereunder or the performance by the Government Official of his duties. |
43
(h) |
Neither the Company nor any of its or its Associates' directors, officers, employees, agents or representatives is an Associate of a Government Official or of an Associate of any Government Official. |
|
(i) |
No Government Official or Designated Party has any indirect ownership or other economic interest in either the Company, the contractual relationship established by this Agreement or the proceeds of this Agreement. |
|
(j) |
The Company has, in connection with |
(i) |
this Agreement or any consideration payable in connection with this Agreement; or |
|
(ii) |
the transactions contemplated by this Agreement; or |
|
(iii) |
any transactions or activities after closing of this transaction, |
whether by itself or by instructing or encouraging anyone else, made, promised to make or offered any payment or transfer of value or given, promised to give or offered any bribe, gift, loan, fee, consideration, reward or advantage of any kind, directly or indirectly, to
(iv) |
any Government Official, Government Authority or political party; |
|
(v) |
any officer, director, employee, agent or representative of any customer of the Company; or |
|
(vi) |
to any other person or entity, |
in each case if such payment or transfer would violate any law.
22. |
DEALING WITH CLIENTS |
All services and products provided by the Group to clients have been provided or organised in all material respects in accordance with the agreements governing such services and products and the Group has been compensated for such services and products in all material respects in accordance with such agreements. |
|
23. |
GENERAL |
As far as the Warrantors are Aware,: (i) all disclosures made to Net 1 during the process of its due diligence were, at the time of such disclosure, true and correct in all material respects; and (ii) it has not withheld any information which the Company, acting bona fide, believes is material to disclose to Net 1 in terms of the Proposed Transaction. |
44
ANNEXURE B - DISCLOSURE SCHEDULE
45
ANNEXURE C - AUDITED ACCOUNTS
46
ANNEXURE D - SIGNATURE DATE ACCOUNTS
47
Exhibit 10.70
MEMORANDUM OF INCORPORATION | ||
DNI - 4PL CONTRACTS PROPRIETARY LIMITED
AJD Holdings
(Pty) Ltd |
Peter Gain |
Richmark Holdings
(Pty) Ltd |
Net 1 Applied
Technologies South Africa (Pty) Ltd |
DNI - 4PL Contracts
(Pty) Ltd |
|
Initial
Who warrants that he/she is duly authorised to |
/s/ A.J. Dunn | /s/ P.K. Gain | /s/ A.J. Dunn | /s/ H.G. Kotzé | /s/ A.J. Dunn |
Memorandum of Incorporation
DNI - 4PL Contracts Proprietary Limited
(Registration number: 2005/040937/07)
Article 1 - Interpretation
In this MOI clause headings are inserted for convenience only and shall not be used in its interpretation and, unless the context clearly indicates a contrary intention,
1.1 |
an expression which denotes - |
|
(a) |
any gender includes the other gender; |
|
(b) |
a natural person includes a juristic person and vice versa; |
|
(c) |
the singular includes the plural and vice versa; |
1.2 |
the following expressions shall bear the meanings assigned to them below and cognate expressions bear corresponding meanings |
|
(a) |
Additional Subscription Agreement - the subscription agreement headed " Additional Subscription Agreement " to be entered into between the Company, Net 1, AJD Holdings and Richmark, contemporaneously with the Shareholders Agreement; |
|
(b) |
AJD Holdings - AJD Holdings Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 1975/004328/07; |
|
(c) |
Board - the board of directors of the Company from time to time; |
|
(d) |
Blue Label - Blue Label Telecoms Limited, a limited liability public company duly incorporated in accordance with the laws of the RSA with registration number 2006/002679/06; |
|
(e) |
Budget and Business Plan - as defined in the Shareholders' Agreement; |
|
(f) |
Business Day - any day other than a Saturday, Sunday, official public holiday in the RSA; |
|
(g) |
Company - DNI - 4PL Contracts Proprietary Limited, a private company duly incorporated in accordance with the laws of the RSA, registration number 2005/040937/07; |
|
(h) |
Companies Act - the Companies Act 71 of 2008, as amended from time to time, including any regulations promulgated thereunder and for the time being in force; |
|
(i) |
Director - a director of the Company from time to time; |
(j) |
Dispose - to sell, transfer, make over, give, donate, exchange, dispose of, unbundle, distribute or otherwise alienate and "Disposal" has a corresponding meaning; |
|
(k) |
Encumber - to mortgage, pledge, cede, assign, confer security, hypothecate, create a lien or security interest, preferential right or trust arrangement or other agreement or arrangement, the effect of which is to create security, and Encumbrance has a corresponding meaning; |
|
(l) |
Group - the Company and its subsidiaries, and " Group Company " shall mean any of them; |
|
(m) |
Measurement Period - the period commencing on 1 July 2017 and ending 30 June 2019; |
|
(n) |
MOI - the memorandum of incorporation of the Company, being this document (including any schedules hereto), as amended or replaced from time to time; |
|
(o) |
Net 1 - Net 1 Applied Technologies South Africa Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2002/031446/07; |
|
(p) |
Ordinary A Share - shall bear the meaning ascribed thereto in Schedule 1; |
|
(q) |
Ordinary Share - shall bear the meaning ascribed thereto in Schedule 1; |
|
(r) |
Participation Interest - the rights which a Shareholder has to generally participate in distributions made by the Company (on account of the shares held by a Shareholder in the Company from time to time and having regard to all shares in the Company then in issue) expressed as a percentage; |
|
(s) |
Richmark - Richmark Holdings Proprietary Limited, a limited liability private company duly incorporated in accordance with the laws of RSA with registration number 2000/013818/07; |
|
(t) |
RSA - the Republic of South Africa; |
|
(u) |
Share - an Ordinary Share and an Ordinary A Share in the Company (as the context may indicate), having the preferences, rights limitations, and other terms contemplated in Schedule 1; |
|
(v) |
Shareholder - the shareholders of the Company from time to time; and |
|
(w) |
Shareholders' Agreement - at any time means, the shareholders' agreement to which, all of the Shareholders at the time are party and which relates in whole or in part to their rights and obligations in relation to each other and/or the Company as Shareholders; |
1.3 |
any reference to legislative provisions shall be reference to the Companies Act, unless indicated otherwise; |
1.4 |
any reference to any legislation is to such legislation as at the date of adoption of this MOI and as amended or re-enacted from time to time; |
1.5 |
when any number of days is prescribed such number shall exclude the first and include the last day unless the last day falls on a day which is not a Business Day, in which case the last day shall be the next succeeding day which is a Business Day; |
1.6 |
any reference to days (other than a reference to Business Days) months or years shall be a reference to calendar days, months or years, as the case may be; |
1.7 |
the use of the words "including", "includes" and "include" followed by a specific example/s shall not be construed as limiting the meaning of the general wording preceding it and the rule of interpretation to the contrary shall not be applied in the interpretation of such general wording or such specific example/s; and |
1.8 |
where any term is defined within the context of any particular clause in this MOI, the terms so defined, unless it is clear from the clause in question that the term has limited application to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this MOI, notwithstanding that that term has not been defined in this interpretation clause; and |
1.9 |
where figures are referred to in numerals and words, if there is any conflict between the two, the words shall prevail. |
Article 2 - Incorporation and Nature of the Company
2.1 |
Incorporation |
(a) |
The Company is incorporated as a private company, as defined in the Companies Act. |
||
(b) |
The Company is incorporated in accordance with, and governed by: |
||
(i) |
the provisions of the Companies Act, without any limitation, extension, variation or substitution; and |
||
(ii) |
the provisions of this MOI. |
2.2 |
Powers of the Company |
(a) |
The Company is not subject to any provision contemplated in section 15(2)(b) or 15(2)(c) of the Companies Act. |
|
(b) |
The purposes and powers of the Company are not subject to any restriction, limitation or qualification, as contemplated in section 19(1)(b)(ii) of the Companies Act. |
2.3 |
Memorandum of Incorporation and Company Rules |
(a) |
This MOI may be altered or amended only in the manner set out in section 16, 17 or 152(6)(b) of the Companies Act. |
|
(b) |
To the extent that the provisions of this MOI are inconsistent with the provisions of the Shareholders' Agreement, this MOI shall, to the extent of any such inconsistency and to the extent required by the Companies Act, take precedence over the Shareholders' Agreement until this MOI is amended in accordance with Article 2.3(c). If however, the provisions of the Shareholders' Agreement merely supplement, but are not inconsistent with this MOI, then those supplementary provisions of the Shareholders' Agreement shall be given effect. |
|
(c) |
Any Shareholder shall be entitled, by giving written notice to that effect to the Company and the other Shareholder(s), to require this MOI to be amended, to the extent permissible in terms of the Companies Act, so as to be consistent with the Shareholders' Agreement or to record the supplementary provisions of the Shareholders' Agreement. Upon receipt of that notice: |
(i) |
the Company shall procure that a general meeting of the Shareholders of the Company is called as soon as practically possible; and |
|
(ii) |
the Shareholders shall exercise all votes which they may have to vote in favour of or to procure the adoption of all resolutions of the Company necessary to amend this MOI in terms of this Article 2.3. |
(d) |
The authority of the Board to make rules for the Company ( Rules ), as contemplated in section 15(3) or section 15(5) of the Companies Act, is not limited or restricted in any manner by this MOI. |
(e) |
The Board must publish any Rules made in terms of section 15(3) to section 15(5) of the Companies Act by delivering a copy of those Rules to each Shareholder by ordinary mail. |
|
(f) |
The Company must publish a notice of any alteration of the MOI or the Rules, made in terms of section 17(1) of the Companies Act, by delivering a copy of the notice to each Shareholder by ordinary mail. |
2.4 |
Optional provisions of Companies Act do not apply |
(a) |
The Company does not elect, in terms of section 34(2) of the Companies Act, to comply voluntarily with the provisions of Chapter 3 of the Companies Act. |
|
(b) |
The Company does not elect, in terms of section 118(1)(c)(ii) of the Companies Act, to submit voluntarily to the provisions of Parts B and C of Chapter 5 of the Companies Act, and to the Takeover Regulations provided for in the Companies Act. |
Article 3 - Securities of the Company
3.1 |
Securities |
(a) |
The Company is authorised to issue no more than the maximum number of each of the classes of shares as set out in Schedule 1, subject to the preferences, rights, limitations and other terms associated with each such class, as set out in Schedule 1. |
|
(b) |
This MOI does not limit or restrict the authority of the Board to: |
(i) |
authorise the company to issue secured or unsecured debt instruments, as set out in section 43(2) of the Companies Act; or |
|
(ii) |
grant special privileges associated with any debt instruments to be issued by the Company, as set out in section 43(3) of the Companies Act; or |
|
(iii) |
authorise the Company to provide financial assistance to any person in relation to the subscription of any option or Shares of the Company or a related or inter- related company, as set out in section 44 of the Companies Act; or |
|
(iv) |
approve the issuing of any authorised Shares of the Company as capitalisation shares, as set out in section 47(1) of the Companies Act; or |
|
(v) |
resolve to permit Shareholders to elect to receive a cash payment in lieu of a capitalisation share, as set out in section 47(1) of the Companies Act. |
3.2 |
Registration of Beneficial Interests |
The authority of the Board to allow the Company's issued securities to be held by and registered in the name of one person or the beneficial interest of another person, as set out in section 56(1) of the Companies Act, is not limited or restricted by this MOI.
3.3 |
Restriction on transfers and encumbrance of shares |
(a) |
The Company must not make an offer to the public of any of its Shares. |
|
(b) |
Subject to Article 3.3(c), any Shareholder (solely after the Measurement Period) may only Dispose of or Encumber any Shares held by it in the Company in terms of this Article 3.3, Article 3.4 and any other provision of the Shareholders' Agreement specifically providing for Disposal and/or Encumbrance. |
|
(c) |
Notwithstanding anything to the contrary contained herein, unless otherwise agreed by the Shareholders in writing: |
(i) |
for the duration of the Measurement Period, no Party shall be entitled to sell or in any other way Dispose of its Shares in the Company to a third party, unless the other Parties haves consented to such Disposal in writing and have waived, in writing, their pre-emptive rights to be offered such Shares in terms of Article 3.4; and |
(ii) |
after the expiry of the Measurement Period, no Party shall be entitled to sell or in any other way Dispose of its Shares in the Company to a third party, other than as expressly permitted in terms of this MOI or the Shareholders Agreement; and |
|
(iii) |
no Shareholder (other than (i) Net 1, which shall be entitled to Encumber its shares in favour of Rand Merchant Bank, and (ii) AJD Holdings and Richmark, each of which shall be entitled to Encumber their shares in favour of Peter Gain to facilitate the implementation of the transactions contemplated in an agreement headed " Framework Agreement " entered into between the Company, Net 1, Peter Gain, AJD Holdings and Richmark, contemporaneously with the Shareholders Agreement) shall be entitled to Encumber its Shares without the prior written consent of the other Shareholders. |
(d) |
Subject to Article 3.3(c) and Article 3.4, notwithstanding anything to the contrary in the MOI for the time being, but save as specifically otherwise agreed to in writing by all of the Shareholders or specifically permitted by this MOI, a Shareholder may only Dispose of any of its Shares in the Company if, in one and the same transaction it also Disposes of that portion of its loan account (if any) ( Corresponding Loan Account ) which bears the same proportion to its entire loan account (if any) as the number of Shares so Disposed of bear to the Participation Interest held by that Shareholder. |
3.4 |
Pre-emptive rights |
(a) |
Save as contemplated herein, if the Company proposes to issue any shares, other than as contemplated in section 39(1)(b) of the Companies Act, each Shareholder has the right, before any other person who is not a shareholder in the Company, to be offered and, within a reasonably time to subscribe for, a percentage of the Shares to be issued equal to that Shareholders' Participation Interest. |
|
(b) |
Subject to Article 3.3, following the expiry of the Measurement Period, if any Shareholder ( Offeror ), wishes to Dispose or receives an offer for the purchase of any of its Shares in the Company, as the case may be, it shall first offer those Shares and its claims in respect of the Corresponding Loan Account to the remaining Shareholders ( Offeree ). |
|
(c) |
Such offer contemplated in Article 3.4(a) ( Offer ) shall: |
(i) |
be in writing; |
|
(ii) |
be irrevocable and open for acceptance by the Offeree/s for a period of 30 days following the date of receipt of the Offer by the Offeree/s ( First Period ); |
|
(iii) |
stipulate a cash price (which shall be expressed and payable in South African Rands) at which the Offeror is prepared to Dispose of its Shares and claims in respect of the Corresponding Loan Account or at which the Offeror has received an offer for the purchase of the Shares concerned and its claims in respect of the Corresponding Loan Account. Such purchase price shall be: |
(A) |
payable free of deduction or set-off at the Company's registered office against delivery of the Shares in negotiable form and cession of the claims in respect of the Corresponding Loan Account to the Offerees; |
|
(B) |
be capable of acceptance in whole or in part; and |
|
(C) |
not be subject to any other term or condition. |
(d) |
If any of the Offeree/s do not accept the Offer or accept the Offer in part for the Shares and claims in respect of the Corresponding Loan Account offered to it ( Declining Offeree ), the Offeree/s who have accepted the Offer ( Accepting Offerees ) shall be entitled, within seven days after either the Declining Offeree has stated in writing that it does not accept the Offer (whether in whole or in part) or the expiry of the First Period, whichever is the earlier, to accept the Offer in respect of the Shares and claims in respect of the Corresponding Loan Account offered to the Declining Offeree and not accepted by it ( Declined Offer ) at the price and on the same terms and conditions, mutatis mutandis , stated in the Offer rateably in proportion to their respective Participation Interest held between them (or in such other proportions as may be agreed upon between them) and this procedure shall be repeated as often as is necessary until the Shares and claims in respect of the Corresponding Loan Account offered have been acquired or until no Accepting Offeree remains who is willing to accept the Declined Offer in whole or in part. |
|
(e) |
If the procedure in Article 3.4(c) and Article 3.4(d) is completed and no Accepting Offeree remains who is willing to accept the Declined Offer in whole or in part, then the Offeror shall be entitled within 30 days after such non-acceptance, to offer in writing ( Outside Offer ) to Dispose of and transfer all of its Shares and claims in respect of the Corresponding Loan Account which formed the subject matter of the Offer and in respect of which the Offer was not accepted to any bona fide person ( Third Party ) at a price not lower and on terms and conditions not more favourable to the Third Party than those at which the Offeree/s were entitled to purchase those Shares and claims in respect of the Corresponding Loan Account in terms of the Offer; provided that the whole (and not part) of the Outside Offer shall be accepted by the Third Party. |
|
(f) |
Transfer of the Offeror's Shares to the Third Party shall thereafter be registered as soon as possible, provided that: |
(i) |
the identity of the Third Party will have been approved by the Board by way of resolution, which approval may not be unreasonably withheld; |
|
(ii) |
the Third Party will have agreed in writing to be bound, mutatis mutandis , in place of the Offeror to the Shareholders' Agreement and any other agreement for the time being subsisting between the Parties to the extent to which such agreement regulates their relationship inter se as Shareholders. |
(g) |
Waiver of pre-emptive rights in favour of Blue Label : |
(i) |
For a period of one year from the Effective Date (as defined in the Shareholders' Agreement), the Shareholders shall not have pre-emptive rights on the issue of any Share, as contemplated in Article 3.4(a) above, in respect of the issuance of 45,000,000 Ordinary A Shares, provided that: |
(A) |
they are issued to Blue Label; |
|
(B) |
they are issued on substantially the same terms that Net 1 subscribed for (or will subscribe for) 45,000,000 Ordinary A Shares; and |
|
(C) |
Article 3.4(f)(ii) is complied with mutatis mutandis or a new Shareholders Agreement is agreed and entered into between the Shareholders, Blue Label and the Company. |
Article 4 - Shareholders and Meetings
4.1 |
Shareholders' Right to Information |
Every person who has a beneficial interest in any of the Company's securities has the rights to access information set out in section 26(1) of the Companies Act. |
|
4.2 |
Shareholders' Authority to Act |
(a) |
If, at any time, there is only one Shareholder of the Company, the authority of that Shareholder to act without notice or compliance with any other internal formalities, as set out in section 57(2) of the Companies Act, is not limited or restricted by this MOI. |
|
(b) |
If, at anytime, every Shareholder is also a Director of the Company, as contemplated in section 57(4) of the Companies Act, the authority of the Shareholders to act without notice or compliance with any other internal formalities, as set out in that section is not limited or restricted by this MOI. |
4.3 |
Shareholder Representation by Proxies |
(a) |
This MOI does not limit, restrict or vary the right of a Shareholder: |
||
(i) |
to appoint 2 or more persons concurrently as proxies, as set out in section 58(3)(a) of the Companies Act; or |
||
(ii) |
to delegate the proxy's powers to another person, as set out in section 58(3)(b) of the Companies Act. |
||
(b) |
The requirement that a Shareholder must deliver to the Company a copy of the instrument appointing a proxy before that proxy may exercise the Shareholder's rights at a Shareholders' meeting, as set out in section 58(3)(c) of the Companies Act is not varied by this MOI. |
||
(c) |
The authority of a Shareholder's proxy to decide without direction from the Shareholder whether to exercise, or abstain from exercising, any voting right of the Shareholder, as set out in section 58(7) of the Companies Act is not limited or restricted by this MOI. |
4.4 |
Record Date for Exercise of Shareholder Rights |
If, at any time, the Board fails to determine a record date, as contemplated in section 59 of the Companies Act, the record date for the relevant matter is as determined in accordance with section 59(3) of the Companies Act. |
4.5 |
Shareholders' Meetings |
|
(a) |
The Company is not required to hold any Shareholders' meetings other than those specifically required by the Companies Act. |
|
(b) |
The right of Shareholders to requisition a meeting, as set out in section 61(3) of the Companies Act, may be exercised by the holders of at least 10% of the voting rights entitled to be exercised in relation to the matter to be considered at the meeting. |
|
(c) |
The authority of the Board to determine the location of any Shareholders' meeting, and the authority of the Company to hold any such meeting in the RSA or in any foreign country, as set out in section 61(9) of the Companies Act is not limited or restricted by this MOI. |
|
(d) |
The minimum number of days for the Company to deliver a notice of a Shareholders' meeting to the Shareholders, shall be in accordance with section 62(1) of the Companies Act. |
|
(e) |
The minimum requirements for a notice of a Shareholders' meeting shall be in accordance with section 62(3) of the Companies Act. |
|
(f) |
The authority of the Company to conduct a meeting entirely by electronic communication, or to provide for participation in a meeting by electronic communication, as set out in section 63(2) of the Companies Act is not limited or restricted by this MOI. |
|
(g) |
The quorum for a Shareholders' meeting shall be one representative of each of the Shareholders present in person or represented by proxy. If no quorum is present at any duly convened meeting of Shareholders within 30 (thirty) minutes after the scheduled time for commencement of that meeting, the meeting shall be adjourned to be resumed at the same time and venue on the seventh Business Day thereafter. If at such adjourned meeting a quorum is not present within 30 (thirty) minutes after the scheduled time for commencement of that meeting, the Shareholders present shall constitute a quorum. Written notice of each adjournment specifying the business to be dealt with at the adjourned meeting shall be given by the Company to each of the Shareholders forthwith after such adjournment. No business shall be transacted at the resumption of any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. |
|
(h) |
The authority of a meeting to continue to consider a matter, as set out in section 64(9) of the Companies Act is not limited or restricted by this MOI. |
4.6 |
Shareholders' Resolutions |
|
(a) |
Ordinary resolutions: |
|
For an ordinary resolution to be adopted at a Shareholders' meeting, it must be supported by the holders of more than 50% of the voting rights exercised on the resolution, as provided in section 65(7) of the Companies Act. |
(b) |
Reserved matters: |
(i) |
The approval of the Shareholders holding at least 75% of the Participation Interest shall be required for those matters, as set out in section 65(11) of the Companies Act and the undermentioned matters (and notwithstanding anything to the contrary contained in this MOI, the powers of the Board shall accordingly be limited in regard to the matters set out below until the Shareholders have voted on and approved a particular matter: |
(A) |
the disposal or transfer (whether directly or through a subsidiary or other vehicle) of any business, share, asset or other investment (in the case of an asset otherwise than in the ordinary course of business of the Company); |
|
(B) |
the establishment, acquisition or purchase of any business, share, asset or other investment (in the case of an asset otherwise than in the ordinary course of business of the Company); |
|
(C) |
the Encumbering of any assets of the Company in any manner whatsoever; |
|
(D) |
any change in the basis of accounting or accounting policies from those used during the immediately preceding financial year otherwise than in accordance with IFRS; |
|
(E) |
any agreement between the Company and any Shareholder or any holding company or subsidiary of any Shareholder or any person holding at least 5% of the total Participation Interest of any Shareholder; |
|
(F) |
the revaluation of any material asset; |
|
(G) |
any decision to cover or not to cover forward any amounts receivable or payable in a currency other than ZAR; |
|
(H) |
any decision not to insure (or to insure for a lesser amount) against such risks as may be recommended by the Company's insurance brokers; |
|
(I) |
any termination of or amendment to the Company's retirement or medical aid funding; |
|
(J) |
any amendment to the Company's MOI; |
|
(K) |
any increase in, alteration or reduction or conversion of the Company's authorised or issued share capital; |
|
(L) |
any variation of any of the rights attaching to any Shares or class of Shares in the Company; |
|
(M) |
the issue or allotment by the Company of any shares of whatsoever class, bonus Shares, share options, share warrants or debentures, in each case other than as expressly provided for in this Agreement; |
|
(N) |
the repurchase of any of the Company's issued Shares; |
(O) |
the liquidation or winding-up or the discontinuance of the business activities of the Company; |
|
(P) |
any matter relating to the financing or capital or borrowings of the Company which would have the effect of directly or indirectly reducing the proportionate shareholding of any Shareholder; |
|
(Q) |
any re-structuring of the Company, merger of the Company and any other entity and any joint venture agreements; |
|
(R) |
any material change in the nature of the business of the Company; |
|
(S) |
any appointment and removal of auditors to the Company; |
|
(T) |
the listing of any Shares or share options on any recognised stock exchange; |
|
(U) |
the incurring of any direct indebtedness (other than trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(V) |
the issue of guarantees, suretyships, letters of comfort or other similar undertakings (other than to secure trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(W) |
the incurring of any direct indebtedness (other than trade debt in the ordinary course of business) plus guarantees, suretyships, letters of comfort or other similar undertakings (other than to secure trade debt in the ordinary course of business) other than as contemplated in the Budget and Business Plan; |
|
(X) |
the authorisation of foreign exchange commitments, unless such commitments are contemplated in the Budget and Business Plan; |
|
(Y) |
the instituting of any material litigation or settlement of any material claim or any such claim or settlement which is strategic in nature and falls outside of the ordinary course of business (regardless of materiality), but specifically excluding the institution of any legal proceedings against any Shareholder or Director; and |
|
(Z) |
and the aforegoing shall apply, mutatis mutandis , in relation to any Group Company. |
(ii) |
This entire Article 4.6(b)(i) shall automatically fall away and be of no further force and effect on the earlier to occur of the implementation of the option contained in clause 15 or 16 of the Shareholders Agreement. |
(c) |
Written resolutions: |
||
(i) |
Subject to the Companies Act, a written resolution of Shareholders which has been signed by the majority of the Shareholders, and upon which the requisite majority of Shareholders indicate their approval of the resolution, shall be as valid and effective as if it had been adopted by a duly convened meeting of Shareholders, as the case may be. |
(ii) |
Unless the contrary is stated therein, any such resolution shall be deemed to have been passed on the date on which it was signed by or on behalf of the Shareholder, who signed it last. The resolution may consist of one or more documents each signed by one or more Shareholders. |
|
(iii) |
A scanned copy of the resolution shall be sufficient evidence that such resolution has been signed by the Shareholder whose signature appears thereon. |
Article 5 - Directors and Officers
5.1 |
Appointment of Directors and removal of Directors |
(a) |
Each Shareholder undertakes to co-operate to procure the election and/or removal, as the case may be, of any person nominated by any other Shareholder in compliance with this Article 5.1, and, for this purpose, shall vote in favour of or sign any resolution of Shareholders which is required to effect such election in terms of section 68 of the Companies Act, or removal, in terms of section 71 of the Companies Act. |
|
(b) |
It is agreed that - |
(i) |
the Company shall have a minimum of 3 Directors; |
||
(ii) |
each Shareholder shall be entitled, by giving written notice to that effect to the Company from time to time, to: |
(A) |
nominate one Director to the candidate pool for election as Directors. It is recorded that the Director nominated by AJD Holdings is Andrew Dunn and that he is the designated chief executive officer of the Company; |
|
(B) |
nominate for election one or more alternate(s) to the Directors nominated by it; and |
|
(C) |
request that the Company call a shareholders' meeting to elect the persons nominated by it or to remove any Director (or alternate) nominated by it and elected to serve on the Board, in terms of section 71 of the Companies Act; |
(iii) |
no Shareholder shall nominate any person to the candidate pool for election as a Director: |
(A) |
unless pursuant to consultation with the other Shareholders; or |
|
(B) |
if that person's directorship will contravene this MOI or the Companies Act. |
(iv) |
Each person appointed as a Director or alternate shall, prior to his appointment becoming effective, but save to the extent otherwise agreed in writing by the Company, execute a written acknowledgement in which he: |
(A) |
acknowledges and agrees that he will not have any claims against the Company for remuneration or compensation for services rendered to the Company or for reimbursement of expenses incurred in the business of the Board other than such remuneration or reimbursement, if any, as may be approved by the Board; and |
|
(B) |
furnishes the Company with a postal address and e-mail address at which notice of meetings shall be given to him. |
(v) |
Any Shareholder which has nominated a Director to the candidate pool for election in terms of Article 5.1(b)(ii) shall: |
(A) |
procure the resignation of that Director as soon as: |
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(1) |
that Shareholder ceases to be entitled to nominate that Director in terms of Article 5.1(b), whether as a result of that Shareholder ceasing to be a Shareholder or otherwise; or |
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(2) |
the continued directorship of that Director would contravene this MOI or the Companies Act; and |
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(B) |
indemnify the Company against any loss, liability, damage, cost or expense which may be suffered or incurred by the Company as a result of any removal or resignation of such Director from the Board. |
5.2 |
Authority of the Board of Directors |
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(a) |
The authority of the Board to manage and direct the business and affairs of the Company, as set out in section 66(1) of the Companies Act is not limited or restricted by this MOI. |
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(b) |
If, at anytime, the Company has only one Director, as contemplated in section 57(3) of the Companies Act, the authority of that director to act without notice or compliance with any other internal formalities, as set out in that section is not limited or restricted by this MOI. |
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(c) |
The Board may not register the transfer of any Shares unless the conditions for the transfer contemplated in Articles 3.3 and Article 3.4 have been met. |
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5.3 |
Directors' Meetings |
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(a) |
Any Director, or the company secretary (if one is appointed) may convene a meeting of Directors at any time by giving not less than seven days (or such lesser period as may be reasonable in the circumstances) written notice of such meeting to the other Directors and the Company. The Board shall meet as and when required and any Director shall be entitled to convene a meeting of the Board. Notwithstanding the aforegoing, the Board shall meet at least once every calendar quarter. |
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(b) |
This MOI does not limit or restrict the authority of the Company's Board to: |
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(i) |
conduct a meeting entirely by electronic communication, or to provide for participation in a meeting by electronic communication, as set out in section 73(3) of the Companies Act; or |
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(ii) |
determine the manner and form of providing notice of its meetings, as set out in section 73(4) of the Companies Act; or |
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(iii) |
proceed with a meeting despite a failure or defect in giving notice of the meeting, as set out in section 73(5) of the Companies Act, or |
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(iv) |
consider a matter other than at a meeting, as set out in section 74 of the Companies Act. |
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(c) |
The quorum for the meeting of the Board shall be one Board representative for each Shareholder. If no quorum is present at any duly convened meeting of the Board within 30 (thirty) minutes after the scheduled time for commencement of that meeting, the meeting shall be adjourned to be resumed at the same time and venue on the seventh Business Day thereafter. If at such adjourned meeting a quorum is not present within 30 (thirty) minutes after the scheduled time for commencement of that meeting, the Directors present shall constitute a quorum. Written notice of each adjournment specifying the business to be dealt with at the adjourned meeting shall be given by the Company to each of the Directors forthwith after such adjournment. No business shall be transacted at the resumption of any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. |
(d) |
AJD Holdings and Richmark shall (for so long as they between them hold the majority of the Participation Interest) jointly elect a chairman from among the Board who shall (i) chair and determine the procedures to be followed at all meetings of the Board and Shareholders; and (ii) not have a deliberative or casting vote, in the event of a deadlock. In the event that the chairman is absent from any given board meeting, the chairman shall appoint a proxy to vote in his/her stead at the relevant board meeting. |
5.4 |
Board Resolutions |
|
(a) |
Resolutions of the Board shall be passed by a simple majority of the votes of the Directors cast at a quorate meeting, on the basis that each Director at quorate meetings of the Board shall have that percentage of the total votes of all Directors which corresponds with the Participation Interest in the Company held by the Shareholder which nominated such Director, divided by the number of Directors nominated by such Shareholder, who are present and voting at such meeting. |
|
(b) |
Subject to the Companies Act, a written resolution of the Board which has been signed by a majority of the Directors (or their alternatives) and upon which the requisite majority of the Directors indicate their approval of the resolution, shall be as valid and effective as if it had been adopted by a duly convened meeting of the Board. Unless the contrary is stated therein, any such resolution shall be deemed to have been passed on the date on which it was signed by or on behalf of the Director (or their alternate) who signed it last. The resolution may consist of one or more documents each signed by one or more Directors (or their alternates), as the case may be. A scanned copy of the resolution shall be sufficient evidence that such resolution has been signed by the Director whose signature appears thereon. |
5.5 |
Directors compensation and financial assistance |
|
This MOI does not limit the authority of the Company to: |
||
(a) |
pay remuneration to the Company's directors, in accordance with a special resolution approved by the Shareholders within the previous two years, as set out in section 66(9) and section 66(10) of the Companies Act; |
|
(b) |
advance expenses to a director, or indemnify a director, in respect of the defense of legal proceedings, as set out in section 78(4) of the Companies Act; |
|
(c) |
indemnify a director in respect of liability, as set out in section 78(5) of the Companies Act; or |
(d) |
purchase insurance to protect the Company, or a director, as set out in section 78(7) of the Companies Act. |
SCHEDULE 1 - SHARE TERMS
1. |
DEFINITIONS |
(a) |
In these terms and conditions, unless inconsistent with or otherwise indicated by the context, the following words and expressions bear the meanings assigned to them and cognate expressions bear corresponding meanings |
||
(i) |
" Companies Act " means the Companies Act, No. 71 of 2008; |
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(ii) |
" Company " means DNI - 4PL Contracts Proprietary Limited, registration number 2005/040937/07, a company with limited liability duly registered in accordance with the laws of the Republic of South Africa; |
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(iii) |
" Distribution " means any payment of whatsoever nature and howsoever described (including share buy backs, a distribution or payment upon or in connection with a reduction of capital, an issue of shares or other securities credited as fully or partly paid up by way of a capitalisation of profits or reserves and the payment (or repayment) of any amount on loan account) by or on behalf of a company to or for the account of any member or shareholder of that company, in each case whether paid or payable and whether paid or payable in cash or in specie , and for the avoidance of doubt, includes any " distributions " as defined in the Companies Act; |
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(iv) |
" Holder " means, in relation to any Ordinary A Share at any time, the Person who then holds that Ordinary A Share at that time; |
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(v) |
" Ordinary Shares " means the par value ordinary shares in the Company which confer on their Holder/s the rights and privileges set out in 3 below; |
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(vi) |
" Ordinary A Shares " means no par value ordinary "A" shares in the Company which confer on their Holder/s the rights and privileges set out in 5 below; and |
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(vii) |
" Person " includes any individual, firm, company, corporation, government, state or agency of a state or any association, trust, joint venture, consortium or partnership (whether or not having separate legal personality). |
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(b) |
The words " include " and " including " mean "include without limitation" and "including without limitation". The use of the words " include " and " including " followed by a specific example or examples shall not be construed as limiting the meaning of the general wording preceding it. |
2. |
ORDINARY SHARES |
The Company is authorised to issue no more than 1,000 Ordinary Shares with a par value of R1.00 each. |
3. |
RIGHTS AND ENTITLEMENTS OF ORDINARY SHARES |
(a) |
The rights and privileges attaching to the Ordinary Shares prior to the issue of Ordinary A Shares shall be as follows: |
||
(i) |
the Ordinary Shares shall rank pari passu with all other Ordinary Shares in respect of all rights. |
(ii) |
accordingly, each Ordinary Share entitles the Holder thereof to |
(A) |
vote on any matter to be decided by the shareholders of the Company and to 1 vote in the case of a vote by means of a poll; |
|
(B) |
participate proportionally (having regard to the total number of Ordinary Shares in issue at the applicable time) in any Distribution made by the Company; and |
|
(C) |
receive proportionally (having regard to the total number of Ordinary Shares in issue at the applicable time) to the net assets of the Company upon its liquidation. |
(b) |
Upon the issuance of any Ordinary A Shares and for so long as there remains any Ordinary A Shares in issue, the rights and privileges of the Ordinary Shares shall be subject to the rights and privileges attaching to the Ordinary A Shares. |
4. |
ORDINARY A SHARES |
The Company is authorised to issue no more than 90,000,000 ordinary A shares, with the rights and entitlements set out in 5 below. |
|
5. |
RIGHTS AND ENTITLEMENTS OF ORDINARY A SHARES |
Each Holder shall be entitled, in respect of the Ordinary A Shares held by it, to the following rights |
(a) |
1% of the total voting rights exercisable in the Company for each 1,000,000 Ordinary A Shares held by a Holder, or part thereof; |
|
(b) |
1% of the rights to any and all Distributions for each 1,000,000 Ordinary A Shares held by a Holder, or part thereof, provided that the A Ordinary Shares shall not confer the Holder the right to receive |
(i) |
any cash distribution declared and made by the Company in respect of the subscription proceeds received by the Company pursuant to the issue of any Ordinary A Shares; or |
|
(ii) |
any cash distribution, the quantum of which is determined with reference to the Company's profit after tax in respect of the period between 1 March 2017 and 30 June 2017; |
(c) |
upon the Company's liquidation, 1% of the net assets of the Company for each 1,000,000 Ordinary A Shares, or part thereof. |
EXHIBIT 12
Statement regarding computation of ratio of earnings to fixed charges
Year ended June 30, | |||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
(in thousands, except for ratio of earnings to fixed charges) | |||||||||||||||
Fixed charges | |||||||||||||||
Interest expensed and capitalized | $ | 3,484 | $ | 3,423 | $ | 4,456 | $ | 7,473 | $ | 7,966 | |||||
Amortized premiums, discounts and
capitalized expenses related to indebtedness |
|||||||||||||||
Estimate of the interest within rental expense | 933 | 755 | 650 | 709 | 1,430 | ||||||||||
Preference security dividend requirements
of consolidated subsidiaries |
- | - | - | - | - | ||||||||||
Fixed charges | 4,417 | 4,178 | 5,106 | 8,182 | 9,396 | ||||||||||
Earnings | |||||||||||||||
Add | 118,873 | 130,415 | 145,524 | 117,324 | 36,675 | ||||||||||
Pretax income from continuing operations
before adjustment for non-controlling interests in consolidated subsidiaries or income or loss from equity investees |
114,456 | 126,237 | 140,418 | 109,142 | 27,279 | ||||||||||
Fixed charges | 4,417 | 4,178 | 5,106 | 8,182 | 9,396 | ||||||||||
Amortization of capitalized interest | - | - | - | - | - | ||||||||||
Distributed income of equity investees | - | - | - | - | - | ||||||||||
Your share of pre-tax losses of equity
investees for which charges arising from guarantees are included in fixed charges |
- | - | - | - | - | ||||||||||
Less | 2,359 | 362 | 328 | - | - | ||||||||||
Interest capitalized | |||||||||||||||
Preference security dividend requirements
of consolidated subsidiaries |
|||||||||||||||
Non-controlling interest in
pre-tax income
of subsidiaries that have not incurred fixed charges |
2,359 | 362 | 328 | ||||||||||||
Earnings | $ | 116,514 | $ | 130,053 | $ | 145,196 | $ | 117,324 | $ | 36,675 | |||||
Ratio of earnings to fixed charges | 26.38 | 31.13 | 28.44 | 14.34 | 3.90 |
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of the Company as of June 30, 2017, omitting subsidiaries which, considered in the aggregate, would not constitute a significant subsidiary.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-208324, 333-126958, 333-140042 and 333-170395 on Form S-8 and in Registration Statement No. 333-211968 and No. 333-208065 on Form S-3 of our reports dated August 24, 2017, relating to the consolidated financial statements of Net 1 UEPS Technologies, Inc. and its subsidiaries (collectively, the Company), and the effectiveness of the Companys internal control over financial reporting, appearing in the Annual Report on Form 10-K of Net 1 UEPS Technologies, Inc. for the year ended June 30, 2017.
/s/ Deloitte & Touche
Registered Auditors
Johannesburg, South Africa
August 24, 2017
National Executive: *LL Bam Chief Executive Officer *TMM Jordan
Deputy Chief Executive Officer
*MJ Jarvis Chief Operating Officer *AF Mackie
Audit & Assurance *N Sing Risk Advisory *NB Kader Tax TP Pillay Consulting S
Gwala BPS *K Black Clients & Industries *JK Mazzocco Talent &
Transformation MG Dicks Risk Independence & Legal *TJ Brown Chairman of the
Board
A full list of partners and directors is available on request | *Partner and Registered Auditor |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
I, Herman G. Kotzé, certify that:
1. I have reviewed this annual report on Form 10-K of Net 1 UEPS Technologies, Inc. (Net1) for the year ended June 30, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of Net1s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Net1s internal control over financial reporting that occurred during Net1s most recent fiscal quarter (Net1s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Net1s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Net1s auditors and the Audit Committee of Net1s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1s internal control over financial reporting.
Date: August 24, 2017 | /s/ Herman G. Kotzé |
Herman G. Kotzé | |
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
I, Herman G. Kotzé, certify that:
1. I have reviewed this annual report on Form 10-K of Net 1 UEPS Technologies, Inc. (Net1) for the year ended June 30, 2017;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of Net1s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Net1s internal control over financial reporting that occurred during Net1s most recent fiscal quarter (Net1s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Net1s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Net1s auditors and the Audit Committee of Net1s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1s internal control over financial reporting.
Date: August 24, 2017 | /s / Herman G. Kotzé |
Herman G. Kotzé | |
Chief Financial Officer |
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Net 1 UEPS Technologies, Inc. (Net1) on Form 10-K for the period ended June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the Report), Herman G. Kotzé, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary, of Net1, certifies, pursuant to 18 U.S.C. § 1350, that to his knowledge:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
|
|
||
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Net1. |
Date: August 24, 2017 | /s/: Herman Kotzé |
Name: Herman Kotzé | |
Chief Executive Officer, Chief | |
Financial Officer, Treasurer and | |
Secretary |