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As filed with the Securities and Exchange Commission on
July 19, 2005
Registration No. 333-125273
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Florida | 7389 | 65-0903895 | ||
|
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
President Place, 4th Floor
Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg, South Africa
(2711) 343-2000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Net 1 UEPS Technologies, Inc.
President Place, 4th Floor
Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg, South Africa
(2711) 343-2000
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies to:
|
Dr. Serge C.P. Belamant Net 1 UEPS Technologies, Inc. President Place, 4th Floor Cnr. Jan Smuts Avenue and Bolton Road Rosebank, Johannesburg, South Africa Tel: (2711) 343-2000 Fax: (2711) 880-7080 |
Marjorie Sybul Adams, Esq. DLA Piper Rudnick Gray Cary US LLP 1251 Avenue of the Americas New York, NY 10020 Tel: (212) 835-6000 Fax: (212) 835-6001 |
Chris Ewing, Esq. Cliffe Dekker Inc 1 Protea Place Sandown, South Africa Tel: (2711) 290-7120 Fax: (2711) 290-7300 |
Paul Kumleben, Esq. Davis Polk & Wardwell 99 Gresham Street London, EC2V 7NG England Tel: (4420) 7418-1300 Fax: (4420) 7418-1400 |
Approximate
date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration
statement.
If any of
the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the “Securities
Act”), check the following
box. o
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this
Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this
form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
| Proposed Maximum | ||||||||
| Title of Each Class of | Aggregate | Amount of | ||||||
| Securities to be Registered | Offering Price(1)(2) | Registration Fee(3) | ||||||
|
Common stock, par value $0.001 per share
|
$ | 145,000,000 | $ | 17,066.50 | ||||
| (1) | Includes shares of common stock that the underwriters may purchase to cover over-allotments, if any. |
| (2) | In accordance with Rule 457(o) under the Securities Act, the number of shares being registered and the proposed maximum offering price per share are not included in this table. |
| (3) | A $13,535.50 fee has been previously paid in connection with the registration of an initial aggregate amount of $115,000,000 on Form S-1 filed on May 26, 2005. |
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
registration statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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|
The
information in this prospectus is not complete and may be
changed. The selling shareholders and, if the over-allotment is
exercised by the underwriters, we may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and the selling
shareholders and, if the over-allotment is exercised by the
underwriters, we are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
|
SUBJECT TO COMPLETION. DATED
JULY 19, 2005.
PROSPECTUS
9,850,000 Shares
Common Stock
This is a public offering of our shares of common stock. All of
the shares are being sold by the selling shareholders identified
in this prospectus. In connection with this offering, certain of
our optionholders are exercising options to purchase the shares
that they are selling in this offering. We will not receive any
of the proceeds from the sale of shares by the selling
shareholders other than proceeds from the exercise of these
options. Concurrently with this offering, certain selling
shareholders are selling in a private placement an aggregate of
$75.0 million of our shares at the public offering price to
investment entities affiliated with General Atlantic LLC. The
closing of the private placement is expected to occur
concurrently with the closing of this offering.
Our common stock is quoted on the OTC Bulletin Board under
the symbol “NOUT.OB.” The last reported sale price of
our common stock on July 14, 2005 was $18.00 per
share. We currently expect the public offering price to be
between $18.00 and $20.00 per share. Our common stock has been
approved for quotation on the Nasdaq National Market under the
symbol “UEPS.”
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 11 to read about factors
you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
| Per Share | Total | |||||||
|
Public offering price
|
$ | $ | ||||||
|
Underwriting discounts and commissions
|
$ | $ | ||||||
|
Proceeds, before expenses, to selling shareholders
|
$ | $ | ||||||
We have granted the underwriters an option to purchase up to an
additional 1,477,500 shares of common stock to cover
over-allotments at the public offering price less underwriting
discounts and commissions.
The underwriters expect to deliver the shares to purchasers
on ,
2005.
| Morgan Stanley | JPMorgan |
|
Robert W. Baird & Co.
|
Jefferies & Company, Inc. | Thomas Weisel Partners LLC |
The date of this prospectus
is ,
2005.
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You should rely only on the information contained in this
prospectus. Neither we nor the selling shareholders have
authorized anyone to provide you with different information. The
selling shareholders are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
shares of common stock.
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PROSPECTUS SUMMARY
You should read the following summary together with the
entire prospectus, including the more detailed information in
our audited consolidated financial statements and related notes
as well as the unaudited interim financial information appearing
elsewhere in this prospectus. You should consider carefully,
among other matters, the matters we discuss in “Risk
Factors.” All references in this prospectus to
“we,” “us,” or “our” are
references to Net 1 UEPS Technologies, Inc. and its consolidated
subsidiaries, collectively, except as otherwise indicated or
where the context indicates otherwise. All references in this
prospectus to Net 1 are to Net 1 UEPS Technologies, Inc., all
references to New Aplitec are to Net 1 Applied Technologies
South Africa Limited and all references to Aplitec are to
Net 1 Applied Technology Holdings Limited. All dollar
amounts referred to in this prospectus are in U.S. dollars
unless otherwise indicated. As of July 14, 2005, the
exchange rate for South African Rand to U.S. dollars was
ZAR 6.67 = US$1.00.
Our Company
We provide our universal electronic payment system, or UEPS, as
an alternative payment system for the unbanked and under-banked
populations of developing economies. We believe that we are the
first company worldwide to implement a system that can enable
the estimated four billion people 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. To accomplish
this, we have developed and deployed the UEPS. This system uses
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 enter into
transactions at any time with other card holders in even the
most remote areas so long as a portable offline smart card
reader is available. In addition to payments and purchases, our
system can be used for banking, health care management,
international money transfers, voting and identification.
Our technology is widely used in South Africa today. We have
over 3.3 million clients in five provinces who receive
social welfare grants using our smart cards. We have started to
implement our UEPS for employers to pay wages and provide
financial services to their employees. In addition, we are
working closely with non-governmental organizations to deploy
our new medical application into a number of hospitals and
clinics. This application of our system is used to administer
the treatment of HIV/ AIDS and other high-risk diseases, record
patient progress and manage drug inventory.
Recently, Cell C (Proprietary) Limited, a mobile telephone
service provider in South Africa, chose our solution as the
transaction payment system for its planned roll-out of
approximately 52,000 public cellular pay phones that will
provide lower income consumers with telephone access at reduced
rates. We believe the implementation of this project could
provide us with up to 10,000 access points through which we will
be able to market and sell our financial products. This
deployment is part of a government initiative for the
empowerment of small businesses in rural and semi-urban areas of
South Africa.
Outside of South Africa, the Reserve Bank of Malawi has
implemented our solution as a national payment system. To date,
seven local financial institutions and BP p.l.c., a bulk fuel
supplier, are using our system for transaction switching and
settlement. We have deployed smaller, more limited versions of
our system in Burundi, Ghana, Latvia, Mozambique, Rwanda, and
Zimbabwe.
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 similar to an individual bank account
in the case of financial services or an individual record
management system in the case of medical services. All
transactions that take place through our system occur between
two smart cards at the point of service, or POS, with all of the
relevant information necessary to perform and record a
transaction held on the smart cards.
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The transfer of money or other information can take place
without any communication with a centralized computer since all
validation, creation of audit records, encryption, decryption
and authorization take place on, or are generated between, the
smart cards themselves. Importantly, the cards are protected
through the use of biometric fingerprint identification, which
is designed to ensure the security of funds and card holder
information. Transactions are generally settled by merchants and
other commercial participants in the system by sending the
transaction data to a mainframe computer on a batch basis.
Settlement 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.
We generate our revenues by charging transaction fees to
government agencies, employers, merchants and other financial
service providers, by providing financial services such as loans
and by selling hardware, software and related technology. In
South African rand, our revenues and operating income increased
by 32% and 39%, respectively, from fiscal 2003 to 2004, and by
29% and 34%, respectively, from fiscal 2002 to 2003. In South
African rand, our revenues and operating income increased 31%
and 62%, respectively, for the nine months ended March 31,
2005, as compared to the nine months ended March 31, 2004.
We believe this growth reflects the accelerating adoption of our
solution.
Market Opportunity
According to the United States Census Bureau, the world’s
population currently exceeds 6.4 billion people. Yet of
this total, it has been reported that over four billion people
earn less than the purchasing parity equivalent of two dollars
per day. In general, these people either have no bank account or
very limited access to banking services. This situation arises
when banking fees are too high relative to an individual’s
income, a bank account provides little meaningful benefit or
there is insufficient infrastructure to provide banking services
economically in the individual’s geographical market. We
refer to these people as the unbanked and the under-banked.
These individuals generally receive wages, welfare benefits or
loans in the form of cash and conduct commercial transactions,
including buying food and clothing, in cash.
The use of cash, however, presents significant problems. In the
case of recipients, they generally have no secure way of
protecting that 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, 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.
The use of cash or lack of access to a bank account can
dramatically increase the cost to, and in some cases completely
prevent, individuals from engaging in basic financial
transactions. These basic transactions include the routine
payment of insurance premiums, the transfer of money to
relatives and the use of credit. Without a bank account, it is
also difficult for an individual to obtain a loan on attractive
terms since that individual lacks a credit history and usually
cannot present a reliable means of repayment to the lender.
For governments, assistance programs face significant challenges
when dependent on the use of cash. In addition to the costs and
difficulties of using cash, corruption becomes an even more
challenging problem since there is no clear audit trail. In
fact, the absence of an electronic system for the distribution
of goods, including foodstuff or medicine, or welfare benefits
presents a significant obstacle to ensuring the fair and
reliable implementation of government policy or deployment of
foreign aid.
Traditional payment systems offered today by the major banking
institutions do not address the key requirements of the unbanked
and the under-banked populations. In addition to the high cost
of maintaining a bank account relative to a customer’s
income level, customers must generally have basic literacy,
administrative and record-keeping abilities and a minimum income
level. Additionally, banks operate through online transaction
settlement systems, which are often unavailable or costly to
implement in undeveloped areas. Finally, having a bank account
does not eliminate the need for significant quantities of cash
in many instances because customers must withdraw large sums at
one time to avoid incremental transaction fees.
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Our Solution
We believe that we are the first company to enable the
affordable delivery of financial products and services to the
world’s unbanked and under-banked people. Our approach
takes full advantage of moving processing away from a
centralized point to the computer chip embedded on a smart card.
A smart card reader or other POS device is used to enable
communication between smart cards in real-time during a
transaction and indirectly with our mainframe computer at a
later time. This architecture has significant implications in
terms of the products and services that we can deliver compared
to those offered by banking institutions or other card providers.
First, our system enables offline transactions, which is
essential in serving the unbanked and under-banked. Second, it
means that while offline, the smart card can engage in
sophisticated transaction processing, using data encryption and
biometric fingerprint protection to ensure security. In fact,
our smart cards can calculate the interest owed to the card
holder for having funds recorded onto our system without ever
coming online. Third, with all of the software and transaction
records on the smart card, the POS device itself requires far
fewer components, circuitry and memory, substantially reducing
costs. Fourth, each transaction is recorded on both
participating smart cards, copied in subsequent transactions to
additional smart cards, and ultimately reported to our mainframe
computer. This creates a full audit trail that significantly
reduces the potential for corruption, theft and fraud. Lastly,
instead of having to build the overall system to handle peak
loads, our system further reduces costs by smoothing the
transaction flow over time.
We believe that our solution delivers benefits to each of the
users of our system, including:
Individuals. There is no minimum income requirement for
individuals to use our smart card, making our solution
universally accessible. It is also inexpensive since the overall
cost of the system is much less than widely available solutions,
including cash, bank accounts and bank cards that require online
access. Our solution additionally has the advantage of working
everywhere, including remote areas where many unbanked and
under-banked people live. Even more importantly, our solution is
secure and smart cards are replaceable. This means that
individuals do not have to fear that their money will be stolen
or that they will be charged for fraudulent transactions. Since
the smart card performs all of the required processing and
contains all of the different service features, the smart card
can be tailored to meet the needs of the individual. Card
holders can also receive interest on their card balances, a
benefit not available to them when transacting solely in cash.
We believe our solution has the potential to enhance
significantly the living standards of the unbanked and
under-banked by reducing transaction costs and providing them
with new and additional financial products and services.
Merchants and Financial Service Providers. Merchants
derive several different benefits from our system. Our system
decreases the amount of cash they must hold, improving security
and reducing expenses. In addition, it provides a record of
transactions that is useful for administrative purposes. For
instance, by providing financial services through our POS
devices, merchants benefit from new income streams at no
additional incremental cost. For formal financial service
providers, the use of smart cards provides opportunities to
directly sell products and services to a market that was
previously difficult to reach. For instance, insurance companies
can offer their products with the premium deducted directly from
the individual’s smart card. In the case of lending,
administrative costs are decreased along with the expense of
holding cash. Again, the collection of payments can occur
directly from the smart card, reducing credit risk and helping
to establish credit history.
Employers. Our system enables employers to eliminate cash
from the wage payment process. This reduces expenses by avoiding
cash handling and management, the need to insure or transport
that cash and the bank transaction fees associated with
obtaining cash in the first place. The process of paying
employees using cash is also time consuming, taking up to half a
day per pay period in some instances. The use of our system
eliminates this process and thereby increases productivity. In
addition, because cash payments are distributed in packets to
employees, disputes can arise as to the amount of cash in the
packet. Our system also eliminates this problem since the amount
reflected on the card holders’ accounts are recorded on the
back-end system and then distributed on the smart cards.
Finally, employers frequently provide
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additional services to their employees out of necessity,
particularly loans. Our system enables other service providers
to deliver these products.
Government Agencies. A fundamental policy goal for almost
any government is to enhance the welfare of the poorest citizens
in the country. Yet the use of cash is a poor method for
delivering social welfare grants since it is difficult to track,
and the recipients endure a range of expenses and dangers that
reduce their options. By using our system, government agencies
enjoy reduced costs in the delivery of benefits to recipients by
eliminating the use of cash while increasing the options
available to the recipient. This use of our system intrinsically
increases the welfare that government agencies can provide from
the same amount of taxes collected. Our system also has the
potential to increase the amount of taxes collected by bringing
informal businesses into the formal economy. The presence of a
full audit trail also means that government agencies can combat
corruption. Moreover, the use of smart cards for the delivery of
additional services, including insurance products, means that
regulatory bodies can expand their oversight of transactions for
individuals who are frequently least able to protect themselves.
In regard to medical benefits, our system provides comprehensive
inventory management and has the potential to improve the
treatment of patients significantly. For instance, we have
deployed an artificial intelligence program on our smart cards
used for the treatment of HIV/ AIDS in South Africa that can be
used to adjust a patient’s prescription based on data
entered by a trained medical worker through the POS device.
Our Business Strengths
We believe our business strengths include:
Technology Leadership. We believe we are the first
company to develop, implement and operate an affordable,
flexible and secure electronic payment system for the unbanked
and under-banked that works offline. Of equal importance, our
smart cards have a broad range of additional functionality
through the use of “wallets” that can be turned on as
needed or as services become available. We can deliver these
services to the population at a fraction of the cost of
traditional systems. Our ability to implement an HIV/ AIDS
system on the same smart card as financial services demonstrates
the flexibility of our approach. In addition, we have validated
the security of our smart cards along with our overall system,
forming the foundation for a trusted solution. Independent third
parties have reviewed and published our security protocols and
we have refined our system in a way to provide system integrity
over the life of the smart cards. From our inception in 1989 to
date, we have not suffered any security breaches or losses of
transactions or funds on our system.
Proven Solution. Our system is proven and has been
increasingly used. Today over 3.3 million clients in South
Africa receive monthly welfare or pension payments through our
system under contracts with five provinces. Historically,
welfare and pension recipients would only download cash from
smart cards, but these recipients increasingly choose to use
their smart cards at merchant locations, which generates
additional revenue for us. During the nine months ended
March 31, 2005, the rate of client purchases using our
smart cards rather than merely downloading the value for cash
grew at a compounded monthly growth rate of 71% while the value
of those transactions grew at a compounded monthly growth rate
of 60%. As of March 31, 2005, we had 2,406 POS devices
installed at 1,441 participating retail merchants. For the nine
months ended March 31, 2005, the total value of
transactions processed through our UEPS merchant network was
approximately $59.7 million. During the nine months
following our implementation of these retail merchant POS
devices in July 2004, the percentage of transactions which
consisted of merchant purchases, as opposed to cash downloading
only, increased from approximately 0% to approximately 23% of
the total number of processed transactions.
Versatile Application. Once an individual begins using
our smart card, we become a logical provider of a broad range of
additional products and services. For instance, a card holder
using our system for the administration of medical treatment can
also use the same smart card for receiving welfare payments or
wages as well as making purchases. Because use of each smart
card is secured biometrically, the smart card can also be used
for identification and voting. These additional uses mean that
once we have enrolled
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and delivered a smart card to an individual, our revenue
potential increases significantly beyond the initial service for
which that individual has signed up.
Broad Appeal that Drives Opportunities. Because our
system provides economic benefits to all participants, we
believe there are strong incentives for government agencies and
employers to adopt our system in many developing countries. Our
solution is also appealing because a single deployment enables
the delivery of a broad array of new services to those who are
potentially most in need of them, often at a lower cost than
alternative distribution methods.
Increasing Returns to Scale. The initial establishment of
our system in a province or country requires upfront
expenditures for computers, distribution infrastructure and card
holder registration. Once in place, though, the cost to us of
supplying additional products to users is low. For instance, if
a customer receives welfare payments on one of our smart cards
and then chooses to purchase insurance through our system, there
is almost no additional expense for us to deduct the insurance
premium regularly. As a result, the operating margin for that
customer increases significantly, offset only by any marketing
or administrative costs associated with that product.
Our Strategy
We intend to provide the leading system for the world’s
estimated four billion unbanked and under-banked people to
engage in electronic transactions globally. To achieve this
goal, we intend to pursue the following strategies:
Disciplined Approach to New Markets. We carefully
evaluate new opportunities in order to deploy our business
development resources effectively. We believe there are
significant opportunities for our system in developing
economies, such as Brazil, India, Mexico and Indonesia, where
the unbanked and under-banked comprise a majority of the
population. Where we believe it makes sense, we will use
partnerships or make acquisitions to accelerate our entry into
new markets.
Unlock Target Markets with a Key Product. The first step
in establishing our system within a new province or country is
to establish a broad base of smart card users around a single
application. One of our preferred routes is to secure contracts
to implement payment systems for government programs having
large numbers of potential card holders. We believe another
effective route will be the delivery of medical management
applications, such as for HIV/ AIDS. However, we are not
dependent on government agencies to establish an initial base.
Employers are widely examining our system to address their wage
payment challenges and we are currently pursuing opportunities
to deliver this solution.
Expand Our Products Within the Markets We Serve. With the
establishment of a strong base of card holders and related
infrastructure, we can then move to providing additional
products and services. As part of broadening our card
holders’ options, we will also sell our smart card readers
and POS devices to merchants to enable them to enter into
transactions. Additionally, we will work to establish
relationships with post offices, banks and other financial
service providers with the goal of making our system ubiquitous
in the markets we serve.
Provide Products and Services Ourselves Where the Profit
Potential is Compelling. Our system can dramatically reduce
transaction costs and improve data collection for a broad set of
products and services. We intend to offer those products and
services ourselves where the profit potential is significant.
For instance, we engage in lending in South Africa. We are able
to offer this service at a lower interest rate than competitors
due to our ability to deduct interest and principal directly
from a borrower’s smart card and our knowledge of that
individual’s payment history.
Establish Partnerships or Make Acquisitions When
Appropriate. As part of our disciplined approach to growing
our presence globally, we will evaluate and enter into
partnerships where we can draw on local knowledge and
infrastructure to drive the rapid adoption of our system. We
believe that this will enable us to focus on our core strength
in technology as well as product development and delivery. In
some instances, we will make acquisitions where we believe that
our approach will enable us to gain customers and realize
operational benefits rapidly from the deployment of our more
efficient solution.
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Concurrent Private Placement
Concurrently with this offering, certain selling shareholders
are selling in a private placement an aggregate of
$75.0 million of our shares at the public offering price to
investment entities affiliated with General Atlantic LLC, or
General Atlantic. The closing of the private placement is
expected to occur concurrently with the closing of this
offering. Under the General Atlantic stock purchase agreement,
we will add one seat to our board of directors and cause to be
elected to the board one person designated by General Atlantic.
See “Certain Relationships and Related Party
Transactions — General Atlantic Private
Placement.”
Corporate Information
We were incorporated in Florida in May 1997. In June 2004, we
acquired substantially all of the business and assets of
Aplitec, a South African company listed on the JSE Securities
Exchange South Africa, and the former shareholders of Aplitec
obtained a majority voting interest in us. The Aplitec
transaction is discussed in more detail under “Corporate
History.”
Our principal executive offices are located at President Place,
4th Floor, Cnr. Jan Smuts Avenue and Bolton Road, Rosebank,
Johannesburg, South Africa. Our phone number is (2711) 343-2000.
Our website address is www.net1ueps.com. The information on our
website, including any information accessible by a hyperlink or
on another website accessible through our website, does not
constitute part of this prospectus.
Our trademarks include NET1, FTS and UEPS. All other trademarks,
trade names and service marks appearing in this prospectus are
the property of their respective owners.
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Summary of the Offering
| Common stock offered by the selling shareholders | 9,850,000 shares | |
| Common stock outstanding prior to this offering, as of March 31, 2005 | 27,175,135 shares | |
| Special convertible preferred stock outstanding prior to this offering, as of March 31, 2005 | 27,525,259 shares | |
| Special convertible preferred stock converted into common stock and sold in this offering | 9,186,163 shares | |
| Common stock outstanding after this offering and concurrent private placement | 36,606,493 shares | |
| Special convertible preferred stock outstanding after this offering and concurrent private placement | 18,339,096 shares | |
| Total shares outstanding after this offering and concurrent private placement | 54,945,589 | |
| Use of proceeds | Certain of the selling shareholders may exercise options to purchase the shares of common stock that they are selling in this offering. We will not receive any proceeds from this offering other than proceeds we receive from the exercise of any of these options and from any shares sold pursuant to the exercise by the underwriters of the over-allotment option. We will use any proceeds we receive for working capital and general corporate purposes. | |
| Purposes of this offering | To achieve a broader shareholder base, to increase visibility in the U.S. marketplace and to provide increased liquidity for our shareholders. The offering is also intended to provide our existing South African shareholders who desire to sell their shares with the opportunity to sell their shares in a broadly marketed underwriting. | |
| Nasdaq National Market symbol | UEPS | |
The number of shares of our common stock referred to above as
outstanding after the offering and concurrent private placement
and, unless otherwise indicated, the other information in the
prospectus excludes:
| • | 27,525,259 shares of common stock issuable upon conversion of an equal number of outstanding shares of our special convertible preferred stock; and | |
| • | 2,906,980 shares of common stock issuable upon the exercise of options and other stock-based awards outstanding as of March 31, 2005, granted under our 2004 Stock Incentive Plan at a weighted average exercise price of $1.50 per share. |
Unless otherwise indicated, the information in this prospectus:
| • | reflects a one-for-six reverse stock split of our common stock and special convertible preferred stock which became effective on June 13, 2005. The effect of this reverse stock split was to decrease the number of issued and outstanding shares by a factor of six and correspondingly increase the earnings per share by a factor of six; and | |
| • | assumes no exercise of the underwriters’ over-allotment option. |
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The South African Invitation to Participate
An invitation to participate was distributed in South Africa on
June 17, 2005, which invited holders of our linked units to
offer for sale in this offering their shares of our common stock
issuable upon conversion of the special convertible preferred
stock these holders are entitled to receive upon giving of an
irrevocable exercise form to the trustee of the South African
trust. As described under “Corporate History— The
Aplitec Transaction,” the South African trustee holds for
the benefit of the linked unit holders the New Aplitec B class
loan accounts and B class preference shares which are part of
the linked units. Our invitation to participate was sent only to
holders of linked units who have mailing addresses in South
Africa as reflected on the records of the South African trustee.
We did not recommend that any holders of linked units
participate in this offering, and we are not purchasing any of
the shares of common stock offered in this offering.
The selling shareholders in this offering include holders of
linked units who accepted the invitation to participate and gave
the conversion notice to the trustee of the South African trust.
Each holder of linked units who has elected to participate in
this offering has deposited with the trustee of the South
African trust an irrevocable exercise form instructing the
trustee of the South African trust to convert up to a specified
number of special convertible preferred shares, effective only
upon the closing of the offering.
The successful completion of these transactions by us, the
selling shareholders and the trustee is a condition precedent to
the underwriters’ obligations to purchase any shares in the
offering.
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Summary Consolidated Financial Data
The following table sets forth our summary consolidated balance
sheet data as of March 31, 2005 and our consolidated
statements of operations data for the years ended June 30,
2004, 2003 and 2002, and for the nine months ended
March 31, 2005 and 2004. You should read the following
summary consolidated financial data together with “Selected
Consolidated Financial Data,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” the consolidated financial statements and
notes thereto and other financial information included elsewhere
in this prospectus. In connection with U.S. generally accepted
accounting principles, we accounted for the Aplitec transaction
as a reverse acquisition, which requires that the company whose
shareholders retain a majority voting interest in a combined
business be treated as the acquiror for accounting purposes.
Therefore, for all periods after June 7, 2004, our
consolidated financial statements and management’s
discussion and analysis reflect the operations of Net 1 and its
consolidated subsidiaries and, for prior periods, reflect the
operations of Aplitec and its consolidated subsidiaries, but not
Net 1. The summary consolidated statements of operations data
for the years ended June 30, 2004, 2003 and 2002, have been
derived from our audited consolidated financial statements which
are included elsewhere in this prospectus. Our audited
consolidated financial statements are prepared in
U.S. dollars and in accordance with accounting principles
generally accepted in the United States. The summary
consolidated balance sheet data as of March 31, 2005 and
the summary consolidated statements of operations data for the
nine months ended March 31, 2005 and 2004 are derived from
unaudited interim financial information and have been prepared
in accordance with accounting principles generally accepted in
the United States. Results for interim periods are not
necessarily indicative of the results expected for the entire
year. You should also read the following summary of consolidated
financial data in conjunction with the exchange rate information
contained in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Currency Exchange Rate Information.”
| Nine Months | |||||||||||||||||||||
| Ended | |||||||||||||||||||||
| March 31, | Year Ended June 30, | ||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
|
Consolidated Statements of Operations Data:
|
|||||||||||||||||||||
|
Revenue
|
$ | 134,885 | $ | 91,463 | $ | 131,098 | $ | 74,924 | $ | 51,793 | |||||||||||
|
Cost of goods sold, IT processing, servicing and support
|
41,207 | 28,206 | 39,134 | 25,935 | 14,170 | ||||||||||||||||
|
General and administrative charges
|
33,804 | 25,625 | 39,677 | 26,399 | 21,637 | ||||||||||||||||
|
Depreciation and amortization
|
4,897 | 4,110 | 5,676 | 3,323 | 3,128 | ||||||||||||||||
|
Reorganization costs
|
— | 3,537 | 11,133 | — | — | ||||||||||||||||
|
Operating income
|
54,977 | 29,985 | 35,478 | 19,267 | 12,858 | ||||||||||||||||
|
Interest, net
|
1,497 | 2,464 | 3,640 | 2,600 | 1,381 | ||||||||||||||||
|
Income before taxes
|
56,474 | 32,449 | 39,118 | 21,867 | 14,239 | ||||||||||||||||
|
Income tax expense
|
22,534 | 13,896 | 25,927 | 9,473 | 5,554 | ||||||||||||||||
|
Income from continuing operations
|
34,420 | 18,553 | 13,278 | 11,942 | 8,518 | ||||||||||||||||
|
Net income attributable to shareholders(1)
|
34,420 | 18,553 | 13,278 | 13,117 | 8,518 | ||||||||||||||||
|
Income from continuing operations per share:
|
|||||||||||||||||||||
|
Basic(2)
|
$ | 0.63 | $ | 0.58 | $ | 0.40 | $ | 0.37 | $ | 0.27 | |||||||||||
|
Diluted(2)
|
$ | 0.62 | $ | 0.58 | $ | 0.38 | $ | 0.37 | $ | 0.27 | |||||||||||
|
Cash dividend per share(3)
|
$ | — | $ | — | $ | 1.14 | $ | 0.12 | $ | 0.06 | |||||||||||
| (1) | Net income attributable to shareholders for 2003 includes an extraordinary item of $0.9 million and the results of a change in accounting policy of $0.3 million as a result of the adoption and application of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. |
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| (2) | The basic and diluted earnings per share have been restated as a result of the transaction described in notes 1, 10 and 11 to our consolidated financial statements and the one-for-six reverse stock split. |
| (3) | The cash dividend per share has been restated as a result of the transaction described in notes 1, 10 and 11 to our consolidated financial statements and the one-for-six reverse stock split. The cash dividend per share for 2004 was calculated based on 32,161,190 Aplitec shares and represents the dividend paid to shareholders of Aplitec as a result of the transaction. |
| As of March 31, 2005 | ||||
| (In thousands) | ||||
|
Consolidated Balance Sheet Data:
|
||||
|
Cash and cash equivalents
|
$ | 92,712 | ||
|
Total current assets
|
141,960 | |||
|
Total assets
|
175,318 | |||
|
Total current liabilities
|
32,650 | |||
|
Total debt
|
— | |||
|
Total shareholders’ equity
|
128,680 | |||
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RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should consider carefully the following risk factors, as
well as the other information in this prospectus, before
deciding to invest in our shares of common stock. If any of the
following risks actually occurs, our business, financial
condition and results of operations would suffer. If this
happens, the trading price of our common stock would likely
decline and you might lose all or part of your investment in our
common stock.
Risks Relating to Our Business
| The provincial governments of South Africa are our largest customers, and any non-renewal or termination of our government social welfare contracts would materially and adversely affect our business and revenues, results of operations and cash flows. |
A substantial portion of our current business involves the
distribution of social welfare grants on behalf of five of the
nine provincial governments of South Africa. For the foreseeable
future, our revenues, results of operations and cash flows will
depend on this concentrated group of customers. During the year
ended June 30, 2004 and the nine months ended
March 31, 2005, we derived approximately 82% and 77%,
respectively, of our revenues from our government social welfare
contracts. In general, these contracts provide for terms of
three years and are extendable at the option of the provincial
governments for an additional two year period. Our contracts
with the governments of the Eastern Cape, KwaZulu-Natal and
North West provinces will expire in 2005, unless renewed by
consent of both parties. Our contracts with the governments of
the Limpopo and Northern Cape provinces currently are scheduled
to expire in November and December 2006, respectively. In
addition, any of these contracts may be terminated at any time
by the respective governments in the event of a material breach.
The early termination, or our failure to obtain extensions, of
any of these contracts would have a material adverse effect on
our business and revenues, results of operations and cash flows.
Moreover, because we incur a significant portion of the expenses
associated with these contracts during the initial
implementation phase, we have historically enjoyed higher profit
margins on these contracts after the completion of the
implementation period, which averages approximately
18 months. Therefore, the early termination of, or our
failure to extend, any of these contracts would also adversely
affect our margins. We cannot assure you that we will be
successful in renewing any of these contracts upon expiration of
the respective contract periods or that they will not otherwise
be terminated.
In addition, there are legislative proposals and other
initiatives underway in South Africa that could materially
affect the way we do our business. The South African government
passed legislation during 2004 for the creation of the South
African Social Security Agency, or SASSA. The primary purpose of
SASSA is to consolidate at the central government level the
administration of social welfare grants, which is currently
performed primarily at the provincial level. SASSA commenced
operations on April 1, 2005. SASSA may appoint a single
contractor to perform the distribution of social welfare grants
on a national basis, following the expiration of the various
contracts entered into by the individual provinces. If SASSA
does not appoint us as a national social welfare grant
contractor, then we may not be able to renew some or all of our
social welfare distribution contracts when they expire, which
could have a material adverse effect on our financial condition,
cash flows and results of operations.
| We may not maintain our current level of profitability or rates of growth. |
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
| • | continue to enroll new smart card users in South Africa; | |
| • | hire and train personnel capable of marketing, installing and integrating our solution, supporting customers and managing operations; | |
| • | continue to expand the range of applications that use our technology and to market these applications successfully; |
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| • | successfully identify and enter other markets for our products; and | |
| • | manage the costs of our business, including the costs associated with maintaining and developing our technology and expanding our operations internationally. |
If we are not able to achieve any or all of the above, our
profitability and/or growth rate will likely decline.
| Changes in current 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 onto smart cards in South
Africa and the transaction fees resulting from use of these
smart cards. Because social welfare eligibility and grant
amounts are regulated by the 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 recipients are no longer
eligible. If any of these changes were to occur, the number of
smart cards in use could decrease, the amount of money on any
particular smart card could decrease or the amount of
transactions effected on any particular smart card may decrease,
all of which could result in a reduction of our revenues and
cash flows.
| We may have difficulty managing our growth which could limit our ability to increase sales and cash flow. |
We have recently been experiencing significant growth, both in
the scope of our operations and size of our organization. This
growth is placing significant demands on our management, as well
as on our operational resources. In order to achieve our
business objectives, however, we anticipate that we will need
this growth to continue. Continued growth would increase the
challenges involved in:
| • | implementing appropriate operational and financial systems; | |
| • | expanding our sales and marketing infrastructure and capabilities; | |
| • | providing adequate training and supervision to maintain high quality standards; and | |
| • | preserving our culture and values. |
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.
| There are risks relating to operating in South Africa that could adversely affect our business, operating results, cash flows and financial condition. |
Our primary operations are located in South Africa and we
currently generate substantially all of our revenues from our
operations in South Africa. As a result, we are subject to any
political, economic and regulatory uncertainties in South Africa.
The changing political and social environment. South
Africa faces certain social, political and economic challenges,
which may adversely affect our business, operating results, cash
flows and financial condition. The country is experiencing high
levels of unemployment and there are significant differences in
the level of economic and social development among its people,
with large parts of the population, particularly in the rural
areas, having limited access to education, healthcare, housing
and other basic services. Furthermore, South Africa faces
challenges in building adequate infrastructure. These problems,
together with a shortage of skilled labor, may in the future
have an adverse impact on productivity.
Inflation and interest rates. The economy of South Africa
is currently characterized by low inflation and interest rates.
As of May 2005, the inflation rate was approximately 3.9%. The
Reserve Bank’s
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base lending rate is currently approximately 7.0% per annum.
However, the economy of South Africa in the past has been, and
in the future may be characterized by high rates of inflation
and high interest rates. High rates of inflation could increase
our South African-based costs and decrease our operating
margins. High interest rates could adversely affect our ability
to obtain cost-effective debt financing in South Africa.
Regulatory uncertainty regarding black economic
empowerment. The South African government, over the past
five years, has been developing an economic indigenization
program referred to as black economic empowerment, or BEE. BEE
is regulated pursuant to an Act of the South African Parliament,
namely the Broad-Based Black Economic Empowerment Act 53 of
2003, or the BBBEE Act. The BBBEE Act recognizes two distinct
mechanisms for the achievement of BEE objectives: (1) codes
of good practice issued under the Act and (2) sectoral
transformation charters developed by specific industry sectors
and which may be recognized by the Minister of Trade and
Industry if they have been developed by the major stakeholders
in the relevant industry and advance the objectives of the BBBEE
Act. Draft codes of good practice have recently been published
for public comment, but none of them is, as yet, enforceable.
The information and communication technology sector, or ICT
sector, and the financial services sector have both developed
sectoral transformation charters, but they have not yet been
published in the Government Gazette and, consequently, they do
not currently enjoy any formal status. The ICT sector has
attempted to ensure as great a degree of comparability between
its sectoral transformation charter and the draft codes of good
practice, thereby assuring the probable publication of that
charter in the Government Gazette by the Minister of Trade and
Industry. By contrast, there are no indications that the
financial services sector has made any attempt to achieve
significant alignment between its transformation charter and the
draft codes of good practice. Once the codes of good practice
become law, all businesses in South Africa will be subject to
those codes unless they form part of a sector in respect of
which the Minister of Trade and Industry has published an
industry charter in the Government Gazette as a code of good
practice. The current uncertainty as to the final form of the
regulatory regime poses a risk, but there are indications that
the regime will be settled in the next 12 months. We are
likely to be subject to the ICT sector’s charter if this
document is published in the Government Gazette as a code of
good practice. This charter applies, among others, to companies
that manufacture equipment for, or provide services relating to,
the electronic capturing, transmission and display of data and
information. Compliance with the charter is not enforced through
civil or criminal sanction, but only through its effect on the
ability to secure contracts in the public and private sectors.
One of the components of BEE is that a certain percentage of
ownership by black South Africans or historically disadvantaged
South Africans of our South African business should be achieved
over a period of time which is generally thought to be ten to
15 years. Although BEE is not expropriatory in nature,
there may be a dilutive effect to current shareholders in the
South African business and there may be a cost associated with
increasing the level of black shareholders or historically
disadvantaged South Africans, both of which factors may
represent a risk. However, given that non-BEE compliance may
place in jeopardy existing and future South African public and
private sector contracts, the loss of which could cause a loss
of revenue, the attendant risk associated with BEE
non-compliance is material.
Exchange control regulation. South Africa’s exchange
control regulations restrict the export of capital from South
Africa, the Republic of Namibia and the Kingdoms of Lesotho and
Swaziland, known collectively as the Common Monetary Area.
Transactions between South African residents, including
companies, and non-residents of the Common Monetary Area are
subject to exchange controls enforced by the South African
Reserve Bank. In October 2004, the South African exchange
control regulations were liberalized by the abolishment of
exchange control limits on new investments outside of South
Africa by South African companies. However, according to the
circular giving notice of this liberalization, the South African
Reserve Bank retains an oversight function, the exact nature of
which is not entirely clear from the circular. According to the
circular, South African companies investing outside of South
Africa must now apply to the South African Reserve Bank only for
monitoring purposes and for the approval of the South African
Reserve Bank pursuant to existing foreign direct investment
criteria, including demonstrated benefit to South Africa. The
South African Reserve Bank reserves the right to stagger capital
outflows relating to very large investments outside of South
Africa by South African companies, so as to manage any potential
impact on the foreign exchange market. Also, these
liberalization measures permit South
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African companies to retain, outside of South Africa, dividends
received in relation to shares held by them in non-South African
companies.
South African exchange controls are expected to continue for the
foreseeable future. The South African government, however, has
committed itself to gradually relaxing exchange controls, and
significant relaxations have occurred in recent years.
Nevertheless, under the current exchange control regulations,
our management may be limited in its ability to consider
strategic options and our shareholders may not be able to
realize the premium over the current trading price of our shares.
Although Net 1 is a U.S. corporation and is not itself
subject to these regulations, the ability of New Aplitec to
raise and deploy capital outside the Common Monetary Area is
restricted. As of March 31, 2005, approximately 87% of our
cash and cash equivalents were held by New Aplitec and its
subsidiaries. During the year ended June 30, 2004 and the
nine months ended March 31, 2005, substantially all of our
revenues were generated by New Aplitec and its subsidiaries. In
particular, New Aplitec will generally not be permitted to
export capital from South Africa or to hold foreign currency
without the approval of the South African Reserve Bank, unless
such export of capital or foreign currency holding is permitted
by the October 2004 liberalization measures. This
restriction may affect New Aplitec’s ability to pay
dividends to Net 1. Moreover, although the requirement that the
South African Reserve Bank approve investments by South African
companies outside of South Africa has been relaxed, this
requirement could restrict our future international expansion.
South African Reserve Bank approval is required for New Aplitec
to receive loans from and repay loans to non-residents of the
Common Monetary Area. In addition, New Aplitec may not use
income earned in South Africa to repay or service foreign debts,
without the South African Reserve Bank approval. Repayment of
principal and interest on such loans will usually be approved at
the time of the granting of such loans, where the payment is
limited to the amount borrowed and a market related rate of
interest. New Aplitec will also need South African Reserve Bank
approval to raise capital involving a currency other than South
African rand, which approval may be provided subject to
conditions. Thus, unless we can obtain funding at the Net 1
level, these restrictions could prevent us from obtaining
adequate funding on acceptable terms for acquisitions and other
business opportunities outside South Africa.
Trade unions and labor laws. Most of South Africa’s
major industries are unionized, and the majority of employees
belong to trade unions. In the past, 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. We
currently have approximately 109 unionized employees which
represents approximately 6% of our workforce. Although in recent
years we have not experienced any labor disruptions, such labor
disruptions may occur in the future. In addition, the cost of
complying with labor laws may adversely affect our operations.
Regional instability. Historically, there has been
regional, political, and economic instability in the countries
surrounding South Africa. Such political or economic instability
in neighboring countries could affect the social, political and
economic conditions in South Africa, for example, as a result of
immigration, and this could have a negative impact on our
ability to manage our operations in the country.
HIV/ AIDS. HIV/ AIDS and tuberculosis, which is
exacerbated in the presence of HIV/ AIDS, are major healthcare
challenges in South Africa and other sub-Saharan countries. HIV
infection among women in antenatal clinics throughout South
Africa has risen from 1% in 1990 to nearly 25% in 2000.
According to the most recent research published by the Medical
Research Council of South Africa, over five million South
Africans were HIV positive in 2004, resulting in a total
population prevalence rate of approximately 11%. Under South
African law, we are generally prohibited from testing employees
to determine their HIV status. Due to the high prevalence of
HIV/ AIDS in South Africa, we may incur costs relating to the
loss of personnel and the related loss of productivity as well
as the costs relating to recruiting and training of new
personnel. We are not able to quantify these costs accurately
and cannot assure you that the costs we will incur in connection
with this epidemic will not have a material adverse effect on us
and our financial condition.
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| There are risks relating to other countries in which we intend to operate that could adversely affect our future business, operating results, cash flows and financial condition. |
In the future, we intend to expand operations into countries and
regions, including African countries outside South Africa, South
America, Southeast Asia and Central Europe, that are subject to
significantly differing political, economic and market
conditions. Specific country and regional risks that may have a
material impact on our business, operating results, cash flows
and financial condition include:
| • | political and economic instability; | |
| • | loss due to civil strife, acts of war, guerrilla activities and insurrection; | |
| • | competition from existing market participants that may have a longer history in or greater familiarity with the foreign markets we enter; | |
| • | government interventions and protectionism; | |
| • | potential adverse changes in laws and regulatory practices, including import and export license requirements, tariffs, legal structures and tax laws; | |
| • | cancellation of contractual rights; | |
| • | trade barriers; | |
| • | difficulties in staffing and managing operations; | |
| • | import and export restrictions; | |
| • | adverse tax consequences; | |
| • | the lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property and contractual rights; | |
| • | security and safety of employees; | |
| • | restrictions on the right to convert or repatriate currency or export assets; | |
| • | greater risk of uncollectible accounts and longer collection cycles; | |
| • | currency fluctuations; | |
| • | indigenization and empowerment programs; | |
| • | logistical and communications challenges; | |
| • | changes in labor conditions; | |
| • | discrimination against U.S. companies; and | |
| • | exposure to liability under U.S. securities laws, including the Foreign Corrupt Practices Act. |
Many of these countries and regions are in various stages of
developing institutions and 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
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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.
| Volatility in the South African Rand to U.S. dollar exchange rate may adversely affect our reported operating results. |
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. Because our sales are
primarily denominated in ZAR, a decline in the value of the ZAR
against the U.S. dollar may have a significant adverse
effect on our reported results of operations. During the two
years ended June 30, 2002, the ZAR steadily depreciated
against the U.S. dollar, moving at an average rate per
U.S. dollar from ZAR 6.35 in 2000 to ZAR 7.61 in 2001 to
ZAR 10.15 in 2002. However, since June 2002, the ZAR has
appreciated against the U.S. dollar, mainly due to a
general depreciation of the U.S. dollar and the
strengthening of the South African economy and commodity and
precious metals prices, reaching ZAR 6.67 on July 14,
2005. Over this period, the exchange rate has been volatile and
we expect this volatility to continue in the foreseeable future.
Trends in sales and profits may experience significant
fluctuations as the rate of exchange between the ZAR and the
U.S. dollar fluctuates. We cannot assure you what effect,
if any, changes in the exchange rate of the ZAR against the
U.S. dollar will have on our results of operations and
financial condition.
We do not currently 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.
| The loss of the services of Dr. Belamant or any of our other executive officers would adversely affect our business. |
Our future financial and operational performance depends, in
large part, on the continued contributions of our Chief
Executive Officer and Chairman, Dr. Serge Belamant, as well
as Mr. Herman Kotze, our Chief Financial Officer,
Ms. Brenda Stewart, our Senior Vice President-Marketing and
Sales, and Mr. Nitin Soma, our Senior Vice
President-Information Technology. Many of our key
responsibilities are performed by these four individuals, and
the loss of the services of any of them could disrupt our
development efforts or business relationships and our ability to
continue to innovate and to meet customers’ needs, which
could have a material adverse effect on our business and
financial performance. We do not have employment agreements with
our executive officers, any of whom may terminate their
employment at any time, nor do we maintain any “key
person” life insurance policies.
| We face a highly competitive employment market and may not be successful in attracting and retaining a sufficient number of skilled employees, particularly in the technical and sales areas and senior management. |
Our future success depends on our ability to continue to develop
new products that use our UEPS technology 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
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depleted over time because of natural attrition. Furthermore,
social and economic factors in South Africa have led, and
continue to lead, numerous qualified individuals to leave the
country, thus depleting the availability of qualified personnel
in South Africa. In addition, our multi-country strategy will
also require us to hire and retain highly qualified managerial
personnel in each of these markets. If we cannot recruit and
retain people with the appropriate capabilities and experience
and effectively integrate these people into our business, it
could negatively affect our product development and marketing
activities.
| We pre-fund the payment of social welfare grants on behalf of our South African government customers and any payment defaults by these customers would adversely affect our operations. |
We use our internal cash resources and facilities to fund the
payment of social welfare grants under our contracts with the
KwaZulu-Natal and Eastern Cape provincial governments. We
recover these funds from the KwaZulu-Natal provincial government
on a seven-day cyclical basis and from the Eastern Cape
provincial government on a 14-day cyclical basis. Therefore,
these pre-funding obligations expose us to the risk of default
by the applicable provincial government. Although no provincial
government has ever defaulted on a repayment of funds at the end
of the payment cycle, we cannot guarantee that such a default
will not occur in the future. Any such default could have a
material adverse effect on us, our financial position and
results of operations.
| Our ability to operate our wage payment and insurance products businesses may be limited by existing South African banking and financial services laws and regulations. |
The South African retail banking market is highly regulated, but
the South African government has identified the need to service
the unbanked market through the liberalization of the regulatory
environment in order for retailers and non-banking service
providers to innovate products and delivery channels for the
unbanked market. However, under current law and regulations, a
portion of our South African wage payment business activities in
the unbanked market requires us to be registered as a bank in
South Africa. We are not currently so registered and therefore
are not entitled to perform these activities in South Africa and
may face prosecution if we do. We are in the process of
appointing expert advisers to assist us in making application
for the appropriate banking license. While we believe that we
will be able to obtain this license, there is a possibility that
our application may not be successful or that a grant of the
license may be delayed. In addition, the South African Financial
Advisory and Intermediary Services Act, 2002, requires persons
who give advice regarding the purchase of financial products or
who act as intermediaries between financial product suppliers
and consumers in South Africa to register as financial service
providers. We have applied for a license under this Act in order
to continue to provide advice and intermediary services in
respect of the financial products on which we advise and the
payment processing services we provide in South Africa on behalf
of insurers and other financial product suppliers. While the
license application is pending, we are entitled to continue this
part of our business in South Africa. If we fail to obtain this
license, we may be stopped from continuing this part of our
business in South Africa.
| We may face competition from the incumbent retail banks in South Africa in the unbanked market segment. |
The incumbent South African retail banks recently announced a
joint initiative to create a common banking product to offer to
the significant portion of South Africa’s population that
does not have access to traditional banking services, or the
unbanked. This bank account, generally referred to as the
“Mzansi” account, was introduced in October 2004 and
offers limited transactional capabilities at reduced charges,
when compared to the accounts traditionally offered by these
banks. We believe that currently there are approximately one
million Mzansi account holders. The social welfare beneficiaries
who are currently paid through our smart card system may elect
to use these accounts to receive their grants. A decision by a
substantial number of these beneficiaries to elect to use these
accounts rather than our smart card system may have a material
adverse effect on our financial condition, cash flows and
results of operations.
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| We may face increased competition as our sales and product offerings increase. |
In addition to competition that we face from the use of cash,
checks, credit and debit cards, existing payment systems and the
providers of financial services, we have identified a number of
other products currently being produced that use smart card
technology in connection with a funds transfer system and the
companies that promote them. These include EMV, a system that is
being promoted by Visa International Service Association,
MasterCard International and Europay International; Mondex
International Limited, a subsidiary of MasterCard; and Proton
World International N.V., a subsidiary of STMicroelectronics
Belgium N.V. In South Africa, and specifically in the payment of
social welfare grants, our competitors also include AllPay
Consolidated Investment Holdings (Pty) Ltd., which is
responsible for social welfare payments in the Free State,
Gauteng and Western Cape provinces and a small portion of the
Eastern Cape province, and Empilweni Payout Services, which is
responsible for payments in the Mpumalanga province. We also may
face competition from companies to which we have licensed our
technology, including Visa and BGS Smart Card Systems AG.
Moreover, as our product offerings increase and gain market
acceptance, banks in South Africa and other jurisdictions in
which we operate may seek governmental or other regulatory
intervention if they view us as infringing on their funds
transfer or other businesses.
| Patent competition may adversely affect our products or processes, and limited patent protection, a lack of proprietary protection and the potential to incur costly litigation could be harmful to our operations. |
Our products and technology have unique characteristics and
structures and, as a result, are subject to patent protection,
the extent of which varies from country to country. During the
life of a patent, a product is only subject to competition by
non-infringing products. However, aggressive patenting by our
competitors and potential patent piracy may threaten protected
products and processes and may result in an increased patent
infringement risk, especially in emerging economies such as
those where we currently operate. The expiration of a patent may
also result in increased competition in the market for the
previously patented products and processes. The patents for our
funds transfer system, or FTS, will expire, at the latest, in
Namibia in 2007; in South Africa, Botswana, Swaziland and Hong
Kong in 2009; and in the United States in 2011. In addition, our
European Union FTS patent has been challenged and revoked.
Consequently, we do not have any patent protection in the member
countries of the European Union. Additionally, we could have
difficulty asserting the Hong Kong patent as it is not
registered in our name and it could be difficult to record our
ownership of that patent. Further, BGS, the local system
operator in the Commonwealth of Independent States has stopped
paying licensing fees to us on the grounds that the revocation
of the European FTS patent relieves it from the obligation to
pay such fees, although we believe that the licensing fees
relate to BGS’s use of our UEPS technology rather than the
FTS patent. There is a risk that a similar refusal to pay our
licensing fees can occur elsewhere. Moreover, although we have
certain patent rights in the United States, these are not
expected to have significant utility in our business given that
our management does not expect the U.S. market to become a
material part of our business in the future. Each of these
factors could have a material adverse effect on our business,
operating results, cash flows and financial condition. In
addition, to date, we have relied not only on patent
protections, but also on trade secret, trademark and copyright
laws, as well as nondisclosure, licensing and other contractual
arrangements to protect the proprietary aspects of our
solutions. Other than the patents discussed above, we do not own
any other patents that protect important aspects of our current
solutions. We will, however, prepare patent applications where
possible for technology related to our smart cards and UEPS
system when we believe it is appropriate to do so. These
applications and contractual arrangements and our reliance on
these laws may not be successful.
Litigation to enforce our intellectual property rights or
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,
operating results, cash flows and financial condition. In
addition, the laws of certain foreign countries may not protect
our intellectual property rights to the same extent as do the
laws of South Africa, Namibia, Botswana, Swaziland, the United
States and the European Union. Our means of protecting our
intellectual
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property rights in South Africa, Namibia, Botswana, Swaziland,
the United States and the European Union 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.
| The copyrights and certain related intellectual property rights in earlier versions of our UEPS software are jointly owned and potentially subject to non-exclusive rights, which may reduce our future revenues. |
While we own the exclusive copyrights in the current version of
the UEPS software, these copyrights are subject to the
preexisting copyrights in the earlier versions of our software
that are owned jointly by us and Nedbank. As joint owners of the
copyrights in these earlier versions of our software that
existed prior to July 2000, there is a risk that Nedbank could
license these works to others and otherwise commercially exploit
these earlier works. Under our Nedbank agreements, Nedbank also
acquired the right to request a license of our South African and
U.S. FTS patents and of all technology and know-how
relating to the UEPS described in those earlier patents from us
for entities partly owned by Nedbank that are located anywhere
within South Africa and neighboring countries. Under these
licenses, Nedbank would pay us a license fee, with us supplying
smart cards or being paid a royalty if the cards are obtained
from a third party. If Nedbank licenses our works to others or
otherwise commercially exploits our technology and know-how
related to UEPS, our future revenues may be reduced.
| Our current license agreement with Visa imposes long-term restrictions on our ability to license rights in our technology and could inhibit our ability to realize additional revenue from these rights in our technology. |
In 1997, we entered into a technology license agreement with
Visa. Under that agreement, Visa purchased a non-exclusive,
perpetual, worldwide license to our technology rights, as
defined in the agreement, relating to our UEPS technology and an
exclusive, perpetual, worldwide license under our patents, as
defined in the agreement, licensed to Visa that is exclusive to
the financial services industry, as defined in the agreement.
Our Visa agreement grants back to us the non-exclusive right
under our Visa-licensed patents to make, use and sell our
payment systems and other products in the financial services
industry as discussed in the agreement. In our Visa agreement,
Visa agrees not to grant a sublicense to any payment system to
any entities in the financial services industry who are not
members of Visa already if such entity already has a right to
use such payment systems from us. The agreement permits Visa to
sublicense our licensed technology rights to any of its members,
any entity in the financial services industry or any entity
outside of the financial services industry that provides
products to Visa or its sublicensees. The agreement prohibits us
from licensing our technology rights, not just our licensed
patents, to any of Visa’s competitors, including
MasterCard, Europay, American Express Company, Discover
Financial Services, Diners Club International Credit Card Co.,
Carte Blanche Card or JCB International Credit Card Co. or any
of their parents, subsidiaries or affiliates. We may need
Visa’s consent, not to be unreasonably withheld, in order
to transfer or assign our rights and obligations under the
agreement. As this agreement does not contain a termination date
and contains restrictions on our ability to license our
technology rights in the financial services industry and to
competitors of Visa, we may not be able to realize the full
value of our technology rights.
| Our license agreement with Visa substantially impacts our ability to defend and enforce our patents licensed to Visa and could substantially inhibit our ability to protect the rights in our technology. |
Under our license agreement with Visa, we are restricted from
suing Visa, its members and any third-party vendors or customers
of Visa or its members for infringement of our technology rights
licensed to Visa in connection with their manufacture, use or
sale of any product or service offered by Visa. The
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license also grants Visa sole discretion with regard to
enforcement of any of the licensed technology rights against
third parties in the financial services industry. Under the
agreement, Visa has the right to control the prosecution and
maintenance of the patents and related patent applications we
have licensed to Visa in all jurisdictions, and we are obligated
to cooperate and support any of Visa’s actions in this
regard. This arrangement could substantially impact our ability
to defend these patents, and could make enforcement actions
against our competitors more difficult.
| We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business. |
We obtain our smart cards, POS devices and the other hardware we
use in our business from a limited number of suppliers, and do
not manufacture this equipment ourselves. We generally do not
have long-term agreements with our manufacturers or component
suppliers. If our suppliers become unwilling or unable to
provide us with adequate supplies of parts or products when we
need them, or if they increase their prices, we may not be able
to find alternative sources in a timely manner and could be
faced with a critical shortage. This could harm our ability to
implement new systems and cause our revenues to decline. Even if
we are able to secure alternative sources in a timely manner,
our costs could increase. A supply interruption or an increase
in demand beyond current suppliers’ capabilities could harm
our ability to distribute our equipment and thus, to acquire a
new source of customers who use our UEPS technology. Any
interruption in the supply of the hardware necessary to operate
our technology, or our inability to obtain substitute equipment
at acceptable prices in a timely manner, could impair our
ability to meet the demand of our customers, which would have an
adverse effect on our business.
| Escalating pricing pressures from our retail customers may adversely affect our business. |
We have recently begun to experience pressure from our retail
merchant customers seeking to negotiate the fees we charge them.
This pressure is likely to continue. This pricing pressure could
cause us to reduce the level of the fees we charge to these
customers, which could adversely impact our revenues and profit
margins.
| 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. Some of these partnering
arrangements may take the form of joint ventures in which we
receive a minority interest. Minority ownership carries with it
numerous risks, including dependence on partners to provide
knowledge of local market conditions and to facilitate the
acquisition of any necessary licenses and permits, as well as
the inability to control the joint venture vehicle and to direct
its policies and strategies. Such a lack of control could result
in the loss of all or part of our investment in such entities.
In addition, our foreign partners may have different business
methods and customs which may be unfamiliar to us and with which
we disagree. Our joint venture partners may not be able to
implement our business model in new areas as efficiently and
quickly as we have been able to do in South Africa. Furthermore,
limitations imposed on New Aplitec 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. In addition, certain of our licensees,
including BGS and Visa, have become our competitors and this
could occur with our joint venture partners in the future.
We have lost license fees in the CIS as a result of a dispute
with BGS, the local system operator, which claims that the
revocation of the European FTS patent relieves it from the
obligation to pay us licensee fees. We believe that the
licensing fees due from BGS relate to its use of our UEPS
technology rather than the FTS patent and, therefore, we are
currently evaluating our options on this matter.
| 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
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scrutiny of our government customers. Frequent or persistent
interruptions in our services could cause current or potential
customers and users to believe that our systems are unreliable,
leading them to avoid our technology altogether, and could
permanently harm our reputation and brands. These interruptions
would increase the burden on our engineering staff, which, in
turn, could delay our introduction of new applications and
services. Finally, because our customers may use our products
for critical transactions, any system failures could result in
damage to our customers’ businesses. These customers could
seek significant compensation from us for their losses. Even if
unsuccessful, this type of claim could be time consuming and
costly for us to address.
Although our systems have been designed to reduce downtime in
the event of outages or catastrophic occurrences, they remain
vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks
and similar events. Some of our systems are not fully redundant,
and our disaster recovery planning may not be sufficient for all
eventualities.
Protection against fraud is of key importance to the purchasers
and end users of our solutions. We incorporate security
features, including encryption software, biometric
identification and secure hardware, into our solutions to
protect against fraud in electronic transactions and to provide
for the privacy and integrity of card holder data. Our solutions
may be vulnerable to breaches in security due to defects in the
security mechanisms, the operating system and applications or
the hardware platform. Security vulnerabilities could jeopardize
the security of information transmitted using our solutions. If
the security of our solutions is compromised, our reputation and
marketplace acceptance of our solutions will be adversely
affected, which would cause our business to suffer, and we may
become subject to damage claims. We have not yet experienced any
security breaches affecting our business.
Despite any precautions we may take, the occurrence of a natural
disaster or other unanticipated problems with our system could
result in lengthy interruptions in our services. Our current
business interruption insurance may not be sufficient to
compensate us for losses that may result from interruptions in
our service as a result of system failures.
| We may not be able to exploit technological advances quickly and successfully, which could impair our competitive position and operations. |
Most of our operations depend on the use of advanced
technological methods, which must keep pace with rapid
technological changes, new product introductions by competitors,
evolving industry and government performance and security
standards and changes in customer and end-user requirements. The
use of the appropriate advanced technological procedures can
affect, among other things, the competitiveness of our products,
the safety of transactions performed using our products, the
continuity of our operations and the capacity and efficiency of
our production.
We believe that new technologies may emerge and that existing
technologies may be further developed in the fields in which we
operate. Unexpected rapid changes in employed technologies that
affect our operations and product range could render the
technologies we use obsolete or less competitive in the future.
Difficulties in accessing new technologies may impede us from
implementing them and competitive pressures may force us to
implement these new technologies at a substantial cost. In
addition, limited access to sources of new capital to acquire
new technologies may adversely affect our results of operations
and financial condition.
We cannot predict the effect of technological changes on our
business or on our ability to provide competitive products. Our
ability to meet the competition will depend on our timely and
cost-effective implementation of new technological advances. It
will also depend on our success in commercializing these
advances in spite of competition we face by patents registered
by our competitors. If we are unable to implement new
technologies in a timely or cost-efficient basis or penetrate
new markets in a timely manner in response to changing market
conditions or customer requirements, we could experience a
material adverse effect on our business, operating results, cash
flows and financial condition.
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| We may incur material losses in connection with our distribution of cash to recipients of social welfare grants. |
Many social welfare recipients use our services to access cash
using their smart cards. We use armored vehicles to deliver
large amounts of cash to rural areas across South Africa to
enable these welfare recipients 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 the risk of loss or theft of cash from our delivery
vehicles as we have not identified any insurance underwriters
willing to accept this risk. Therefore, we will bear the full
cost of any loss or theft in connection with the delivery
process, and such loss could materially and adversely affect our
financial condition, cash flows and results of operations.
During the year ended June 30, 2004 and the nine months
ended March 31, 2005, we incurred losses in connection with
our cash delivery system of $4.2 and $2.2 million,
respectively.
| We may not recover outstanding amounts owed to our micro-finance businesses. |
We operate a traditional micro-finance business, with
approximately 100 branches throughout South Africa. These
branches extend short-term loans for periods ranging from
30 days to six months at loans bearing interest rates of
12% to 30% per month. Despite the fact that we attempt to
reduce credit risk by employing credit profiling techniques, the
rate of default on loans has been high due to the high credit
risk of these borrowers and the difficulty of collecting
outstanding repayments. We may therefore not recover some or all
of the principal and interest amounts currently owed by our
borrowers, which on March 31, 2005, totaled
$4.1 million, or ZAR 25.8 million. Our inability to
recover some or all of these amounts may have a material adverse
effect on our financial position and results of operations.
| We may undertake acquisitions that could increase our costs or liabilities or be disruptive to our business. |
One of our strategies is to pursue selective acquisitions.
Although we do not currently have any commitments, contracts or
understandings to acquire any specific businesses or other
material operations, we have made a number of acquisitions in
the past and will consider other acquisitions in the future. We
may not be able to locate suitable acquisition candidates at
prices that we consider appropriate or to finance acquisitions
on terms that are satisfactory to us. If we do identify an
appropriate acquisition candidate, we may not be able to
successfully negotiate the terms of an acquisition, finance the
acquisition or, if the acquisition occurs, integrate the
acquired business into our existing business. Acquisitions of
businesses or other material operations may require debt
financing or additional equity financing, resulting in
additional leverage or dilution of ownership. Integration of
acquired business operations could disrupt our business by
diverting management away from day-to-day operations. 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 intangible assets, which could reduce our future
reported earnings. At times, acquisition candidates may have
liabilities or adverse operating issues that we fail to discover
through due diligence prior to the acquisition.
| We may be subject to privacy laws in South Africa and other jurisdictions in which we operate. |
Our collection, storage and processing, and any disclosure of,
customer and employee personal information must comply with
South Africa’s privacy laws, which are at various stages of
legislative and judicial development. However, South African
common law and the South African Constitution do recognize an
individual’s right to privacy, and there are some statutes
and other regulations which have been enacted that apply to us
and the way we operate our business. For example, one statute
sets out a framework for the electronic collection, processing,
storage and disclosure of personal information. Although
compliance with this statute is voluntary, a South African court
could determine that we would
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be violating an individual’s right to privacy if we do not
operate in compliance with this framework. In addition, South
African law requires that we must keep confidential the HIV
status of the people that participate in our HIV/ AIDS program.
New privacy laws may be enacted in the future which could
adversely affect the way we do business, and we could be
required to devote substantial management time and resources to
comply with these new laws. In addition, if we violate, or are
judged to have violated, the privacy rights of people whose
information we collect, store and process, we could become
liable for damages, which could have a material adverse effect
on our financial condition, cash flows or results of operations.
| Our international operations require us to comply with a number of U.S. and international regulations. |
We need to comply with a number of international regulations in
countries outside of the United States. In addition, we must
comply with the Foreign Corrupt Practices Act, or FCPA, which
prohibits U.S. companies or their agents and employees from
providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals
in their official capacity to help obtain or retain business,
direct business to any person or corporate entity or obtain any
unfair advantage. Any failure by us to adopt appropriate
compliance procedures and ensure that our employees and agents
comply with the FCPA and applicable laws and regulations in
foreign jurisdictions could result in substantial penalties
and/or restrictions in our ability to conduct business in
certain foreign jurisdictions. The U.S. Department of The
Treasury’s Office of Foreign Asset Control, or OFAC,
administers and enforces economic and trade sanctions against
targeted foreign countries, entities and individuals based on
U.S. foreign policy and national security goals. As a result, we
are restricted from entering into transactions with certain
targeted foreign countries, entities and individuals except as
permitted by OFAC which may reduce our future growth.
| We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements. |
We may incur significant costs associated with our public
company reporting requirements, costs associated with newly
applicable corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002 and other
rules implemented by the Securities and Exchange Commission and
the Nasdaq National Market. Moreover, many of these corporate
governance requirements will not apply to us until our shares
become listed for quotation on the Nasdaq National Market. We
expect all of these newly applicable rules and regulations to
increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect
that these newly applicable rules and regulations may make it
more difficult and more expensive for us to obtain director and
officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified
individuals to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring
developments with respect to these newly applicable rules, and
we cannot predict or estimate the amount of additional costs we
may incur or the timing of such costs.
| We may not be able to meet the accelerated filing and internal control reporting requirements imposed by the SEC. |
We became an accelerated filer on June 30, 2005. As an
accelerated filer, we are required to file our Annual Report on
Form 10-K by September 13, 2005. While we expect to
meet the accelerated filer deadlines, there is a risk that we
may not be able to comply with these accelerated filing
requirements. If we fail to meet the accelerated filing
requirements by the time we are required to file our Annual
Report on Form 10-K, then the market price for our common
stock may decline.
As directed by Section 404 of the Sarbanes-Oxley Act, the
SEC adopted rules requiring each public company to include a
report of management on the company’s internal controls
over financial reporting in its annual reports. In addition, the
independent registered public accounting firm auditing a
company’s
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financial statements must also attest to and report on
management’s assessment of the effectiveness of the
company’s internal controls over financial reporting as
well as the operating effectiveness of the company’s
internal controls. We were not subject to these requirements for
the fiscal year ended June 30, 2004. We are in the process
of evaluating our internal control systems in order to allow our
management to report on, and our independent registered public
accounting firm to attest to, our internal controls as a
required part of our Annual Report on Form 10-K beginning
with our report for the fiscal year ending June 30, 2005.
While we have been expending significant resources in developing
the necessary documentation and testing procedures required by
Section 404 of the Sarbanes-Oxley Act, there is a risk that
we may not be able to comply timely with all of the requirements
imposed by this rule. At present, there is no precedent
available with which to measure compliance adequacy. We have
identified items that constitute deficiencies in some of our
internal control processes. In the event that we conclude that
these are significant deficiencies or material weaknesses and we
cannot remediate such significant deficiencies or material
weaknesses in a timely manner or we are unable to receive a
positive attestation from our independent registered public
accounting firm with respect to our internal controls, investors
and others may lose confidence in the reliability of our
financial statements and our stock price and ability to obtain
equity or debt financing as needed could suffer.
In addition, in the event that our independent registered public
accounting firm is unable to rely on our internal controls in
connection with its audit of our financial statements, and in
the further event that it is unable to devise alternative
procedures in order to satisfy itself as to the material
accuracy of our financial statements and related disclosures, it
is possible that we would be unable to file our Annual Report on
Form 10-K with the SEC, which could also adversely affect
the market price of our common stock and our ability to secure
additional financing as needed.
| We may be required 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. Because of the early stage of
development of our operations and 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 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, performances, 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,
additional financing may be required to continue to develop and
exploit existing and new technologies and to expand into new
markets. The exploitation of our technologies may, therefore, be
dependent upon our ability to obtain financing through debt and
equity or other means.
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| Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline. |
We expect our revenues and operating results to vary from
quarter to quarter. As a consequence, our operating results in
any single quarter may fall below the expectations of securities
analysts and investors, which could cause the price of our
common stock to decline. Factors that may affect our operating
results include:
| • | demand for and acceptance of our new product offerings; | |
| • | delays in the implementation and delivery of our products and services, which may impact the timing of our recognition of revenue; | |
| • | variations in product mix and cost during any period; | |
| • | development of new relationships and maintenance and enhancement of existing relationships with customers and strategic partners; | |
| • | difficulties with component supplies, manufacturing or distribution; | |
| • | deferral of customer contracts in anticipation of product or service enhancements; | |
| • | timing of commencement, implementation or completion of major implementation projects; | |
| • | the relative mix of net revenues from established markets, including South Africa, and unestablished markets; | |
| • | fluctuations in currency exchange rates; | |
| • | the fixed nature of many of our expenses; and | |
| • | industry and economic conditions, including competitive pressures and inventory obsolescence. |
In particular, differences in relative growth rates between our
businesses in our established markets for certain products and
unestablished markets may have a significant effect on our
operating results, particularly our reported operating profit
percentage, in any individual quarter, with unestablished market
sales typically carrying lower margins in the initial phases of
our operations in a new area or the introduction of a new
product to an area in which we already operate. Certain
transactions that occur infrequently, including the bulk supply
of hardware to a customer, may also have a significant effect on
our operating results. For example, during the nine months ended
March 31, 2005, we supplied a customer with POS devices,
pin-pads and smart cards for $10.4 million. Sales of this
nature are infrequent and cause fluctuations in revenue and
operating income when they occur.
| The period between our initial contact with a potential customer and the sale of our 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 products and services is often long and
subject to delays associated with the budgeting, approval and
competitive evaluation processes that frequently accompany
significant capital expenditures. A lengthy sales cycle may have
an impact on the timing of our revenues, which may cause our
quarterly operating results to fall below investor expectations.
A customer’s decision to purchase our products and services
is often discretionary, involves a significant commitment of
resources, and is influenced by customer budgetary cycles. To
sell our products and services successfully we generally must
educate our potential customers regarding the uses and benefits
of our products and services, which can require the expenditure
of significant time and resources; however, there can be no
assurance that this significant expenditure of time and
resources will result in actual sales of our products and
services.
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Table of Contents
| We may become subject to a U.S. tax liability for failing to withhold on certain distributions on instruments issued in connection with the Aplitec transaction. |
There is no statutory, judicial or administrative authority that
directly addresses the tax treatment of non-U.S. holders
that elected to receive units in a trust representing beneficial
interests in B class preference shares and B class loan accounts
issued by New Aplitec pursuant to the reinvestment option in
connection with our acquisition of Aplitec. We believe these
interests should be treated for United States federal income tax
purposes as, and we did treat them as, separate and distinct
interests in New Aplitec. As such, we and our affiliates do not
presently intend to withhold any amounts for U.S. federal
taxes in respect of any distributions paid on such interests.
There is a risk, however, that these interests, together with
the special convertible preferred stock, may be treated as
representing a single direct equity interest in us for
U.S. federal income tax purposes. In such case,
distributions received with respect to the B class preference
shares and B class loan accounts could be subject to
U.S. federal withholding tax, and we could be liable for
failure to withhold such taxes in our capacity as withholding
agent. In addition, our failure to collect and remit
U.S. federal withholding tax may also subject us to
penalties.
| 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 in
the industry and our relationships with our customers.
| Force majeure events, such as terrorist attacks, other acts of violence or war, political instability and health epidemics may adversely affect us. |
Terrorist attacks, war and international political instability,
along with health epidemics, may disrupt our ability to generate
revenues. These events may negatively affect our ability to
maintain sales revenue and to develop new business
relationships. Because a substantial and growing part of our
revenues is derived from sales and services to customers outside
of the United States and we have our electronic payment systems
manufactured outside the United States, terrorist attacks, war
and international political instability anywhere may decrease
international demand for our products and inhibit customer
development opportunities abroad, disrupt our supply chain and
impair our ability to deliver our electronic payment systems,
which could materially adversely affect our net revenues or
results of operations. Any of these events may also disrupt
global financial markets and precipitate a decline in the price
of our common stock.
Risks Relating to this Offering
| The price for shares of our common stock quoted on the Over-the-Counter Bulletin Board may not be indicative of their fair value. |
The shares of our common stock are currently quoted on the
Over-the-Counter Bulletin Board, or OTCBB. The trading
volume for shares of our common stock historically has been
limited. During the period from our completion of the Aplitec
transaction on June 7, 2004 through July 14, 2005, the
average daily trading volume of our shares of common stock has
been approximately 38,404 shares. During this period, the market
price of our shares of common stock has ranged from $5.94 to
$61.50, after giving effect to the one-for-six reverse stock
split. On July 14, 2005, the closing price per share of our
common stock as quoted on the OTCBB was $18.00. Although the
trading volume of our common stock has increased since we
completed the Aplitec acquisition, the prices at which our
common stock has been quoted since that time may not be
indicative of their fair value. If you purchase shares of our
common stock, you may not be able to resell those shares at or
above the public offering price.
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In addition, an active public trading market may not develop
after completion of this offering, or if developed, may not be
sustained. The lack of a trading market may result in the loss
of research coverage by securities analysts. Moreover, we cannot
assure you that any securities analysts will initiate or
maintain coverage of our company and our common stock.
| We expect that the price of our shares of common stock will fluctuate substantially. |
We expect that after this offering the market price for our
shares of common stock will be affected by a number of factors,
including:
| • | the gain or loss of significant orders or customers; | |
| • | announcements of our participation in a joint venture or partnership; | |
| • | recruitment or departure of key personnel; | |
| • | the announcement of new products or service enhancements by us or our competitors; | |
| • | changes in government regulation that directly or indirectly affect our business; | |
| • | quarterly variations in our results of operations; | |
| • | changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earning estimates; | |
| • | developments in our industry; | |
| • | events and news related to the regions where we and our subsidiaries conduct our business; and | |
| • | general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors. |
These factors and price fluctuations may materially and
adversely affect the market price of our shares of common stock.
| Future sales of our common stock could reduce our stock price. |
Sales by shareholders of substantial amounts of our shares, or
the perception that these sales may occur in the future, could
affect materially and adversely the market price of our common
stock. The shares that the selling shareholders are offering for
sale in this offering will be freely tradeable immediately
following this offering. Upon the closing of this offering, an
aggregate of approximately 33,766,194 shares of common
stock outstanding or issuable in the future upon conversion of
special convertible preferred stock will be freely tradeable
without restriction or further registration under the Securities
Act, of which 3,850,738 are subject to lock-up agreements. We
have agreed to grant to South African Private Equity
Fund III, L.P., or SAPEF, and Brenthurst Private
Equity II Limited and their respective affiliates, and to
the investment entities affiliated with General Atlantic,
certain registration rights with respect to the shares of common
stock owned by them. The registration rights that we will grant
to the investment entities affiliated with General Atlantic will
provide that these entities will first be entitled to exercise
demand registration rights one year after the closing of this
offering. We expect to enter into these agreements shortly after
completion of the offering. Each of our directors and executive
officers, certain selling shareholders who, prior to this
offering, owned more than 10,000 linked units representing
approximately 1,357 shares and certain of our other shareholders
have agreed not to sell their shares (other than shares they are
selling in this offering) for a period of 180 days after
the date of this prospectus. Certain of the selling
shareholders, who in the aggregate will beneficially own after
this offering approximately 2.8% of our common stock, assuming
full conversion of our special convertible preferred stock into
common stock, are organized as unit investment trusts. These
unit investment trusts may be required to sell all or a portion
of our shares beneficially owned by the trust if the manager of
the trust changes or if a holder in the trust redeems its
interest in the trust. To the extent that the governing
documents of the unit investment trust require the sale of our
shares under these circumstances, the lock-up restrictions do
not apply to these selling shareholders. As of March 31,
2005, there were options to purchase 1,453,490 shares
of our common stock outstanding with a weighted average exercise
price per share of $3.00 and other stock-based awards with
respect to 1,453,490 shares of common stock for no cash
consideration. The
27
Table of Contents
shares underlying these options will be freely tradeable upon
exercise of the options and other stock-based awards after we
have filed a Form S-8, which we intend to do prior to the
closing of this offering or as soon as practicable after the
closing of this offering. Currently, we do not have any further
shares reserved for issuance of additional options or other
stock-based awards under our 2004 Stock Incentive Plan. However,
we intend to authorize additional shares under our 2004 Stock
Incentive Plan or under a successor plan and seek shareholder
approval of the increase after the closing of the offering.
| One of our shareholders will continue to hold a significant block of shares in our company after completion of this offering and, as a result, will continue to have significant influence over our company. |
Upon completion of this offering, three designees of SAPEF, one
of the entities that funded the Aplitec acquisition, will
continue to serve on our current seven-member board of directors
and, pursuant to a common stock purchase agreement between us
and SAPEF, we anticipate that representatives of SAPEF will
continue to serve on our board of directors in the future. In
addition, under the General Atlantic stock purchase agreement,
we will add one seat to our board of directors and cause to be
elected to the board one person designated by General Atlantic.
See “Certain Relationships and Related Party
Transactions — SAPEF Common Stock Purchase Agreement
and — “General Atlantic Private Placement.”
In addition, we expect SAPEF and its affiliates to beneficially
own approximately 22.5% of the outstanding shares of our voting
stock upon the closing of this offering. As a result of its
right to board representation and substantial ownership
interest, SAPEF may have the ability to exert significant
influence on the outcome of a shareholder vote by our
shareholders in respect of matters such as a merger, sale or
similar transaction involving us, the issuance of capital stock
and the incurrence of substantial indebtedness, and SAPEF’s
interests could conflict with your interests. Additionally,
SAPEF is in the business of making investments in companies and
may from time to time acquire and hold interests in businesses
that compete or could in the future compete, directly or
indirectly, with us. SAPEF may also pursue acquisition
opportunities that may be complementary to our business, and as
a result, those acquisition opportunities may not be available
to us.
| We have not paid dividends in the past and it is not our current policy to pay dividends, and any return on investment may be limited to the value of our stock. |
We have never paid cash dividends on our shares of common stock
and we do not anticipate paying cash dividends on our shares of
common stock in the foreseeable future. The payment of dividends
on our shares of common stock will depend on our earnings and
financial condition, our growth plans and strategies and other
business and economic factors affecting us at such time as our
board of directors may consider relevant.
In addition, New Aplitec’s dividend policy must comply with
the restrictions placed by the South African Reserve Bank on the
declaration of dividends by New Aplitec as a condition of its
approval of the Aplitec transaction. These restrictions will
apply until such time as all of our special convertible
preferred stock is converted into common stock. These
restrictions provide that dividends may be declared by the
New Aplitec board of directors only if:
| • | declaration of the dividend is approved by a majority of the holders of New Aplitec B class preference shares; | |
| • | all B loan accounts have been paid by New Aplitec; and | |
| • | the dividend does not exceed 50% of New Aplitec’s annual earnings. |
In addition, under South African law, New Aplitec will only be
entitled to pay a dividend or other similar payment if it meets
the solvency and liquidity tests set out in the South African
Companies Act.
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| You may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this prospectus or asserting U.S. securities laws claims in South Africa. |
A significant portion of our assets and the assets of our
directors and executive officers and some of the experts named
in this prospectus are located outside the United States. In
addition, most of the members of our board of directors, all of
our executive officers and several of our experts named in this
prospectus are residents of South Africa or other foreign
countries. As a result, it may not be possible for you to effect
service of process, within the United States or elsewhere
outside South Africa, upon our non-U.S. directors, our
officers or several of our experts. Moreover, any judgment
obtained against us or any of these foreign persons 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. Further, if a foreign judgment is enforced
by a South African court, it will be payable in South African
currency. Also, under South Africa’s Exchange Control laws,
the approval of the South African Reserve Bank 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. The policy of South African
courts is to award compensation only for loss or damage actually
sustained by the person claiming the compensation. Punitive
damages are generally not recognized by the South African legal
system, on the grounds that such awards are contrary to South
African public policy. Whether a judgment is contrary to public
policy depends on the facts of each case. Exorbitant,
unconscionable or excessive awards will generally be contrary to
South African public policy. South African courts cannot
consider the merits of a foreign judgment and cannot act as a
court of appeal or review over the foreign court. South African
courts will usually observe their own procedural laws, and where
an action based on a contract governed by the laws of a foreign
jurisdiction is brought before a South African court, the
capacity of the parties to contract may under certain
circumstances be determined in accordance with South African
law. A plaintiff who is not resident in South Africa may be
required to provide security for costs where proceedings are
initiated in South Africa. In addition, the Rules of the High
Court of South Africa require that documents executed outside
South Africa must be authenticated in a prescribed manner before
they may be used in South Africa. Also, under the South African
Protection of Business Act, 1978, foreign judgments concerning
the ownership, use or sale of any matter or material connected
with South African commerce (such as production, import and
export) require consent from the South African Minister of Trade
and Industry to be enforced. We have been advised by Cliffe
Dekker, our South African counsel, that there are difficulties
related to the enforceability against us and our directors and
officers in South Africa of liabilities predicated solely upon
the Federal securities laws of the United States. It also may be
difficult for you to assert U.S. securities law claims in
original actions instituted in South Africa. For more
information regarding the enforceability of civil liabilities
against us, our directors and our executive officers, please see
“Enforceability of Civil Liabilities.”
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Table of Contents
FORWARD LOOKING STATEMENTS
Some of the statements under “Summary,” “Risk
Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”
“Business” and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future
events or our future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause
our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any
future results, levels of activity, performance or achievements
expressed, implied or inferred by these forward-looking
statements. Such factors include, among other things, those
listed under “Risk Factors” and elsewhere in this
prospectus. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“will,” “should,” “could,”
“would,” “expects,” “plans,”
“intends,” “anticipates,”
“believes,” “estimates,”
“predicts,” “potential” or
“continue” or the negative of such terms and other
comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we do not know
whether we can achieve positive future results, levels of
activity, performance, or goals. Actual events or results may
differ materially. We undertake no obligation to update any of
the forward-looking statements after the date of this prospectus
to conform those statements to reflect the occurrence of
unanticipated events, except as required by applicable law.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement on Form S-1, of which this
prospectus is a part, that we have filed with the Securities and
Exchange Commission, completely and with the understanding that
our actual future results, levels of activity, performance and
achievements may be materially different from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
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USE OF PROCEEDS
Certain of the selling shareholders may exercise options to
purchase the shares of common stock that they are selling in
this offering. We will not receive any proceeds from this
offering other than proceeds we receive from the exercise of any
of these options and from any shares sold pursuant to the
exercise by the underwriters of the over-allotment option. We
will use any proceeds we receive for working capital and general
corporate purposes.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the OTCBB under the symbol
“NOUT.OB.” Our common stock has been approved for
quotation on the Nasdaq National Market under the symbol
“UEPS.”
The following table sets forth, for the periods indicated, the
high and low bid quotations for our common stock on the OTCBB.
These quotations reflect prices between dealers and do not
include retail mark-ups, mark-downs, and commissions and may not
necessarily represent actual transactions. The trading volume
for shares of our common stock historically has been limited.
The price per share of our common stock quoted on the OTCBB may
not be reflective of the fair value of those shares. You should
not rely on the price per share quoted on the OTCBB as an
indication of the fair value per share of our common stock.
| Quarter Ended | High | Low | ||||||
|
Sep. 30, 2002
|
$ | 7.20 | $ | 5.40 | ||||
|
Dec. 31, 2002
|
$ | 7.80 | $ | 5.40 | ||||
|
Mar. 31, 2003
|
$ | 7.80 | $ | 5.40 | ||||
|
June 30, 2003
|
$ | 12.72 | $ | 6.36 | ||||
|
Sep. 30, 2003
|
$ | 14.40 | $ | 11.40 | ||||
|
Dec. 31, 2003
|
$ | 40.80 | $ | 13.32 | ||||
|
Mar. 31, 2004
|
$ | 60.90 | $ | 31.32 | ||||
|
June 30, 2004
|
$ | 64.20 | $ | 9.00 | ||||
|
Sep. 30, 2004
|
$ | 14.10 | $ | 6.66 | ||||
|
Dec. 31, 2004
|
$ | 16.20 | $ | 5.94 | ||||
|
Mar. 31, 2005
|
$ | 21.30 | $ | 10.56 | ||||
|
June 30, 2005
|
$ | 18.60 | $ | 13.68 | ||||
|
Sep. 30, 2005 (through July 14, 2005)
|
$ | 18.20 | $ | 16.40 | ||||
On July 14, 2005, the last reported sale price of our
common stock was $18.00 per share. As of March 31, 2005,
there were approximately 56 shareholders of record of our
common stock.
DIVIDEND POLICY
Net 1 has not paid any dividends on our shares of common
stock since our incorporation and we presently intend to retain
future earnings to finance the expansion of business. We do not
anticipate that we will pay dividends in the foreseeable future.
Our future dividend policy will depend on our earnings, capital
requirements, expansion plans, financial condition and other
business and economic factors as our board of directors may
consider relevant.
In addition, New Aplitec’s dividend policy must comply with
the restrictions placed by the South African Reserve Bank on the
declaration of dividends by New Aplitec as a condition of its
approval of the Aplitec transaction. These restrictions will
apply until such time as all of our special convertible preferred
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stock is converted into common stock. These restrictions provide
that dividends may be declared by the New Aplitec board of
directors only if:
| • | declaration of the dividend is approved by a majority of the holders of New Aplitec B class preference shares; | |
| • | all B loan accounts have been paid by New Aplitec; and | |
| • | the dividend does not exceed 50% of New Aplitec’s annual earnings. |
In addition, under South African law, New Aplitec will only be
entitled to pay a dividend or other similar payment if it meets
the solvency and liquidity tests set out in the South African
Companies Act. Any dividends declared by New Aplitec will be
distributed to the holders of A class and B class preference
shareholders pro rata in accordance with their respective
ownership interests in New Aplitec.
Aplitec’s dividend policy in fiscal 2003 and 2002, the nine
months ended March 31, 2004 and prior fiscal periods was to
declare regular annual dividend payments of between 25% and 33%
of earnings for such periods. Aplitec declared a dividend of
ZAR 0.90 (US$0.09) per share in fiscal 2003, which was paid
in the first quarter of fiscal 2004, and ZAR 0.66 (US$0.06)
per share in fiscal 2002.
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CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2005. Our capitalization is presented on an
actual basis and gives effect to the one-for-six reverse stock
split of our common stock and special convertible preferred
stock which became effective on June 13, 2005.
You should read this table in conjunction with our consolidated
financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
| As of March 31, 2005 | |||||
| (In thousands) | |||||
|
Shareholders’ equity:
|
|||||
|
Common stock, $0.001 par value; 83,333,333 shares
authorized; 27,175,135 shares issued and outstanding
|
$ | 27 | |||
|
Special convertible preferred stock, $0.001 par value;
50,000,000 shares authorized; 27,525,259 shares issued
and outstanding
|
28 | ||||
|
B Class preferred stock, $0.001 par value;
330,000,000 shares authorized; 209,809,130 shares
issued and outstanding (net of shares held by us)
|
33 | ||||
|
Additional paid-in-capital
|
71,959 | ||||
|
Accumulated other comprehensive income
|
13,711 | ||||
|
Retained earnings
|
42,922 | ||||
|
Total shareholders’ equity
|
$ | 128,680 | |||
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated balance sheet
data as of March 31, 2005 and 2004 and as of June 30,
2004, 2003, 2002, 2001 and 2000, and our consolidated statements
of operations data for the nine months ended March 31, 2005
and 2004 and for the years ended June 30, 2004, 2003, 2002,
2001 and 2000. You should read the following selected
consolidated financial data together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” the consolidated
financial statements and notes thereto and other financial
information included elsewhere in this prospectus. In connection
with U.S. generally accepted accounting principles, we accounted
for the Aplitec transaction as a reverse acquisition, which
requires that the company whose shareholders retain a majority
voting interest in a combined business be treated as the
acquiror for accounting purposes. Therefore, for all periods
after June 7, 2004, our consolidated financial statements
and the discussion and analysis below reflect the operations of
Net 1 and its consolidated subsidiaries and, for prior
periods, reflect the operations of Aplitec and its consolidated
subsidiaries, but not Net 1. The consolidated statements of
operations data for the years ended June 30, 2004, 2003 and
2002, and the consolidated balance sheet data as of
June 30, 2004 and 2003, have been derived from our audited
consolidated financial statements which are included elsewhere
in this prospectus. The consolidated statements of operations
data for the years ended June 30, 2001 and 2000, and the
consolidated balance sheet data as of June 30, 2002, 2001
and 2000, have been derived from Aplitec’s unaudited
consolidated financial statements which are not included in this
prospectus. Our audited consolidated financial statements as of
and for the years ended June 30, 2004, 2003 and 2002 and
our unaudited consolidated financial statements as of and for
the years ended June 30, 2001 and 2000, have been prepared
in accordance with accounting principles generally accepted in
the United States, or US GAAP. The selected consolidated
balance sheet data as of March 31, 2005, and the summary
consolidated statements of operations data for the nine months
ended March 31, 2005 and 2004, are derived from unaudited
and interim financial information included elsewhere in this
prospectus. Results for interim periods are not necessarily
indicative of the results expected for the entire year. You
should also read the following selected consolidated financial
data in conjunction with the exchange rate information in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Currency
Exchange Rate Information.”
| Nine Months Ended | ||||||||||||||||||||||||||||
| March 31, | Year Ended June 30, | |||||||||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||||
|
Consolidated Statements of Operations Data:
|
||||||||||||||||||||||||||||
|
Revenue
|
$ | 134,885 | $ | 91,463 | $ | 131,098 | $ | 74,924 | $ | 51,793 | $ | 73,243 | $ | 68,355 | ||||||||||||||
|
Cost of goods sold, IT processing, servicing and support
|
41,207 | 28,206 | 39,134 | 25,935 | 14,170 | 21,983 | 20,568 | |||||||||||||||||||||
|
General and administrative charges(1)
|
33,804 | 25,625 | 39,677 | 26,399 | 21,637 | 36,779 | 33,754 | |||||||||||||||||||||
|
Depreciation and amortization(1)
|
4,897 | 4,110 | 5,676 | 3,323 | 3,128 | — | — | |||||||||||||||||||||
|
Reorganization costs
|
— | 3,537 | 11,133 | — | — | — | — | |||||||||||||||||||||
|
Operating income(2)
|
54,977 | 29,985 | 35,478 | 19,267 | 12,858 | 14,641 | 14,083 | |||||||||||||||||||||
|
Interest, net
|
1,497 | 2,464 | 3,640 | 2,600 | 1,381 | 1,443 | 1,419 | |||||||||||||||||||||
|
Income before taxes
|
56,474 | 32,449 | 39,118 | 21,867 | 14,239 | 16,084 | 15,503 | |||||||||||||||||||||
|
Income tax expense
|
22,534 | 13,896 | 25,927 | 9,473 | 5,554 | 7,100 | 4,337 | |||||||||||||||||||||
|
Income from continuing operations
|
34,420 | 18,553 | 13,278 | 11,942 | 8,518 | 8,069 | 7,557 | |||||||||||||||||||||
|
Net income attributable to shareholders(3)
|
$ | 34,420 | $ | 18,553 | $ | 13,278 | $ | 13,117 | $ | 8,518 | $ | 8,069 | $ | 7,557 | ||||||||||||||
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| Nine Months Ended | |||||||||||||||||||||||||||||
| March 31, | Year Ended June 30, | ||||||||||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||||||||
|
Income from continuing operations per share(4):
|
|||||||||||||||||||||||||||||
|
Basic
|
$ | 0.63 | $ | 0.58 | $ | 0.40 | $ | 0.37 | $ | 0.27 | $ | 0.24 | $ | 0.30 | |||||||||||||||
|
Diluted
|
$ | 0.62 | $ | 0.58 | $ | 0.38 | $ | 0.37 | $ | 0.27 | $ | 0.24 | $ | 0.24 | |||||||||||||||
|
Cash dividend per share(5)
|
$ | — | $ | — | $ | 1.14 | $ | 0.12 | $ | 0.06 | $ | — | $ | — | |||||||||||||||
| (1) | Prior to 2002, we recorded depreciation as part of general and administrative charges. For the years ended June 30, 2001 and 2000, general and administrative charges included $3.7 million and $4.8 million, respectively, related to depreciation and amortization. After 2002, we began to present depreciation and amortization as a separate line item. |
| (2) | Includes $160,000 and $50,000 of other operating income for the years ended June 30, 2001 and 2000, respectively. |
| (3) | Net income attributable to shareholders for 2003 includes an extraordinary item of $0.9 million and the results of a change in accounting policy of $0.3 million as a result of the adoption and application of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. |
| (4) | The basic and diluted earnings per share have been restated as a result of transaction described in notes 1, 10 and 11 to our consolidated financial statements. |
| (5) | The cash dividend per share has been restated as a result of the transaction described in notes 1, 10 and 11 to our consolidated financial statements. The cash dividend per share for 2004 was calculated based on 32,161,190 Aplitec shares and represents the dividend paid to shareholders of Aplitec as a result of the transaction. |
| Nine Months Ended | ||||||||||||||||||||||||||||
| March 31, | Year Ended June 30, | |||||||||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Additional Operating Data:
|
||||||||||||||||||||||||||||
|
Cash flow from operating activities
|
$ | 15,576 | $ | 35,357 | $ | 41,895 | $ | 17,644 | $ | 11,753 | $ | 19,005 | $ | 12,677 | ||||||||||||||
|
Operating income margin
|
41% | 33% | 27% | 26% | 25% | 20% | 21% | |||||||||||||||||||||
|
Capital expenditures
|
2,982 | 2,392 | 2,802 | 6,712 | 1,919 | 3,640 | 3,460 | |||||||||||||||||||||
| As of | ||||||||||||||||||||||||
| March 31, | As of June 30, | |||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Consolidated Balance Sheet Data:
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 92,712 | $ | 80,282 | $ | 54,313 | $ | 32,150 | $ | 27,033 | $ | 10,172 | ||||||||||||
|
Total current assets
|
141,960 | 117,412 | 78,705 | 45,480 | 43,163 | 33,628 | ||||||||||||||||||
|
Total assets
|
175,318 | 152,632 | 98,359 | 56,496 | 59,575 | 49,776 | ||||||||||||||||||
|
Total current liabilities
|
32,650 | 47,831 | 19,861 | 10,178 | 9,929 | 14,537 | ||||||||||||||||||
|
Total debt
|
— | 252 | — | — | — | 751 | ||||||||||||||||||
|
Total shareholders’ equity
|
$ | 128,680 | $ | 95,588 | $ | 70,504 | $ | 41,724 | $ | 45,033 | $ | 33,490 | ||||||||||||
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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with “Selected Consolidated Financial
Data” and our consolidated financial statements and related
notes included elsewhere in this prospectus. In addition to
historical consolidated financial information, the following
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our financial
condition and results of operations may change as a result of
many factors, including those we discuss in “Risk
Factors” and elsewhere in this prospectus. In connection
with generally accepted accounting principles, we accounted for
the Aplitec transaction as a reverse acquisition, which requires
that the company whose shareholders retain a majority voting
interest in a combined business be treated as the acquirer for
accounting purposes. Therefore, for all periods after
June 7, 2004, our consolidated financial statements and the
discussion and analysis below reflect the operation of Net 1 and
its consolidated subsidiaries and, for prior periods, reflect
the operation of Aplitec and its consolidated subsidiaries, but
not Net 1.
Overview
We provide our universal electronic payment system technology as
an alternative payment system to the unbanked and under-banked
populations of developing economies. We believe that we are the
first company worldwide to implement a system that can enable
the estimated four billion people who generally have limited or
no access to a bank account to effect affordably electronic
transactions with one another, government agencies, employers,
merchants and other financial services providers. To do this, we
have developed and deployed the universal electronic payment
system, or UEPS. This system uses 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 enter into transactions at any time with other
card holders in even the most remote areas so long as a portable
offline card reader is available. In addition to payments and
purchases, our system can be used for banking, health care
management, international money transfers, voting and
identification.
South Africa is the first major market where we achieved
significant success and a high penetration rate in the areas we
targeted. We believe that our operating experience in South
Africa demonstrates the success of our business model in a
developing economy. Currently, South Africa has a population of
approximately 42 million people, of which an estimated 50%
live below the poverty line. The South African unemployment rate
is estimated at 30%. The success we have achieved in South
Africa since commencing operations in December 1997 has
primarily resulted from servicing the needs of the poorest
section of the population — those who are
dependent on government social welfare grants. We have designed
and implemented a complete business model involving the payment,
and subsequent spending, of these grants through our smart cards
and UEPS technology, which provides us with the opportunity to
earn multiple sources of revenue and provides our card holders
with affordable functionality and lifestyle improvement. As part
of our commitment to South Africa and our customer base, we have
a holistic strategy in keeping with the South African
government’s broad-based empowerment objectives and
incorporating, among other things, procurement, employment
equity, corporate social investment and equity ownership
initiatives. We believe we are well positioned, absolutely and
relatively, in terms of meeting the country’s empowerment
objectives. The South African government is also actively
involved in a number of initiatives which may present us with
opportunities to export our South African achievements, such as
the New Partnership for Africa’s Development and the
India-Brazil-South Africa Dialogue Forum, which is currently
considering the establishment of an economic trade bloc between
these three countries.
On the African continent outside South Africa, we have
implemented our systems at the request of a variety of customers
in Ghana, Rwanda, Burundi, Malawi and Mozambique, which are some
of the poorest countries in the world. In Malawi, our system has
been implemented by the Reserve Bank of Malawi as a national
payment system. We are not actively involved as either investors
or operators in any of these systems, but we believe that our
experience and success in South Africa, together with our
36
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understanding of trade in Africa, will permit us to take
advantage of new opportunities both in and outside South Africa,
which in some instances, may involve acquiring a minority
ownership position in these owners and operators.
Description of Our Business and Operating Segments
We analyze our business and operations in terms of four
inter-related but independent operating segments:
(1) Transaction-based activities, (2) Smart card
accounts, (3) Financial services, and (4) Hardware,
software and related technology sales. In addition, we have a
corporate eliminations segment which consists of corporate and
corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any
inter-segment eliminations. Prior to the quarter ended
March 31, 2005, we included the portion of the fee we earn
from provincial governments that relates to the provision of a
smart card account to each social welfare recipient in our
Financial services operating segment. However, we have recently
started analyzing separately the revenues generated from
providing a smart card account, and therefore, we have expanded
our operating segment analysis to include the fee we earn from
provision of the smart card accounts in a separate segment. We
have restated our operating segment information for prior
periods in order to provide comparability between periods.
| Transaction-Based Activities |
The Transaction-based activities operating segment consists
primarily of our contracts to distribute social welfare payments
in South Africa through our subsidiary Cash Paymaster Services
(Proprietary) Limited, or CPS, and its operating subsidiaries.
CPS’s operating subsidiaries utilize the UEPS technology to
administer and distribute social welfare grants in five of South
Africa’s nine provinces. Revenues from Transaction-based
activities include all fees that we earn from provincial
governments and participating retail merchants from recurring
UEPS transactions that we process through our back-end system,
such as the payment of social welfare grants, debit orders,
payment of wages, point of sale spending, distribution of
medicine, money transfers and prepayment of utility bills. The
expenses associated with Transaction-based activities are
primarily variable expenses such as security and guarding
expenses we incur to help ensure the security of the cash we
transport and the safety of our employees who transport the
cash, banking fees we incur when we withdraw and redeposit cash,
insurance and fixed expenses such as salaries and property
rental.
Historically, a substantial majority of the revenues we derive
from Transaction-based activities has consisted of the service
delivery component of the fee we charge to the provincial
governments with whom we contract for the distribution of social
welfare grants. As stated above, the portion of the fee that
relates to the provision of the smart card account is included
in another segment, Smart card accounts. However, as the
implementation of our POS device infrastructure gathers momentum
and the usage of POS devices accelerates, we expect that the
transaction fees we receive from our participating merchant base
will increase significantly.
South African social welfare grants consist of eight different
grant types, including social security, child support and
disability grants. Provincial government contracts are typically
awarded for a period of three years, with an option by the
provincial government to extend the contract for an additional
two years.
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Table of Contents
The following table shows the current status of each of our
provincial government contracts:
| KwaZulu-Natal | Limpopo | North West | Northern Cape | Eastern Cape | ||||||||||||||||
|
Original year of contract award
|
1992 | 1996 | 1995 | 1997 | 2002 | |||||||||||||||
|
Date acquired by Net 1
|
October 1998 | October 1998 | October 1998 | October 1998 | n/a | |||||||||||||||
|
Date of first Net 1 contract
|
January 2000 | December 2003 | July 2000 | January 2000 | November 2003 | |||||||||||||||
|
UEPS smart card implementation date
|
January 2000 | January 2004 | October 2000 | September 2001 | November 2003 | |||||||||||||||
|
Merchant acquiring rollout date
|
December 2004 | March 2005 | n/a | July 2004 | October 2004 | |||||||||||||||
|
Current contract expiration date (including extensions)
|
December 2005 | November 2006 | December 2005 | December 2006 | November 2005 | |||||||||||||||
|
Further possible extensions
|
1 year | 2 years | Negotiable | Negotiable | 2 years | |||||||||||||||
|
Number of beneficiaries paid by CPS (in the March 2005 payment
cycle)
|
1,431,119 | 859,874 | 272,352 | 124,816 | 633,207 | |||||||||||||||
We believe that we currently have approximately 45% of the
market share in South Africa, based on the number of
beneficiaries, for the distribution of social welfare grants,
including grants distributed by the South African Post Office
and the formal banking sector.
A smart card-based biometric, or fingerprint, identification
system is used to verify beneficiaries and effect payments of
social welfare grants onto individual smart cards, with each
card acting as an account for the beneficiary. The beneficiary
then has the choice of either converting the electronic value to
cash using automated cash dispensers or effecting electronic
payments through the smart card for a range of services such as
the purchase of goods, loan repayments and insurance premium
payments. The system’s biometric verification and audit
capabilities help to reduce the risks of fraud and theft
traditionally associated with the use and storage of cash.
Historically, due to the limited number of services available,
almost all of the beneficiaries have downloaded the value of
their grant payments onto their smart cards and then immediately
accessed the full amount as cash. Our revenue has therefore been
limited to fees we earn on the loading and redemption of value
on the cards as well as the registration of beneficiaries rather
than the provision of other services. We are, however,
aggressively expanding the services available to beneficiaries
to include debit orders, point of service spending and money
transfers. We believe that by making these services available to
beneficiaries, we have the potential to earn additional revenues
in the future.
As of March 31, 2005, we have deployed our UEPS retail
application into merchant stores throughout the Northern Cape,
Eastern Cape, KwaZulu-Natal and Limpopo provinces of South
Africa. The system allows all our card holders to load their
social welfare grants or salaries onto their smart cards at any
participating merchant. Once their smart cards have been loaded,
card holders have the flexibility to either purchase goods or
receive cash offline.
We believe that the support from South African merchants has
been highly favorable and we have signed contracts with
merchants in rural, semi-urban and urban areas, including large
chain stores. Potential benefits to merchants from participation
in the system include increased sales from a growing
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Table of Contents
smart card client base, reduced banking charges, reduced
communications and reconciliation costs and a reduction of the
risks associated with fraud and theft.
Participating merchants can also generate new income streams for
themselves by selling a range of financial products that we
offer.
| Smart Card Accounts |
Our Smart card accounts operating segment derives revenue from
the provision of smart card accounts to our card holders, which
currently primarily consist of social welfare grant
beneficiaries. As described under “Transaction-Based
Activities” above, we provide a smart card account to all
social welfare beneficiaries to whom we distribute payments. A
portion of the fee we earn for the delivery of the service is
for the provision of the smart card account and is therefore
included in the Smart card accounts operating segment. The fixed
costs included in this operating segment are primarily computer
equipment-related and personnel costs associated with the
operation of the smart card accounts.
| Financial Services |
Our Financial services operating segment derives revenues from
providing financial services to card holders through our smart
card delivery channel. These financial services consist
primarily of short-term loans and life insurance products. We
provide the loans ourselves and generate revenue from the
interest earned on these loans. We sell life insurance products
on behalf of registered underwriters and earn revenue through
the commissions we receive on the sale of policies. The fees we
earn for the collection of insurance policy premiums through our
debit order system is included in the Transaction-based
activities operating segment. We plan to grow and develop this
business by launching new products into the provinces in which
we administer social welfare grants. The fixed expenses
associated with the Financial services operating segment consist
primarily of costs of administrative personnel and depreciation
of computer equipment.
We also operate a traditional microlending business with
approximately 100 branches located throughout South Africa.
These branches extend short-term loans for periods ranging from
30 days up to six months, with the majority of loans being
30-day loans. The fixed costs associated with the provision of
these accounts are primarily the leasing of office premises and
salaries associated with the provision of microlending loans.
| Hardware, Software and Related Technology Sales |
We have developed a range of technological competencies to
service our own internal needs and to provide links with our
client enterprises. We derive revenues from the Hardware,
software and related technology sales operating segment by
providing to customers the hardware and software required to
implement our system. Typical components for a system
installation are:
| • | hardware for the back-end switching and settlement system; | |
| • | customization of the UEPS software to suit local conditions, including UEPS management system, automated teller machine, or ATM, integration and POS device integration; | |
| • | customization of an applications suite to client’s specific requirements, such as banking, retail or wage payments; | |
| • | ongoing software and hardware support/maintenance; and | |
| • | license fees. |
One of our largest customers in this segment is Nedbank Limited,
one of South Africa’s largest banks by asset size. We have
an arrangement with Nedbank relating to the outsourcing of its
entire POS device management system, front-end switching Stratus
computer platform, software development, smart cards and POS
device maintenance. We also supply hardware to Nedbank in the
form of POS devices and card readers.
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Table of Contents
Description of Income Statement Line Items
| Cost of Goods Sold, IT Processing, Servicing and Support |
Cost of goods sold, IT processing, servicing and support
includes all costs we incur to provide our systems. The most
significant elements of these costs include (1) security
and guarding expenses which we incur to help protect the
security of the cash we transport and the safety of our
employees who transport the cash, (2) banking expenses we
incur when we withdraw and redeposit cash,
(3) transportation expenses we incur, including fuel,
maintenance and insurance for the automotive vehicles that
travel throughout the provinces to distribute social welfare
payments, (4) personnel expenses other than for our
executive and administration employees, (5) rental and
utilities for the facilities we operate and (6) inventory
expenses, which consist primarily of spare parts to perform
hardware repairs.
| General and Administrative |
General and administrative expenses consist primarily of
(1) personnel expenses for our executive and administration
employees, (2) costs associated with our head office
facility, (3) professional fees, such as audit, legal,
advisory and tax and (4) marketing and travel expenses.
| Depreciation and Amortization |
Depreciation and amortization consists of depreciation of
property, plant and equipment and amortization of intangible
assets.
| Reorganization Charges |
These expenses consist primarily of fees we incurred in
connection with the Aplitec transaction, including financial
advisory fees, legal and accounting fees, printing expenses and
filing fees.
| Interest Income |
Interest income consists of interest we receive on our surplus
cash in our bank accounts, net of the interest we pay on
short-term borrowings. Interest income we earn from our business
of providing short-term loans is included in revenue and is not
included in interest income.
| Income Taxes |
We account 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 we
recognize 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 tax rate in South Africa
varies depending on whether income is distributed. The income
tax rate is currently 30%, but upon distribution an additional
tax of 12.5% is due based on the amount of dividends declared,
net of dividends received during a dividend cycle. In February
2005, the Finance Minister of South Africa announced in his
annual budget speech for the 2005/2006 tax year the decrease in
statutory rate of taxation for South African-domiciled companies
from 30% to 29% for all fiscal years ending on or after
April 1, 2005. As at March 31, 2005, the change in the
rate had not been promulgated by parliament in South Africa and
thus is not the enacted rate as described in Statement of
Financial Accounting Standard 109, Accounting for Income
Taxes. It is difficult to predict the ratification date of
the change in tax rate, however, after enactment the distributed
tax rate would decrease from the current 37.78% to 36.89%. We
have not completed our analysis to determine the effect of the
change in tax rate on our tax expense.
| Earnings from Equity-Accounted Investment |
We use the equity method to account for investments in a company
when we have a significant influence, but not control, over the
operations of the investee company. Under the equity method, we
initially record the investment at cost on our balance sheet. We
reflect in our statements of operations our
40
Table of Contents
proportionate share of the investee company’s net income or
loss and we adjust the carrying value of the investment to
reflect this net income or loss. Currently, our sole
equity-accounted investment is our 43% interest in Permit Group
2 (Proprietary) Limited, which in turn owns 95% of the common
stock of New Era Life Insurance Company, a provider of various
insurance products to the South African market.
Current Trends Affecting Our Business
| Government Decision Making |
We currently derive a significant portion of our revenues from
our contracts with various South African provincial governments.
The national South African government passed legislation in 2004
for creation of the South African Social Security Agency, or
SASSA. The primary purpose of SASSA is to consolidate at the
central government level the administration of social welfare
grants. We believe that our successful record with our
provincial government contracts will provide us with a good
opportunity to benefit from the transition to national
administration of social welfare grants because we may be able
to obtain contracts to distribute grants in provinces with which
we do not currently have a contractual relationship. However,
there is a chance that this consolidation could lead to our
losing our current contracts if the SASSA decides to appoint a
single contractor to provide social welfare grant distribution
and we were not chosen. During this transition period, our
existing provincial government contracts will continue to be
governed by their respective terms.
When a provincial government contract expires, whether at its
originally scheduled expiration date or at the end of any
applicable extension period, we must successfully re-tender in
order to retain the contractual relationship. Usually, such a
tender must be submitted as part of a competitive tender
process. The fact that we previously held a particular contract
does not necessarily mean that it will be awarded to us again.
To date, we have successfully renewed every provincial
government contract which we have been awarded. In addition,
there have been occasions when a contract has not been formally
renewed prior to its originally scheduled expiration date or
expiration of the extension period, but in each of these cases,
we and the provincial government have continued to operate under
the terms of the expired contract until execution of a new
contract.
| Rate of Adoption by System Participants |
An important factor in the growth of our business is the rate at
which system participants use our system to effect transactions
with our smart cards, which in turn depends on our success in
placing POS devices at the locations of retailers where our card
holders can load and spend their social welfare grants or
salaries and the rate at which smart card holders effect
transactions through those POS devices. We believe that
increased use of our system by participants will result in a
significant improvement in the lifestyle of our card holders and
at the same time will reduce our costs of delivering social
welfare grants in cash to beneficiaries. Beginning in July 2004,
we began the rollout of our merchant acquiring system and as of
March 31, 2005, we had begun enrolling participating
retailers in the Northern Cape, Eastern Cape, KwaZulu-Natal and
Limpopo provinces. In each case, we conducted this rollout in
consultation with the provincial governments and community
participants to ensure a smooth and efficient implementation. We
measure our success in achieving increased participant use of
our system by tracking the number of new POS devices installed,
the number of new participating retailer locations and the total
value of transactions processed through these POS devices.
During the first quarter of 2005, we enrolled 265 retail
merchants and installed 340 POS devices at their locations.
During the second quarter of 2005, we enrolled 435 retail
merchants and installed 926 POS devices at their locations.
In the third quarter of 2005, we enrolled 741 retail
merchants and installed 1,140 POS devices at their
locations.
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Table of Contents
The following chart shows the growth in the value of
transactions processed through our installed base of POS devices
since we began implementation of our merchant acquiring system
in 2004:
Migration to Merchant Infrastructure
(Migration to Merchant Infrastructure Chart)
| Total Spent | Total cash withdrawal | Total Spent and Withdrawn | ||||||||||
|
Jan-04
|
3 | 7 | 10 | |||||||||
|
Mar-04
|
386 | 599 | 985 | |||||||||
|
May-04
|
668 | 1351 | 2019 | |||||||||
|
Jul-04
|
3135 | 9297 | 12432 | |||||||||
|
Sep-04
|
4942 | 11260 | 16202 | |||||||||
|
Nov-04
|
16770 | 46741 | 63511 | |||||||||
|
Jan-05
|
22307 | 61231 | 83538 | |||||||||
|
Mar-05
|
42266 | 149003 | 191269 | |||||||||
| Implementation of New UEPS Systems |
The implementation of new UEPS systems, particularly in
developing economies outside our current markets, is a vital
component of our future growth. We are currently exploring a
number of opportunities to implement UEPS systems and to
participate as minority investors in these projects. The success
of these endeavors are, 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.
Critical Accounting Policies
Our annual financial statements have been prepared in accordance
with US GAAP, which requires management to make estimates
and assumptions about future events that affect the reported
amount of assets and liabilities and disclosure of contingent
assets and liabilities. As future events and their effects
cannot be determined with absolute certainty, the determination
of estimates requires management’s judgment based on a
variety of assumptions and other determinants such as historical
experience, current and expected market conditions and certain
scientific evaluation techniques. Management believes that the
following accounting policies are critical due to the degree of
estimation required and the impact of these policies on the
understanding of the results of our operations.
| Deferred Taxation |
We estimate our tax liability through the calculations done for
the determination of our current tax liability when tax returns
are filed, 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 will be recovered from future taxable income. To the
extent that we believe recovery is
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Table of Contents
unlikely, we create a valuation reserve. The carrying value of
our net deferred tax assets assumes that we will be able to
generate sufficient future taxable income, based on estimates
and assumptions. Management has considered future taxable income
and ongoing feasible tax strategies in determining the need for
the valuation allowance, but in the event that we were to
determine that we would be able to realize deferred tax assets
in the future, a valuation allowance may not be required which
would reduce net income in the period that such determination is
made.
| Accounts Receivable and Provision for Doubtful Debts |
We maintain a provision for doubtful debts in our microlending
business resulting from the inability of certain of our clients
to make the required payments. Our current policy is to provide
for the full outstanding amount for all debts which are
outstanding for 150 days and longer. As of March 31,
2005, the full amount of such debt outstanding totaled
$8.8 million (ZAR 55.7 million), which is a 2.6%
increase, in rand terms, over the amount outstanding at
March 31, 2004 ($8.5 million or ZAR
54.3 million). 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 clients 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
client.
| Research and Development |
Our business activities and product offerings depend on our
proprietary UEPS software. As a result, we have a large group of
software engineers and developers who are constantly revising
and improving the core UEPS software. We account for the
development cost of software intended for sale to licensees in
accordance with SFAS No. 86, “Accounting for
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.” SFAS 86 requires product development costs
to be charged to expenses as incurred until technological
feasibility is attained. Technological feasibility is attained
when our software has completed system testing and has been
determined viable for its intended use. The time between the
attainment of technological feasibility and completion of
software development has been short with immaterial amounts of
development costs incurred during this period. Accordingly, we
did not capitalize any development costs in fiscal 2003 or
fiscal 2002, particularly because the main part of our
development is the enhancement and upgrading of existing
products.
We account for the costs to develop software for our internal
use in accordance with Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1), issued by the AICPA. SOP 98-1
requires these costs to be expensed as incurred, except to the
extent that these costs are incurred during the application
development stage. All other costs including those incurred in
the project development and post-implementation stages are
expensed as incurred.
A significant amount of judgment is required to separate
research costs, new development costs and ongoing development
costs based on the transition between these stages. A multitude
of factors need to be considered by management, including an
assessment of the state of readiness of the software and the
existence of markets for the software. The possibility of
capitalizing development costs in the future, within the
criteria set by SFAS 86 or SOP 98-1, may have a
material impact on our profitability in the period when the
costs are capitalized, and in subsequent periods when the
capitalized costs are amortized.
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Currency Exchange Rate Information
Exchange rates at and for the nine months ended March 31,
2005 and 2004, and at and for the years ended June 30,
2004, 2003, 2002, 2001 and 2000, were as follows:
| Nine Months | ||||||||||||||||||||||||||||
| Ended March 31, | Year Ended June 30, | |||||||||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||
|
Actual exchange rates
|
||||||||||||||||||||||||||||
|
ZAR: $ average exchange rate
|
6.1546 | 6.9971 | 6.9001 | 9.0568 | 10.1477 | 7.6109 | 6.3487 | |||||||||||||||||||||
|
Highest ZAR: $ rate during period
|
6.7635 | 7.8030 | 7.8030 | 12.3300 | 13.8450 | 8.1900 | 9.1950 | |||||||||||||||||||||
|
Lowest ZAR: $ rate during period
|
5.5350 | 6.0576 | 6.0576 | 6.9900 | 7.9946 | 6.7300 | 5.9350 | |||||||||||||||||||||
|
Rate at end of period
|
6.3099 | 6.3525 | 6.2750 | 7.4700 | 10.3700 | 8.0536 | 6.8250 | |||||||||||||||||||||
US$: ZAR 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 at and for the nine months ended
March 31, 2005 and 2004, and at and for the years ended
June 30, 2004, 2003, 2002, 2001 and 2000, may 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:
| Nine Months | ||||||||||||||||||||||||||||
| Ended March 31, | Year Ended June 30, | |||||||||||||||||||||||||||
| 2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||
|
Income and expense items:
$1 = ZAR |
6.1433 | 6.9734 | 6.9183 | 9.0568 | 10.1477 | 7.6109 | 6.3487 | |||||||||||||||||||||
|
Balance sheet items:
$1 = ZAR |
6.3099 | 6.3525 | 6.2750 | 7.4700 | 10.3700 | 8.0536 | 6.8250 | |||||||||||||||||||||
Results of Operations
The discussion of our consolidated overall results of operations
is based on amounts in US GAAP as reflected in the
unaudited condensed consolidated financial statements. However,
our discussion of results of operations for individual business
segments is based on amounts in South African GAAP, or
SA GAAP, as reflected in note 6, Operating Segments,
of the notes to the unaudited condensed consolidated financial
statements because the internal financial reporting that is used
by our chief operating
44
Table of Contents
decision maker to evaluate segment performance is prepared on an
SA GAAP basis. Please refer to note 6 to our unaudited
condensed consolidated financial statements for information
discussing certain differences between US GAAP and
SA GAAP.
Additionally, our discussion analyzes 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 results for the year ended June 30, 2005 will include
costs associated with this offering and our compliance with
Section 404 of the Sarbanes-Oxley Act. Our June 30, 2005
balance sheet will reflect the June 30 exchange rate of
ZAR6.68=US$1.00
| Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004 |
There are three factors which significantly impacted our results
of operations during the periods presented:
| • | fluctuations in the exchange rate between the South African rand, or ZAR, which is our functional currency, and the U.S. dollar, which is our reporting currency; | |
| • | commencement during the first quarter of the Nedbank project to deliver POS devices and the conclusion of the project during the third quarter; and | |
| • | higher volumes in transaction-based activities and financial services. |
In addition, our earnings per share of common stock and linked
units for each period reflect the full impact of all new shares
of common and special convertible preferred stock issued in
connection with the Aplitec transaction. The calculation of
earnings per share for the nine months ended March 31, 2005
is based on 54,700,394 shares outstanding which, as of
March 31, 2005, comprised 27,175,135 shares of common
stock and 27,525,259 shares of special convertible
preferred stock, compared to 32,161,190 shares of common
stock used for the calculation of earnings per share for the
nine months ended March 31, 2004. We discuss under the
non-GAAP measures heading below how our earnings per share for
the nine months ended March 31, 2005 and 2004, would have
been affected if all 54,700,394 shares had been outstanding
on July 1, 2003.
45
Table of Contents
| Consolidated Overall Results of Operations |
This discussion is based on the amounts which were prepared in
accordance with US GAAP.
The following tables show the changes in the items comprising
our statements of operations, both in U.S. dollars and in
ZAR.
| In United States Dollars | ||||||||||||
| (US GAAP) | ||||||||||||
| Nine Months Ended March 31, | ||||||||||||
| 2005 | 2004 | $ % | ||||||||||
| $ ‘000 | $ ‘000 | Change | ||||||||||
|
Revenue
|
134,885 | 91,463 | 47 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
41,207 | 28,206 | 46 | % | ||||||||
|
General and administrative
|
33,804 | 25,625 | 32 | % | ||||||||
|
Depreciation and amortization
|
4,897 | 4,110 | 19 | % | ||||||||
|
Reorganization charges
|
— | 3,537 | (100 | )% | ||||||||
|
Operating income
|
54,977 | 29,985 | 83 | % | ||||||||
|
Interest income, net
|
1,497 | 2,464 | (39 | )% | ||||||||
|
Income before income taxes
|
56,474 | 32,449 | 74 | % | ||||||||
|
Income tax expense
|
22,534 | 13,896 | 62 | % | ||||||||
|
Net income before earnings from equity accounted investment
|
33,940 | 18,553 | 83 | % | ||||||||
|
Earnings from equity accounted investment
|
480 | — | ||||||||||
|
Net income
|
34,420 | 18,553 | 86 | % | ||||||||
| In South African Rand | ||||||||||||
| (US GAAP) | ||||||||||||
| Nine Months Ended March 31, | ||||||||||||
| 2005 | 2004 | ZAR % | ||||||||||
| ZAR ‘000 | ZAR ‘000 | Change | ||||||||||
|
Revenue
|
830,391 | 635,992 | 31 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
254,899 | 194,876 | 31 | % | ||||||||
|
General and administrative
|
207,668 | 178,693 | 16 | % | ||||||||
|
Depreciation and amortization
|
30,084 | 28,661 | 5 | % | ||||||||
|
Reorganization charges
|
— | 24,665 | (100 | )% | ||||||||
|
Operating income
|
337,740 | 209,097 | 62 | % | ||||||||
|
Interest income, net
|
9,197 | 17,182 | (46 | )% | ||||||||
|
Income before income taxes
|
346,937 | 226,279 | 53 | % | ||||||||
|
Income tax expense
|
138,433 | 96,902 | 43 | % | ||||||||
|
Net income before earnings from equity accounted investment
|
208,504 | 129,377 | 61 | % | ||||||||
|
Earnings from equity accounted investment
|
2,949 | — | ||||||||||
|
Net income
|
211,453 | 129,377 | 63 | % | ||||||||
Analyzed in ZAR, the increase in revenue and cost of goods sold,
IT processing, servicing and support for the nine months ended
March 31, 2005, was primarily due to the delivery of POS
devices to Nedbank and the higher volumes in our
transaction-based activities and financial services operating
segments. The increase in depreciation and amortization for the
nine months to March 31, 2005 was due, in part, to the
inclusion of the Net 1 intangibles. The reorganization
charges for the nine months ended March 31, 2004 relate to
the Aplitec transaction.
46
Table of Contents
The increase in operating income margin to 41% for the nine
months ended March 31, 2005, from 33% for the nine months
ended March 2004, was primarily due to improved efficiencies
across all activities, performance of the Nedbank contract
mentioned above and a significantly improved contribution from
our contract to pay social welfare grants in the Eastern Cape
province. We anticipate that as we continue to enroll
participating retailers in our system, we will experience
increased utilization of the installed base of our POS devices,
which should result in further improvements in our operating
income margins.
Interest Received and Finance Costs
Interest received consists of interest received on our surplus
cash, while finance costs consist of interest paid on short-term
borrowings. We have a unique cash flow cycle due to our
obligations to pre-fund the payments of social welfare grants in
the KwaZulu-Natal and Eastern Cape provinces. We provide the
funds required for the grant payments on behalf of these
provincial governments from our own cash resources and are
reimbursed within two weeks by the KwaZulu-Natal and Eastern
Cape governments, thus exposing us to these provinces’
credit risk. We have overdraft facilities in the amounts of
ZAR 250 million and ZAR 270 million, respectively, to
assist us with our prefunding obligations under the
KwaZulu-Natal and Eastern Cape contracts. The funding
requirements are at peak levels for the first two weeks of every
month during the year. The pre-funding requirement for the
KwaZulu-Natal and Eastern Cape contracts has increased and
resulted in higher finance costs. However, these increased
expenses were partially offset by the decrease in the South
African prime overdraft rate from an average of 12% per
annum during the nine months ended March 31, 2004 to
11% per annum during the nine months ended March 31,
2005. Thus, finance costs increased from $8.5 million
(ZAR 59.3 million) for the nine months ended
March 31, 2004 to $10.1 million
(ZAR 62.0 million) for the same period in 2005.
Interest on surplus cash for the nine months ended
March 31, 2005 changed to $11.5 million
(ZAR 70.6 million) from $10.8 million
(ZAR 75.3 million) for the comparable period during
the prior year. The decrease in ZAR was due to the lower prime
overdraft rate during the 2005 period.
Taxation
Total tax expense for the nine months ended March 31, 2005
was $22.5 million (ZAR 138.4 million) compared
with $13.9 million (ZAR 96.9 million) during the
same period in the prior year. The increase was due to our
increased profitability in all segments. In February 2005, the
Finance Minister of South Africa announced in his annual budget
speech for the 2005/2006 tax year the decrease in statutory rate
of taxation for South African domiciled companies from 30% to
29% for all fiscal years ending on or after April 1, 2005.
As of March 31, 2005, the change in the rate had not been
promulgated by parliament in South Africa and has therefore not
been reflected in the quarterly financial information presented.
It is difficult to predict the ratification date of the change
in tax rate, however, after enactment the distributed tax rate
would decrease from the current 37.78% to 36.89%. We have not
completed our analysis to determine the effect of the change in
tax rate on our tax expense charge.
Results of Operations by
Operating Segment
The composition of revenue and the contributions of our
operating segments to operating income are illustrated below.
The discussion of our operating segments is based on amounts
which were prepared in accordance with SA GAAP. Our management
prepares financial statements for management purposes
47
Table of Contents
under SA GAAP and our chief operating decision maker evaluates
segment performance using SA GAAP measures.
| In United States Dollars (SA GAAP) | ||||||||||||||||||||
| Nine Months Ended March 31, | ||||||||||||||||||||
| 2005 | % of | 2004 | % of | |||||||||||||||||
| $ ‘000 | Total | $ ‘000 | Total | % Change | ||||||||||||||||
|
Operating Segment
|
||||||||||||||||||||
|
Consolidated revenue:
|
||||||||||||||||||||
|
Transaction-based activities
|
77,538 | 57 | % | 59,875 | 66 | % | 30 | % | ||||||||||||
|
Smart card accounts
|
26,362 | 20 | % | 15,762 | 17 | % | 67 | % | ||||||||||||
|
Financial services
|
15,642 | 12 | % | 12,384 | 14 | % | 26 | % | ||||||||||||
|
Hardware, software and related technology sales
|
15,343 | 11 | % | 3,312 | 3 | % | 363 | % | ||||||||||||
|
Total consolidated revenue
|
134,885 | 100 | % | 91,333 | 100 | % | 48 | % | ||||||||||||
|
Consolidated operating income (loss):
|
||||||||||||||||||||
|
Transaction-based activities
|
31,629 | 55 | % | 18,626 | 68 | % | 70 | % | ||||||||||||
|
Smart card accounts
|
11,983 | 21 | % | 7,165 | 26 | % | 67 | % | ||||||||||||
|
Financial services
|
7,579 | 13 | % | 5,150 | 19 | % | 47 | % | ||||||||||||
|
Hardware, software and related technology sales
|
6,036 | 11 | % | (236 | ) | (1 | )% | |||||||||||||
|
Corporate/Eliminations
|
(174 | ) | 0 | % | (3,442 | ) | (12 | )% | (95 | )% | ||||||||||
|
Total consolidated operating income
|
57,053 | 100 | % | 27,263 | 100 | % | 109 | % | ||||||||||||
| In South African Rand (SA GAAP) | ||||||||||||||||||||
| Nine Months Ended March 31, | ||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||
| ZAR | % of | ZAR | % of | |||||||||||||||||
| ‘000 | Total | ‘000 | Total | % Change | ||||||||||||||||
|
Operating Segment
|
||||||||||||||||||||
|
Consolidated revenue:
|
||||||||||||||||||||
|
Transaction-based activities
|
477,346 | 57 | % | 416,937 | 66 | % | 14 | % | ||||||||||||
|
Smart card accounts
|
162,292 | 20 | % | 109,755 | 17 | % | 48 | % | ||||||||||||
|
Financial services
|
96,297 | 12 | % | 86,238 | 14 | % | 12 | % | ||||||||||||
|
Hardware, software and related technology sales
|
94,456 | 11 | % | 23,062 | 3 | % | 310 | % | ||||||||||||
|
Total consolidated revenue
|
830,391 | 100 | % | 635,992 | 100 | % | 31 | % | ||||||||||||
|
Consolidated operating income (loss):
|
||||||||||||||||||||
|
Transaction-based activities
|
194,605 | 55 | % | 129,661 | 68 | % | 50 | % | ||||||||||||
|
Smart card accounts
|
73,728 | 21 | % | 49,878 | 26 | % | 48 | % | ||||||||||||
|
Financial services
|
46,632 | 13 | % | 35,847 | 19 | % | 30 | % | ||||||||||||
|
Hardware, software and related technology sales
|
37,138 | 11 | % | (1,643 | ) | (1 | )% | |||||||||||||
|
Corporate/Eliminations
|
(1,071 | ) | 0 | % | (23,960 | ) | (12 | )% | (96 | )% | ||||||||||
|
Total consolidated operating income
|
351,032 | 100 | % | 189,783 | 100 | % | 85 | % | ||||||||||||
| Transaction-Based Activities |
In U.S. dollars, revenues increased by 30% for the nine
months ended March 31, 2005, from the comparable period in
2004. Operating income increased by 70% for the nine months
ended March 31, 2005, from the comparable period in 2004.
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Table of Contents
In ZAR, revenues increased by 14% for the nine months ended
March 31, 2005, from the comparable period in 2004.
Operating income increased by 50% for the nine months ended
March 31, 2005, from the comparable period in 2004.
These increases in revenues and operating income were due
primarily to the rollout of our merchant acquiring system which
began in July 2004, implementation of transacting ability at
participating retailers’ POS devices, full operation of the
Eastern Cape provincial contract, higher volumes from our other
provincial contracts and annual increases in the amounts we
charge under our provincial contracts. We discuss these factors
in more detail below.
• Rollout of our merchant acquiring system:
During July 2004, we began a major drive to install POS devices
in rural areas where the majority of our card holders spend
their social welfare grants. The number of POS devices
installed, the number of new UEPS participating retail locations
and the total value of transactions processed through these
terminals is summarized in the table below:
| Total Year to | ||||||||||||||||
| Three Months Ended | Date | |||||||||||||||
| Dec. 2004 | Mar. 2005 | (includes | ||||||||||||||
| (includes | (includes | Northern Cape, | ||||||||||||||
| Sept. 2004 | Northern | Northern Cape, | Eastern Cape | |||||||||||||
| (includes | Cape and | Eastern Cape and | and KwaZulu- | |||||||||||||
| Province | Northern Cape) | Eastern Cape | KwaZulu-Natal) | Natal) | ||||||||||||
|
POS devices installed
|
340 | 926 | 1,140 | 2,406 | ||||||||||||
|
Number of new UEPS participating retail locations
|
265 | 435 | 741 | 1,441 | ||||||||||||
|
Value of transactions processed through POS devices (in $
’000)
|
3,563 | 10,596 | 45,529 | 59,688 | ||||||||||||
|
Value of transactions processed through POS devices (in ZAR
’000)
|
22,711 | 64,518 | 273,800 | 361,029 | ||||||||||||
| • | Full operation of Eastern Cape contract: During the first two quarters of fiscal 2004, the implementation of our social welfare grant payment system in the Eastern Cape Province was not fully operational. We processed 5,480,916 transactions during the nine months ended March 31, 2005, compared with 3,889,783 transactions during the nine months ended March 31, 2004. | |
| • | Higher volumes from our other provincial contracts: We have experienced growth in most of the other provinces where we administer payments of social welfare grants. This growth has been mainly due to new qualifying criteria announced in 2003 by the South African government that increased the eligibility for child support grants, and a significant increase in the number of disability grants approved by the various provincial governments. In total, the volume of payments processed during the nine months ended March 31, 2005 increased 21% to 29,435,978 from the comparable period during 2004. | |
| • | Annual price increase adjustments: Under our Service Level Agreements with provincial governments, we are entitled to annual price increases based upon factors such as average grant size, volumes and the South African Consumer Price Index, or “CPI” rates. |
49
Table of Contents
The higher volumes in existing contracts, as well as any price
increases are detailed below:
| Nine Months Ended March 31, | ||||||||||||||||||||||||
| Average Price per Beneficiary Payment | ||||||||||||||||||||||||
| Number of Payments | ||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||
| Province | 2005 | 2004 | $(1) | $(2) | ZAR(1) | ZAR(2) | ||||||||||||||||||
|
KwaZulu-Natal
|
12,494,917 | 10,194,132 | 3.30 | 2.55 | 20.27 | 17.767 | ||||||||||||||||||
|
Limpopo
|
8,012,425 | 6,893,862 | 2.30 | 1.94 | 14.14 | 13.50 | ||||||||||||||||||
|
North West
|
2,366,301 | 2,332,115 | 2.92 | 2.31 | 17.93 | 16.10 | ||||||||||||||||||
|
Northern Cape
|
1,081,419 | 1,029,949 | 3.41 | 3.01 | 20.97 | 20.97 | ||||||||||||||||||
|
Eastern Cape
|
5,480,916 | 3,889,783 | 2.26 | 2.00 | 13.91 | 13.91 | ||||||||||||||||||
|
Total
|
29,435,978 | 24,339,841 | ||||||||||||||||||||||
| (1) | The average price per payment excludes $0.90 (ZAR 5.50) related to the provision of smart card accounts. |
| (2) | The average price per payment excludes $0.79 (ZAR 5.50) related to the provision of smart card accounts. |
Operating income margin for the nine months ended March 31,
2005 increased to 41% from 31% for the nine months ended
March 31, 2004. These profit margin improvements were
mainly due to:
| • | the increased volumes and the higher average price per payment as detailed in the table above; | |
| • | the reduced losses on the Eastern Cape contract, where we incurred significant expenses during the first half of fiscal 2004 in connection with the process of optimizing the logistics of the Eastern Cape implementation, such as the number of vehicles, number of payment points and number of beneficiaries at each payment point; | |
| • | the conversion of our operations in the Limpopo province during November 2003 to February 2004 to a full smart card-based payment system; and | |
| • | the increase in the number of social grant beneficiaries paid through our POS device infrastructure at participating retailers, instead of payment using more costly automated cash dispensers. |
| Smart Card Accounts |
In U.S. dollars, revenues and operating income each
increased by 67% for the nine months ended March 31, 2005,
from the comparable period in 2004.
In ZAR, revenues and operating income each increased by 48% for
the nine months ended March 31, 2005, from the comparable
period in 2004.
Operating income margin from providing smart card accounts was
fairly constant at 45% for the each of the nine months ended
March 31, 2005 and 2004.
Revenue from the provision of smart card based accounts grew in
proportion to the higher number of beneficiaries serviced
through our social welfare payment contracts. A total number of
3,321,368 smart card-based accounts were active as of
March 31, 2005, compared to 2,949,976 active accounts as at
March 31, 2004. The significant increase in the number of
active accounts is primarily due to the conversion to a full
smart card-based payment system of the beneficiaries we service
in the Limpopo province. A total of 859,874 accounts were active
in this province at March 31, 2005.
| Financial Services |
In U.S. dollars, revenues increased by 26% for the nine
months ended March 31, 2005, from the comparable period in
2004. Operating income increased by 47% for the three months
ended March 31, 2005, from the comparable period in 2004.
50
Table of Contents
In ZAR, revenues increased by 12% for the nine months ended
March 31, 2005, from the comparable period in 2004.
Operating income increased by 30% for the nine months ended
March 31, 2005, from the comparable period in 2004.
Revenues from UEPS-based lending improved as a result of growth
in our loan portfolio as we expanded the areas where this
service is offered. By contrast, the loan portfolio of the
traditional micro-lending businesses remained static as a result
of our strategic decision not to grow this business
aggressively. The key indicators of these businesses are
illustrated below:
| At March 31, | At March 31, | At March 31, | At March 31, | ||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||
| $ % | ZAR % | ||||||||||||||||||||||||
| $ ‘000 | $ ‘000 | Change | ZAR ‘000 | ZAR ‘000 | Change | ||||||||||||||||||||
|
Finance loans receivable:
|
|||||||||||||||||||||||||
|
Traditional microlending — gross
|
11,143 | 12,043 | (7 | )% | 70,313 | 76,502 | (8 | )% | |||||||||||||||||
|
Provisions
|
(7,059 | ) | (8,052 | ) | (12 | )% | (44,541 | ) | (51,148 | ) | (13 | )% | |||||||||||||
|
Finance loans receivable:
|
|||||||||||||||||||||||||
|
Traditional microlending — net of provisions
|
4,084 | 3,991 | 2 | % | 25,772 | 25,354 | 2 | % | |||||||||||||||||
|
Finance loans receivable:
|
|||||||||||||||||||||||||
|
UEPS-based lending — net and gross (i.e., no
provisions)
|
4,746 | 4,550 | 4 | % | 29,944 | 28,906 | 4 | % | |||||||||||||||||
| 8,830 | 8,541 | 55,716 | 54,260 | ||||||||||||||||||||||
Operating income margin for the financial services segment
increased to 48% for the nine months ended March 31, 2005
from 42% for the nine months ended March 31, 2004,
primarily due to the change in the composition of the lending
portfolio from the lower margin and higher risk traditional
microlending to the higher margin and lower risk UEPS-based
lending. The provision of UEPS-based lending is volume driven
and profitability improves as volumes increase, as most costs
are fixed. During fiscal 2005, we have substantially reduced the
staff cost associated with UEPS-based lending, as the fixed-term
contracts of staff members who assisted in the establishment of
this initiative expired. The change in the contribution to
segment revenue and the change in the operating income margin of
UEPS-based lending and traditional microlending for the nine
months ended March 31, 2005 and 2004 are illustrated in the
table below:
| Nine Months Ended March 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| % of | % of | |||||||||||||||
| Total | Profit | Total | Profit | |||||||||||||
| Revenue | Margin % | Revenue | Margin % | |||||||||||||
|
UEPS-based lending
|
48 | % | 76 | % | 18 | % | 66 | % | ||||||||
|
Traditional microlending
|
52 | % | 22 | % | 82 | % | 26 | % | ||||||||
| 100 | % | 100 | % | |||||||||||||
| Hardware, Software and Related Technology Sales |
In U.S. dollars, revenues increased by $12.0 million
for the nine months ended March 31, 2005, from the
comparable period in 2004. Operating income increased by
$6.3 million for the nine months ended March 31, 2005,
from the comparable period in 2004.
In ZAR, revenues increased by ZAR 71.4 million for the
nine months ended March 31, 2005, from the comparable
period in 2004. Operating income increased by
ZAR 38.8 million for the nine months ended
March 31, 2005, from the comparable period in 2004.
These increases were due primarily to revenues earned from
commencement of our contract to supply Nedbank with
18,500 POS devices, 5,600 pin-pads and
66,000 merchant smart cards. Total revenues from
51
Table of Contents
this contract were $10.4 million for the nine months ended
March 31, 2005 (approximately ZAR 63.6 million).
As anticipated, we completed this project during the third
quarter of fiscal 2005. Hardware sales of this nature are
infrequent, and we do not anticipate revenue from similar
large-scale hardware supply contracts to occur in the
foreseeable future.
Corporate/Eliminations
In U.S. dollars, operating loss decreased by 95% for nine
months ended March 31, 2005, from the comparable period in
2004.
In ZAR, operating loss decreased 96% for the nine months ended
March 31, 2005, from the comparable period in 2004.
Changes in operating income resulted primarily from higher staff
and audit costs. In addition, Net1’s operating losses are
not included in the comparative information. Operating income
for the nine months ended March 31, 2005, include a gain of
$2 million (ZAR 12.8 million) relating to the
closure of the insurance captive in the first quarter of 2005
and the earnings from the equity accounted investment. Operating
income for the nine months ended March 31, 2004 includes
the $3.5 million (ZAR 24.7 million)
reorganization charge related to the Aplitec transaction.
52
Table of Contents
Year Ended June 30, 2004 Compared to Year
Ended June 30, 2003
There were two factors that had a significant impact on our
results of operations for the year ended June 30, 2004:
| • | reorganization costs associated with the Aplitec transaction; and | |
| • | fluctuations in the exchange rate between the ZAR and the U.S. dollar. |
| Consolidated Overall Results of Operations |
This discussion is based on the amounts which were prepared in
accordance with US GAAP.
The following tables show the changes in the items comprising
our statements of operations, both in U.S. dollars and ZAR:
| In United States Dollars | ||||||||||||
| (US GAAP) | ||||||||||||
| Year Ended June 30, | ||||||||||||
| 2004 | 2003 | $ % | ||||||||||
| $ ‘000 | $ ‘000 | Change | ||||||||||
|
Revenue
|
131,098 | 74,924 | 75 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
39,134 | 25,935 | 51 | % | ||||||||
|
General and administrative
|
39,677 | 26,399 | 50 | % | ||||||||
|
Depreciation and amortization
|
5,676 | 3,323 | 71 | % | ||||||||
|
Reorganization charges
|
11,133 | — | ||||||||||
|
Operating income
|
35,478 | 19,267 | 84 | % | ||||||||
|
Interest income, net
|
3,640 | 2,600 | 40 | % | ||||||||
|
Income before income taxes
|
39,118 | 21,867 | 79 | % | ||||||||
|
Income tax expense
|
25,927 | 9,473 | 174 | % | ||||||||
|
Net income before minority interest, earnings from equity
accounted investment, extraordinary item and cumulative effect
of an accounting charge
|
13,191 | 12,394 | 6 | % | ||||||||
|
Minority interest
|
— | 452 | (100 | )% | ||||||||
|
Earnings from equity accounted investment
|
87 | — | ||||||||||
|
Extraordinary item
|
— | 857 | (100 | )% | ||||||||
|
Cumulative effect of an accounting change
|
— | 318 | (100 | )% | ||||||||
|
Net income
|
13,278 | 13,117 | 1 | % | ||||||||
53
Table of Contents
| In South African Rand | ||||||||||||
| (US GAAP) | ||||||||||||
| Year Ended June 30, | ||||||||||||
| 2004 | 2003 | ZAR | ||||||||||
| ZAR | ZAR | % | ||||||||||
| ‘000 | ‘000 | Change | ||||||||||
|
Revenue
|
898,768 | 678,568 | 32 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
265,003 | 234,879 | 13 | % | ||||||||
|
General and administrative
|
274,497 | 239,090 | 15 | % | ||||||||
|
Depreciation and amortization
|
39,268 | 30,096 | 30 | % | ||||||||
|
Reorganization charges
|
77,021 | — | ||||||||||
|
Operating income
|
242,979 | 174,503 | 39 | % | ||||||||
|
Interest income, net
|
25,183 | 23,548 | 7 | % | ||||||||
|
Income before income taxes
|
268,162 | 198,051 | 35 | % | ||||||||
|
Income tax expense
|
179,371 | 85,795 | 109 | % | ||||||||
|
Net income before minority interest, earnings from equity
accounted investment, extraordinary item and cumulative effect
of an accounting charge
|
88,791 | 112,256 | (21 | )% | ||||||||
|
Minority interest
|
— | 4,094 | (100 | )% | ||||||||
|
Earnings from equity accounted investment
|
602 | — | ||||||||||
|
Extraordinary item
|
— | 7,762 | (100 | )% | ||||||||
|
Cumulative effect of an accounting change
|
— | 2,880 | (100 | )% | ||||||||
|
Net income
|
89,393 | 118,804 | (25 | )% | ||||||||
Analyzed in ZAR, the increase in revenue and cost of goods sold,
IT processing, servicing and support for the year ended
June 30, 2004, was primarily due the higher volumes in our
transaction-based activities and financial services operating
segments. The reorganization charges for the year ended
June 30, 2004 relate to the Aplitec transaction.
The increase in operating income margin to 27% for the year
ended June 30, 2004, from 26% for the year ended
June 30, 2003, was primarily due to improved efficiencies
across all activities.
Interest Received and Finance Costs
Interest received consists of interest received on our surplus
cash, while finance costs consist of interest paid on short-term
borrowings. We have a unique cash flow cycle due to our
obligations to pre-fund the payments of social welfare grants in
the KwaZulu-Natal and Eastern Cape provinces. We provide the
funds required for the grant payments on behalf of these
provincial governments from our own cash resources and are
reimbursed within two weeks by the KwaZulu-Natal and Eastern
Cape governments, thus exposing us to these provinces’
credit risk. These obligations result in a peak funding
requirement, on a monthly basis, of approximately
$36.1 million (ZAR 250 million) for the
KwaZulu-Natal contract and $26 million (ZAR
180 million) for the Eastern Cape contract. The funding
requirements are at peak levels for the first two weeks of every
month during the year. The significantly higher payment volumes
in KwaZulu-Natal during the year ended June 30, 2004, as
well as full operational implementation of the Eastern Cape
provincial contract, increased our pre-funding requirements
which resulted in an increase in finance costs from
$5.5 million (ZAR 49.5 million) in 2003 to
$11.8 million (ZAR 81.5 million) in 2004.
Interest on surplus cash increased from $8.1 million
(ZAR 73.1 million) to $15.4 million
(ZAR 106.4 million), primarily due to the higher
average cash on hand balances during the year ended
June 30, 2004 compared with 2003. Cash on hand increased
from $54.3 million (ZAR 405.7 million) at
June 30, 2003 to $80.3 million
(ZAR 503.7 million) at June 30, 2004.
54
Table of Contents
Taxation
Total tax expense for the year ended June 30, 2004
increased from $9.5 million (ZAR 85.8 million) in
2003 to $26.0 million (ZAR 179.4 million), mainly
due to our increased profitability and the large tax payments
relating to the Aplitec transaction. These taxes relate
primarily to capital gains tax. The majority of the
reorganization charges are also not allowed as deductions for
tax purposes, which further increased the amount of income taxes
payable and the effective tax rate.
Minority Interests
No income was attributable to minority interests during the year
ended June 30, 2004, as we acquired all of these minority
interests during the year ended June 30, 2003.
Results of Operations by
Operating Segment
The composition of revenue and the contributions of our
operating segments to operating income are illustrated below.
The discussion of our operating segments is based on amounts
which were prepared in accordance with SA GAAP. Our management
prepares financial statements for management purposes under SA
GAAP and our chief operating decision maker evaluates segment
performance using SA GAAP measures.
| In United States Dollars (SA GAAP) | ||||||||||||||||||||
| Year Ended June 30, | ||||||||||||||||||||
| 2004 | % of | 2003 | % of | % | ||||||||||||||||
| $ ‘000 | Total | $ ‘000 | Total | Change | ||||||||||||||||
|
Operating Segment
|
||||||||||||||||||||
|
Consolidated revenue:
|
||||||||||||||||||||
|
Transaction-based activities
|
83,275 | 64 | % | 44,058 | 58 | % | 89 | % | ||||||||||||
|
Smart card accounts
|
26,584 | 20 | % | 13,750 | 18 | % | 93 | % | ||||||||||||
|
Financial services
|
16,633 | 13 | % | 13,407 | 18 | % | 24 | % | ||||||||||||
|
Hardware, software and related technology sales
|
4,606 | 3 | % | 5,135 | 6 | % | (10 | )% | ||||||||||||
|
Total consolidated revenue
|
131,098 | 100 | % | 76,350 | 100 | % | 72 | % | ||||||||||||
|
Consolidated operating income (loss):
|
||||||||||||||||||||
|
Transaction-based activities
|
24,913 | 63 | % | 10,196 | 53 | % | 144 | % | ||||||||||||
|
Smart card accounts
|
12,055 | 31 | % | 5,500 | 28 | % | 119 | % | ||||||||||||
|
Financial services
|
6,778 | 17 | % | 4,705 | 24 | % | 44 | % | ||||||||||||
|
Hardware, software and related technology sales
|
1,232 | 3 | % | 680 | 4 | % | 81 | % | ||||||||||||
|
Corporate/ Eliminations
|
(5,735 | ) | (14 | )% | (1,663 | ) | (9 | )% | 245 | % | ||||||||||
|
Total consolidated operating income
|
39,243 | 100 | % | 19,418 | 100 | % | 102 | % | ||||||||||||
55
Table of Contents
| In South African Rand (SA GAAP) | |||||||||||||||||||||
| Year Ended June 30, | |||||||||||||||||||||
| 2004 | 2003 | ||||||||||||||||||||
| ZAR | % of | ZAR | % of | % | |||||||||||||||||
| ‘000 | Total | ‘000 | Total | Change | |||||||||||||||||
|
Operating Segment
|
|||||||||||||||||||||
|
Consolidated revenue:
|
|||||||||||||||||||||
|
Transaction-based activities
|
567,910 | 63 | % | 399,016 | 58 | % | 42 | % | |||||||||||||
|
Smart card accounts
|
183,917 | 20 | % | 124,533 | 18 | % | 48 | % | |||||||||||||
|
Financial services
|
115,077 | 13 | % | 121,426 | 18 | % | (5 | )% | |||||||||||||
|
Hardware, software and related technology sales
|
31,864 | 4 | % | 46,509 | 6 | % | (31 | )% | |||||||||||||
|
Total consolidated revenue
|
898,768 | 100 | % | 691,484 | 100 | % | 30 | % | |||||||||||||
|
Consolidated operating income (loss):
|
|||||||||||||||||||||
|
Transaction-based activities
|
172,360 | 64 | % | 92,343 | 53 | % | 87 | % | |||||||||||||
|
Smart card accounts
|
83,599 | 31 | % | 49,813 | 28 | % | 68 | % | |||||||||||||
|
Financial services
|
46,696 | 17 | % | 42,605 | 24 | % | 10 | % | |||||||||||||
|
Hardware, software and related technology sales
|
8,525 | 3 | % | 6,162 | 4 | % | 38 | % | |||||||||||||
|
Corporate/Eliminations
|
(40,166 | ) | (15 | )% | (15,055 | ) | (9 | )% | 167 | % | |||||||||||
|
Total consolidated operating income
|
271,014 | 100 | % | 175,868 | 100 | % | 54 | % | |||||||||||||
| Transaction-Based Activities |
In U.S. dollars, revenues increased by 89% for the year
ended June 30, 2004, from the comparable period in 2003.
Operating income increased by 144% for the year ended
June 30, 2004, from the comparable period in 2003.
In ZAR, revenues increased by 42% for the year ended
June 30, 2004, from the comparable period in 2003.
Operating income increased by 87% for the year ended
June 30, 2004, from the comparable period in 2003.
These increases in revenues and operating income were due
primarily to the full operation of the Eastern Cape provincial
contract, significantly higher volumes from our other provincial
contracts and annual increases in the amounts we charge under
our provincial contracts. We discuss these factors in more
detail below.
| • | Full operation of Eastern Cape contract: The implementation of our social welfare grant payment system in the Eastern Cape province became fully operational in 2004, which dramatically increased the number of benefits processed during the year in that province to 5,482,237 transactions, compared with 1,050,833 in the prior year. | |
| • | Significantly higher volumes under existing provincial contracts: We experienced significant growth in most of the other provinces where we administer payments of social welfare grants. This growth is mainly due to new qualifying criteria announced in 2003 by the South African government that increased the eligibility for child support grants. In total, the volume of payments processed during the year ended June 30, 2004 increased by 43% to 33,439,462 compared to the year ended June 30, 2003. | |
| • | Annual price increase adjustments: Under our Service Level Agreements with provincial governments, we are entitled to annual price increases based upon factors such as average grant size, volumes and the South African Consumer Price Index, or “CPI” rates. |
56
Table of Contents
The higher volumes under existing provincial contracts during
the year ended June 30, 2004, as well as any price
increases, relative to 2003, are detailed below:
| Year Ended June 30, | ||||||||||||||||||||||||
| Average Price per Beneficiary Payment | ||||||||||||||||||||||||
| Number of Payments | ||||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
| Province | 2004 | 2003 | (US$)(1) | (US$)(2) | (ZAR)(1) | (ZAR)(2) | ||||||||||||||||||
|
KwaZulu-Natal
|
14,037,541 | 11,125,544 | 2.66 | 1.80 | 18.26 | 15.82 | ||||||||||||||||||
|
Limpopo
|
9,402,141 | 7,435,326 | 2.04 | 1.45 | 13.98 | 12.64 | ||||||||||||||||||
|
North West
|
3,127,808 | 2,940,723 | 2.35 | 1.82 | 16.09 | 15.99 | ||||||||||||||||||
|
Northern Cape
|
1,389,735 | 1,180,735 | 3.05 | 2.27 | 20.97 | 20.07 | ||||||||||||||||||
|
Eastern Cape
|
5,482,237 | 1,050,833 | 2.03 | 1.64 | 13.91 | 14.41 | ||||||||||||||||||
|
Total
|
33,439,462 | 23,733,161 | ||||||||||||||||||||||
| (1) | The average price per payment excludes $0.70 (ZAR 5.50) related to the provision of smart card accounts. |
| (2) | The average price per payment excludes $0.70 (ZAR 5.00) related to the provision of smart card accounts. |
Operating income margin for the year ended June 30, 2004,
improved to 30.3% from 20.6% for the year ended June 30,
2003. These margin improvements were mainly due to:
| • | reduced losses on the Eastern Cape contract, on which we experienced significant losses during 2003 as a result of the substantial establishment costs and very low transaction volumes during the contract implementation period. The increased costs we incurred during the first half of 2004 in connection with the process of optimizing the logistics of the Eastern Cape implementation, such as number of vehicles, number of payment points and number of beneficiaries at each payment point, also resulted in reduced losses on the Eastern Cape contract during the second half of 2004; and | |
| • | the conversion of our operations in the Limpopo province to a full smart card-based payment system. |
As we depreciate capital expenditures in respect of the Limpopo
and Eastern Cape provincial contracts and we improve logistical
planning in the Eastern Cape, we expect our operating income
margins from transaction-based activities to improve.
| Smart Card Accounts |
In U.S. dollars, revenues increased by 93% for the year
ended June 30, 2004, from the comparable period in 2003.
Operating income increased by 119% for the year ended
June 30, 2004, from the comparable period in 2003.
In ZAR, revenues increased by 48% for the year ended
June 30, 2004, from the comparable period in 2003.
Operating income increased by 68% for the year ended
June 30, 2004, from the comparable period in 2003.
Operating income margin from providing smart card accounts
increased by 5% for the year ended June 30, 2004, from the
comparable period in 2003.
Revenue from the provision of smart card based accounts grew in
proportion to the higher number of beneficiaries serviced
through our social welfare payment contracts. A total number of
3,066,581 UEPS smart card-based accounts were active at
June 30, 2004, compared to 1,852,624 active accounts as at
June 30, 2003. The significant increase in the number of
active accounts was primarily due to the conversion of the
beneficiaries serviced in the Limpopo province to a full smart
card-based payment system. A total of 840,320 accounts had been
activated in this province at June 30, 2004.
57
Table of Contents
| Financial Services |
In U.S. dollars, revenues increased by 24% for the year
ended June 30, 2004, from the comparable period in 2003.
Operating income increased by 44% for the year ended
June 30, 2004, from the comparable period in 2003.
In ZAR, revenues decreased by 5% for the year ended
June 30, 2004, from the comparable period in 2003.
Operating income increased by 10% for the year ended
June 30, 2004, from the comparable period in 2003.
Revenue from UEPS-based lending improved as a result of strong
growth in our loan portfolio as we expanded the areas where we
offer this service. In contrast, the loan portfolio of our
traditional micro-lending businesses declined as a result of our
strategic decision not to grow this business aggressively. The
key indicators of these businesses are illustrated below:
| Year Ended June 30, | ||||||||||||||||||||||||
| 2004 | 2003 | |||||||||||||||||||||||
| 2004 | 2003 | $ % | ZAR | ZAR | ZAR % | |||||||||||||||||||
| $ ‘000 | $ ‘000 | Change | ‘000 | ‘000 | Change | |||||||||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
Traditional microlending — gross
|
12,609 | 10,963 | 15 | % | 79,124 | 81,890 | (3 | )% | ||||||||||||||||
|
Provisions
|
(8,352 | ) | (6,529 | ) | 28 | % | (52,410 | ) | (48,771 | ) | 8 | % | ||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
Traditional microlending — net of provisions
|
4,257 | 4,434 | (4 | )% | 26,714 | 33,119 | (19 | )% | ||||||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
UEPS-based lending — net and gross (i.e., no
provisions)
|
5,043 | 3,194 | 58 | % | 31,647 | 23,861 | 33 | % | ||||||||||||||||
| 9,300 | 7,628 | 58,361 | 56,980 | |||||||||||||||||||||
Operating income margin increased for the year ended
June 30, 2004 to 41%, compared to 35% for the year ended
June 30, 2003, primarily due to the change in the mix of
the debtors book from the lower margin and higher risk
traditional microlending to the higher margin and lower risk
UEPS-based lending. The provision of UEPS-based lending is
volume driven and profitability improves as volumes increase, as
most costs are fixed. The change in the contribution of the
various components to revenue and the change in the operating
income margin from 2003 to 2004 are illustrated in the table
below:
| Year Ended June 30, | ||||||||||||||||
| 2004 | 2003 | |||||||||||||||
| % of | Operating | % of | Operating | |||||||||||||
| Total | Income | Total | Income | |||||||||||||
| Revenue | Margin % | Revenue | Margin % | |||||||||||||
|
UEPS-based lending
|
41 | % | 66 | % | 34 | % | 58 | % | ||||||||
|
Traditional microlending
|
59 | % | 27 | % | 66 | % | 31 | % | ||||||||
| 100 | % | 100 | % | |||||||||||||
| Hardware, Software and Related Technology Sales |
In U.S. dollars, revenues decreased by 10% for the year
ended June 30, 2004, from the comparable period in 2003.
Operating income increased by 81% for the year ended
June 30, 2004, from the comparable period in 2003.
In ZAR, revenues decreased by 31% for the year ended
June 30, 2004, from the comparable period in 2003.
Operating income increased by 38% for the year ended
June 30, 2004, from the comparable period in 2003.
58
Table of Contents
These activities have limited recurring revenues, such as
royalty income, and are dependent on signing new contracts
and/or the expansion of UEPS systems already implemented.
The revenue decrease was expected due to a significant change in
the product mix, from low margin hardware sales to high margin
software sales. As a result, operating income from these
activities improved and the operating income margin increased to
27% for the year ended June 30, 2004 from 13% for 2003.
A significant local customer serviced through these activities
is Nedbank Limited, one of South Africa’s four largest
banks, which outsources certain processing and development
services to us. The Nedbank business remained fairly static
during 2004. On July 27, 2004, we and Nedbank announced
that we had been contracted to supply Nedbank with 18,500 POS
devices, 5,600 pin-pads and 66,000 merchant smart cards. The
revenue from this contract for the nine months ended
March 31, 2005 was approximately $10.7 million
(ZAR 66.95 million).
| Corporate/Eliminations |
In U.S. dollars, operating loss increased by 245% for the
year ended June 30, 2004, from the comparable period in
2003.
In ZAR, operating loss increased by 167% for the year ended
June 30, 2004, from the comparable period in 2003.
The main component of the Corporate/ Eliminations segment for
2004 was costs relating to the Aplitec transaction. The total
reorganization charge incurred during 2004 amounted to
$11.1 million (ZAR 77.0 million). The full amount of
these costs was expensed during 2004.
59
Table of Contents
Year Ended June 30, 2003 Compared to Year
Ended June 30, 2002
The fluctuation in the exchange rate between the ZAR and the
U.S. dollar was the only critical factor that had a
significant impact on our results of operations during the year
ended June 30, 2003.
| Consolidated Overall Results of Operations |
This discussion is based on the amounts which were prepared in
accordance with US GAAP.
The following tables show the changes in the items comprising
our statements of operations, both in U.S. dollars and in
ZAR.
| In United States Dollars | ||||||||||||
| (US GAAP) | ||||||||||||
| Year Ended June 30, | ||||||||||||
| 2003 | 2002 | $ % | ||||||||||
| $ ‘000 | $ ‘000 | Change | ||||||||||
|
Revenue
|
74,924 | 51,793 | 45 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
25,935 | 14,170 | 83 | % | ||||||||
|
General and administration
|
26,399 | 21,637 | 22 | % | ||||||||
|
Depreciation and amortization
|
3,323 | 3,128 | 6 | % | ||||||||
|
Reorganization charges
|
— | — | ||||||||||
|
Operating income
|
19,267 | 12,858 | 50 | % | ||||||||
|
Interest income, net
|
2,600 | 1,381 | 88 | % | ||||||||
|
Income before income taxes
|
21,867 | 14,239 | 54 | % | ||||||||
|
Income tax expense
|
9,473 | 5,554 | 71 | % | ||||||||
|
Net income before minority interest, earnings from equity
accounted investment, extraordinary item and cumulative effect
of an accounting charge
|
12,394 | 8,685 | 43 | % | ||||||||
|
Minority interest
|
452 | 167 | 171 | % | ||||||||
|
Earnings from equity accounted investment
|
— | — | ||||||||||
|
Extraordinary item
|
857 | — | ||||||||||
|
Cumulative effect of an accounting charge
|
318 | — | ||||||||||
|
Net income
|
13,117 | 8,518 | 54 | % | ||||||||
60
Table of Contents
| In South African Rand | ||||||||||||
| (US GAAP) | ||||||||||||
| Year Ended June 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
| ZAR | ZAR | ZAR % | ||||||||||
| ‘000 | ‘000 | Change | ||||||||||
|
Revenue
|
678,568 | 525,174 | 29 | % | ||||||||
|
Cost of goods sold, IT processing, servicing and support
|
234,879 | 143,375 | 64 | % | ||||||||
|
General and administrative
|
239,090 | 219,566 | 9 | % | ||||||||
|
Depreciation and amortization
|
30,096 | 31,742 | (5 | )% | ||||||||
|
Reorganization charges
|
— | — | ||||||||||
|
Operating income
|
174,503 | 130,491 | 34 | % | ||||||||
|
Interest income, net
|
23,548 | 14,014 | 68 | % | ||||||||
|
Income before income taxes
|
198,051 | 144,505 | 37 | % | ||||||||
|
Income tax expense
|
85,795 | 56,360 | 52 | % | ||||||||
|
Net income before minority interest, earnings from equity
accounted investment, extraordinary item and cumulative effect
of an accounting change
|
112,256 | 88,145 | 27 | % | ||||||||
|
Minority interest
|
4,094 | 1,695 | 142 | % | ||||||||
|
Earnings from equity accounted investment
|
— | — | ||||||||||
|
Extraordinary item
|
7,762 | — | ||||||||||
|
Cumulative effect of an accounting change
|
2,880 | — | ||||||||||
|
Net income
|
118,804 | 86,450 | 37 | % | ||||||||
Analyzed in ZAR, the increase in revenue and cost of goods sold,
IT processing, servicing and support for the year ended
June 30, 2003, was primarily due to the higher volumes in
our transaction-based activities and financial services
operating segments. The decrease in depreciation and
amortization for the year ended June 30, 2003 was due, in
part, to the additional depreciation charge from the Eastern
Cape provincial contract.
The increase in operating income margin to 26% for the year
ended June 30, 2003, from 25% for the year ended
June 30, 2002, was primarily due to improved efficiencies
across all other activities.
Interest Received and Finance Costs
The significantly higher payment volumes in KwaZulu-Natal during
the year ended June 30, 2003, as well as the implementation
of the Eastern Cape provincial contract, increased our
pre-funding requirements, which resulted in an increase in
finance costs in 2003 from $1.9 million (ZAR
19 million) in 2002 to $5.5 million (ZAR
49.5 million).
Interest on our surplus cash increased from $3.3 million
(ZAR 33.1 million) for the year ended June 30, 2002 to
$8.1 million (ZAR 73.1 million) for the year ended
June 30, 2003, primarily due to an increase of
$11.7 million (ZAR 106 million) in cash on hand, as
well as significantly higher interest rates earned on deposits.
We also maximized our interest income through the commencement
in 2002 of a cash management system, which allows for the
overnight set-off of all cash balances and overdrafts across all
of our subsidiaries except for microlending subsidiaries. Any
cash balances related to unpaid social welfare grants received
from provincial governments where we do not pre-fund such grants
(i.e., North West Province, Northern Cape Province and
Limpopo) are excluded from our cash management system and
overnight set-off, as the ownership of these accounts remains
with the provincial governments.
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Table of Contents
Taxation
Total tax expense increased from $5.6 million (ZAR
56.4 million) for the year ended June 30, 2002 to
$9.5 million (ZAR 85.8 million) for the year ended
June 30, 2003, mainly due to our increased profitability.
The increase in the effective tax rate for 2003 was mainly due
to non-deductible expenses of $1.1 million (ZAR
10.2 million), including $0.6 million (ZAR
5.3 million) resulting from the settlement of share options.
Minority Interests
Income attributable to minority interests increased from
$0.2 million (ZAR 1.7 million) for the year ended
June 30, 2002 to $0.5 million (ZAR 4.1 million)
for the year ended June 30, 2003, due to the increased
profitability of four subsidiaries that are involved in the
social welfare payment business with outside shareholders.
During 2003, we acquired the minority interests in three of
these subsidiaries for a total consideration of
$1.4 million (ZAR 12.4 million), which should lead to
a significant reduction in income attributable to minority
interests in 2004.
Results of Operations by
Operating Segments
The composition of revenue and the contributions of our
operating segments to operating income are illustrated below.
The discussion of our operating segments is based on amounts
which were prepared in accordance with SA GAAP. Our management
prepares financial statements for management purposes under SA
GAAP and our chief operating decision maker evaluates segment
performance using SA GAAP measures.
| In United States Dollars (SA GAAP) | ||||||||||||||||||||
| Year Ended June 30, | ||||||||||||||||||||
| 2003 | % of | 2002 | % of | % | ||||||||||||||||
| $ ‘000 | Total | $ ‘000 | Total | Change | ||||||||||||||||
|
Operating Segment
|
||||||||||||||||||||
|
Consolidated revenue:
|
||||||||||||||||||||
|
Transaction-based activities
|
44,058 | 58 | % | 28,291 | 55 | % | 56 | % | ||||||||||||
|
Smart card accounts
|
13,750 | 18 | % | 8,318 | 16 | % | 65 | % | ||||||||||||
|
Financial services
|
13,407 | 18 | % | 10,465 | 20 | % | 28 | % | ||||||||||||
|
Hardware, software and related technology sales
|
5,135 | 6 | % | 4,719 | 9 | % | 9 | % | ||||||||||||
|
Total consolidated revenue
|
76,350 | 100 | % | 51,793 | 100 | % | 47 | % | ||||||||||||
|
Consolidated operating income (loss):
|
||||||||||||||||||||
|
Transaction-based activities
|
10,196 | 53 | % | 7,376 | 55 | % | 38 | % | ||||||||||||
|
Smart card accounts
|
5,500 | 28 | % | 2,772 | 21 | % | 98 | % | ||||||||||||
|
Financial services
|
4,705 | 24 | % | 900 | 7 | % | 423 | % | ||||||||||||
|
Hardware, software and related technology sales
|
680 | 4 | % | 1,611 | 12 | % | (58 | )% | ||||||||||||
|
Corporate/Eliminations
|
(1,663 | ) | (9 | )% | 642 | 5 | % | |||||||||||||
|
Total consolidated operating income
|
19,418 | 100 | % | 13,301 | 100 | % | 46 | % | ||||||||||||
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Table of Contents
| In South African Rand (SA GAAP) | ||||||||||||||||||||
| Year Ended June 30, | ||||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||||
| ZAR | % of | ZAR | % of | % | ||||||||||||||||
| ‘000 | Total | ‘000 | Total | Change | ||||||||||||||||
|
Operating Segment
|
||||||||||||||||||||
|
Consolidated revenue:
|
||||||||||||||||||||
|
Transaction-based activities
|
399,016 | 58 | % | 287,095 | 55 | % | 39 | % | ||||||||||||
|
Smart card accounts
|
124,533 | 18 | % | 84,404 | 16 | % | 48 | % | ||||||||||||
|
Financial services
|
121,426 | 18 | % | 106,196 | 20 | % | 14 | % | ||||||||||||
|
Hardware, software and related technology sales
|
46,509 | 6 | % | 47,890 | 9 | % | (3 | )% | ||||||||||||
|
Total consolidated revenue
|
691,484 | 100 | % | 525,585 | 100 | % | 32 | % | ||||||||||||
|
Consolidated operating income (loss):
|
||||||||||||||||||||
|
Transaction-based activities
|
92,343 | 53 | % | 74,848 | 55 | % | 23 | % | ||||||||||||
|
Smart card accounts
|
49,813 | 28 | % | 28,135 | 21 | % | 77 | % | ||||||||||||
|
Financial services
|
42,605 | 24 | % | 9,131 | 7 | % | 367 | % | ||||||||||||
|
Hardware, software and related technology sales
|
6,162 | 4 | % | 16,354 | 12 | % | (62 | )% | ||||||||||||
|
Corporate/Eliminations
|
(15,055 | ) | (9 | )% | 6,532 | 5 | % | |||||||||||||
|
Total consolidated operating income
|
175,868 | 100 | % | 135,000 | 100 | % | 30 | % | ||||||||||||
| Transaction-Based Activities |
In U.S. dollars, revenues increased by 56% for the year
ended June 30, 2003, from the comparable period in 2002.
Operating income increased by 38% for the year ended
June 30, 2003, from the comparable period in 2002.
In ZAR, revenues increased by 39% for the year ended
June 30, 2003, from the comparable period in 2002.
Operating income increased by 23% for the year ended
June 30, 2003, from the comparable period in 2002.
These increases in revenues and operating income were due
primarily to the commencement of the Eastern Cape provincial
contract, significantly higher volumes from our other provincial
contracts and annual price adjustments in the amounts we charge
under our provincial contracts. We discuss these factors in more
detail below:
| • | New Eastern Cape contract: In November 2002, we commenced the implementation of a social welfare grant payment system in the Eastern Cape province. At year-end, we had processed benefits for 469,918 beneficiaries. The Eastern Cape contract generated revenue of $4.6 million (ZAR 47.1 million) in the last eight months in fiscal 2003. | |
| • | Significantly higher volumes under existing provincial contracts: We experienced significant growth in most of the other provinces where we administer payments of social welfare grants. This growth is mainly due to new qualifying criteria announced by the South African government aimed at increasing the number of citizens eligible for social welfare grants. | |
| • | Annual price increase adjustments: Under our Service Level Agreements with provincial governments, we are entitled to annual price increases based upon factors such as average grant size, volumes and the South African Consumer Price Index, or “CPI” rates. |
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Table of Contents
The higher volumes under existing provincial contracts, as well
as the 2003 price increases, are detailed below:
| Year Ended June 30, | ||||||||||||||||||||||||
| Number of Payments | ||||||||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||||
| Province | 2003 | 2002 | (US$)(1) | (US$)(2) | (ZAR)(1) | (ZAR)(2) | ||||||||||||||||||
|
KwaZulu-Natal
|
11,125,544 | 8,834,917 | 1.80 | 1.23 | 15.82 | 12.48 | ||||||||||||||||||
|
Limpopo
|
7,435,326 | 6,025,866 | 1.45 | 1.07 | 12.64 | 10.82 | ||||||||||||||||||
|
North West
|
2,940,723 | 2,992,402 | 1.82 | 1.52 | 15.99 | 15.43 | ||||||||||||||||||
|
Northern Cape
|
1,180,735 | 1,005,813 | 2.27 | 1.84 | 20.07 | 18.66 | ||||||||||||||||||
|
Eastern Cape
|
1,050,833 | — | 1.64 | — | 14.41 | — | ||||||||||||||||||
|
Total
|
23,733,161 | 18,858,998 | ||||||||||||||||||||||
| (1) | The average price per payment excludes $0.70 (ZAR 5.00) related to the provision of smart card accounts. |
| (2) | The average price per payment excludes $0.70 (ZAR 4.50) related to the provision of smart card accounts. |
Operating income margin decreased for the year ended
June 30, 2003 to 23% from 26% for the year ended
June 30, 2002.
We incurred significant costs in connection with the
commencement of the Eastern Cape social welfare payment system.
This is typical for businesses that have significant up-front
implementation costs but cannot begin collecting revenue until
implementation is complete. This business model exerts pressure
on our operating income margin during the early stages of a new
contract. Efficiency and profitability will increase over time
as more customers are converted to our payment system. The
conversion period in the Eastern Cape took approximately
14 months to complete.
The losses experienced in the Eastern Cape were marginally
offset by the improved profitability of our social welfare
payment contracts in other provinces. As these contracts are now
well beyond their establishment phases, we continue to improve
the efficiencies of these systems through strict cost control
measures and improved logistical planning. We try to keep any
increases in operational, selling, general and administrative
expenses below the total annual price increase rates under these
contracts. A further positive effect on our operating income
margin was that our selling, general and administrative expenses
remained predominantly fixed during the year ended June 30,
2003, while our revenue from these contracts benefited from the
significant increase in volumes.
| Smart Card Accounts |
In U.S. dollars, revenues increased by 65% for the year
ended June 30, 2003, from the comparable period in 2002.
Operating income increased by 98% for the year ended
June 30, 2003, from the comparable period in 2002.
In ZAR, revenues increased by 48% for the year ended
June 30, 2003, from the comparable period in 2002.
Operating income increased by 77% for the year ended
June 30, 2003, from the comparable period in 2002.
Operating income margin from providing smart card accounts
increased from 33% to 40% for the year ended June 30, 2003
as compared to the comparable period in 2002.
Revenue from the provision of UEPS smart card based accounts
grew in proportion to the higher number of beneficiaries
serviced through our social welfare payment contracts. A total
number of 1,852,624 UEPS smart card-based accounts were active
at June 30, 2003, compared to 1,154,088 active accounts as
at June 30, 2002. The significant increase in the number of
active accounts was primarily due
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Table of Contents
to the implementation of the smart card-based payment system in
the Eastern Cape. A total of 469,910 accounts had been activated
in this province at June 30, 2003.
| Financial Services |
In U.S. dollars, revenues increased by 28% for the year
ended June 30, 2003, from the comparable period in 2002.
Operating income increased by 423% for the year ended
June 30, 2003, from the comparable period in 2002.
In ZAR, revenues increased by 14% for the year ended
June 30, 2003, from the comparable period in 2002.
Operating income increased by 367% for the year ended
June 30, 2003, from the comparable period in 2002.
Revenue from UEPS-based lending improved as a result of strong
growth in our loan portfolio as we expanded the areas where we
offered this service. In contrast, the loan portfolio of our
traditional micro-lending businesses remained fairly static as a
result of our strategic decision not to grow this business
aggressively. The key indicators of these businesses are
illustrated below:
| Year Ended June 30, | ||||||||||||||||||||||||
| 2003 | 2002 | $ % | 2003 | 2002 | ZAR % | |||||||||||||||||||
| $ ‘000 | $ ‘000 | Change | ZAR ‘000 | ZAR ‘000 | Change | |||||||||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
Traditional microlending — gross
|
10,963 | 7,971 | 38% | 81,890 | 82,664 | (1 | )% | |||||||||||||||||
|
Provisions
|
(6,529 | ) | (4,060 | ) | 61% | (48,771 | ) | (42,102 | ) | 17 | % | |||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
Traditional microlending — net of provisions
|
4,434 | 3,911 | 13% | 33,119 | 40,562 | (18 | )% | |||||||||||||||||
|
Finance loans receivable:
|
||||||||||||||||||||||||
|
UEPS-based lending — net and gross (i.e., no
provisions)
|
3,194 | 1,945 | 64% | 23,861 | 20,174 | 18 | % | |||||||||||||||||
| 7,628 | 5,856 | 56,980 | 60,736 | |||||||||||||||||||||
Operating income margin increased for the year ended
June 30, 2003 compared to 35%, compared to 9% for the year
ended June 30, 2002, primarily due to the change in the mix
of the debtors book from the lower margin and higher risk
traditional microlending to the higher margin and lower risk
UEPS-based lending. The provision of UEPS-based lending is
volume driven and profitability improves as volumes increase, as
most costs are fixed. The change in the contribution of the
various components to revenue and the change in the operating
income margin from fiscal 2002 to fiscal 2003 are illustrated in
the table below:
| Year Ended June 30, | ||||||||||||||||
| 2003 | 2002 | |||||||||||||||
| % of | Operating | % of | Operating | |||||||||||||
| Total | Income | Total | Income | |||||||||||||
| Revenue | Margin % | Revenue | Margin % | |||||||||||||
|
UEPS-based lending
|
34% | 58% | 21% | 16% | ||||||||||||
|
Traditional microlending
|
66% | 31% | 79% | 12% | ||||||||||||
| 100% | 100% | |||||||||||||||
The increases in revenues and operating income were due
primarily to the full operation of UEPS-based lending during the
year ended June 30, 2003 and significant improvements in
traditional micro-lending activity. We discuss these factors in
more detail below:
| • | The UEPS-based lending initiative was profitable, on a monthly basis, for the entire 2003 year. During the first half of 2002, UEPS-based lending was in the start-up stage and therefore we |
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Table of Contents
| incurred significant costs in connection with these activities. Accordingly, the operating income on these activities improved significantly from the break-even result achieved during 2002. | ||
| • | Traditional microlending activity exhibited significant improvements in operating income margins following a management change in the second half of 2002. This new management focused heavily on cost controls and managing bad debt. We also established a dedicated collection department, which produced significant cost savings during 2003 as the amount of doubtful accounts written off and provisions for doubtful debts (calculated on the same basis as in previous years) was significantly reduced, while we made meaningful progress with the recovery of debts written off in prior years. The cost of running an internal collection department is also considerably less than our previous practice of outsourcing this function. |
| Hardware, Software and Related Technology Sales |
In U.S. dollars, revenues increased by 9% for the year
ended June 30, 2003, from the comparable period in 2002.
Operating income decreased by 58% for the year ended
June 30, 2003, from the comparable period in 2002.
In ZAR, revenues decreased by 3% for the year ended
June 30, 2003, from the comparable period in 2002.
Operating income decreased by 62% for the year ended
June 30, 2003, from the comparable period in 2002.
These activities have limited recurring revenues and are
dependent on signing new contracts and/or the expansion of UEPS
systems already implemented.
The decrease in revenue was expected given the very successful
UEPS implementation in Malawi in 2002. While we successfully
implemented systems in Mozambique and Latvia in 2003, these were
much smaller than the Malawi system. The implementation of the
Malawi system resulted in some additional revenue in 2003 as we
continue to provide smart cards and related equipment for that
system.
Nedbank, a significant local customer, outsources certain
processing and development services to us. The Nedbank business
remained fairly static during 2003.
The decrease in the operating income margin was mainly due to a
significant change in our product mix. The implementation of the
national UEPS-based payment system in Malawi, which dominated
the 2002 results, yielded significantly high margin revenue for
that year. During 2003, we implemented systems in Latvia and
Mozambique, but these were much smaller than the Malawi system.
As a result, our low-margin products such as hardware sales and
our outsourcing business with Nedbank, which remained fairly
static during the year, had a significant impact on the margins
reported for 2003.
Use of Non-GAAP Measures
Our results of operations for the periods presented were
significantly affected by the issuance of shares of common stock
and linked units in connection with the Aplitec transaction. In
the table below, we have restated our as reported basic earnings
per share of common stock and linked units, after giving effect
to the one-for-six reverse stock split, using an aggregate of
54.7 million shares outstanding upon completion of the
Aplitec transaction as if such issuance had occurred on
July 1, 2003. The restated number of outstanding shares of
common stock issued at June 30, 2004, was
54.7 million. The restated number of outstanding shares of
common stock issued at March 31, 2004 and June 30,
2003, was 32.2 million. We
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Table of Contents
have presented the non-GAAP per share and linked unit data
because our management believes that this information will
assist investors in comparing our financial performance between
the periods presented.
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
|
Earnings per share (U.S. cents)
|
||||||||
|
Basic earnings per common share and linked unit
|
||||||||
|
— using shares in issue for period (as reported)
|
62.9 | 57.7 | ||||||
|
— using shares issued as at March 31, 2005
(non-GAAP measure)
|
61.8 | 57.7 | ||||||
|
Number of shares (thousands)
|
||||||||
|
— weighted average number of shares (as reported)
|
54,700 | 32,161 | ||||||
|
— number of shares in issue as at March 31, 2005
(used in non-GAAP measure)
|
54,700 | 54,700 | ||||||
| Year Ended June 30, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
|
Earnings per share (U.S. cents)
|
||||||||||||
|
Basic earnings per common share and linked unit
|
||||||||||||
|
— using shares in issue for period (as reported)
|
39.6 | 40.8 | 27.0 | |||||||||
|
— using shares issued as at March 31, 2005
(non-GAAP measure)
|
24.6 | 24.0 | 15.6 | |||||||||
|
Number of shares (thousands)
|
||||||||||||
|
— weighted average number of shares (as reported)
|
33,581 | 32,161 | 31,215 | |||||||||
|
— number of shares in issue as at March 31, 2005
(used in non-GAAP measure)
|
54,700 | 54,700 | 54,700 | |||||||||
| Quarterly Results of Operations |
The following table presents our unaudited quarterly results of
operations for the eleven quarters in the period ended
March 31, 2005. This unaudited information has been
prepared in accordance with SA GAAP, which was the basis on
which we prepared our financial statements for periods prior to
June 7, 2004, when we completed the Aplitec transaction. We
have reconciled this information to US GAAP information for
periods after June 30, 2003, when we began reporting our
results of operations in US GAAP. We have not reconciled this
information to US GAAP information for prior periods because we
believe that preparing such a reconciliation would involve an
unreasonable effort and expense. The operating results for any
quarter are not necessarily indicative of the results for any
future quarters or for a full year.
| In United States Dollars | |||||||||||||||||||||
| Three Months Ended (SA GAAP) | |||||||||||||||||||||
| June 30, | Mar 31, | Dec 31, | Sept 30, | Total | |||||||||||||||||
| 2003 | 2003 | 2002 | 2002 | YTD | |||||||||||||||||
| (In thousands except per share data) | |||||||||||||||||||||
|
Revenue
|
21,861 | 20,169 | 16,204 | 18,116 | 76,350 | ||||||||||||||||
|
Operating income (loss)
|
5,676 | 5,493 | 3,388 | 4,861 | 19,418 | ||||||||||||||||
|
Net Income
|
4,468 | 3,463 | 2,656 | 3,345 | 13,932 | ||||||||||||||||
|
Earnings per share (common stock and linked units)
|
|||||||||||||||||||||
|
Basic earnings per share (US cents)
|
13.8 | 10.8 | 8.4 | 10.8 | 43.8 | ||||||||||||||||
|
Diluted earnings per share (US cents)
|
13.8 | 10.8 | 8.4 | 10.8 | 43.8 | ||||||||||||||||
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Table of Contents
| In United States Dollars | |||||||||||||||||||||
| Three Months Ended (SA GAAP) | |||||||||||||||||||||
| June 30, | Mar 31, | Dec 31, | Sept 30, | Total | |||||||||||||||||
| 2004 | 2004 | 2003 | 2003 | YTD | |||||||||||||||||
| (In thousands except per share data) | |||||||||||||||||||||
|
Revenue
|
39,765 | 36,144 | 29,338 | 25,851 | 131,098 | ||||||||||||||||
|
Operating income (loss)
|
11,892 | 12,468 | 7,501 | 7,294 | 39,155 | ||||||||||||||||
|
Net Income
|
(4,570 | ) | 8,208 | 5,503 | 4,866 | 14,007 | |||||||||||||||
|
Earnings per share (common stock and linked units)
|
|||||||||||||||||||||
|
Basic earnings per share (US cents)
|
(12.0 | ) | 25.8 | 17.4 | 15.0 | 42.0 | |||||||||||||||
|
Diluted earnings per share (US cents)
|
(12.0 | ) | 25.8 | 17.4 | 15.0 | 40.2 | |||||||||||||||
| In United States Dollars | |||||||||||||||||
| Three Months Ended | |||||||||||||||||
| (SA GAAP) | |||||||||||||||||
| Mar 31, | Dec 31, | Sept 30, | Total | ||||||||||||||
| 2005 | 2004 | 2004 | YTD | ||||||||||||||
| (In thousands except per share data) | |||||||||||||||||
|
Revenue
|
45,667 | 45,995 | 43,223 | 134,885 | |||||||||||||
|
Operating income (loss)
|
20,544 | 18,343 | 18,166 | 57,053 | |||||||||||||
|
Net income
|
13,951 | 13,616 | 12,991 | 40,558 | |||||||||||||
|
Earnings per share (common stock and linked units)
|
|||||||||||||||||
|
Basic earnings per share (US cents)
|
25.8 | 24.6 | 24.0 | 74.4 | |||||||||||||
|
Diluted earnings per share (US cents)
|
25.2 | 24.6 | 23.4 | 72.6 | |||||||||||||
We expect that the amount and timing of our sales expenses will
vary from quarter to quarter depending on our level of actual
and anticipated business activities.
Our sales and operating results are difficult to forecast and
will fluctuate, and we believe that period-to-period comparisons
of our operating results will not necessarily be meaningful. See
“Risk Factors —Our quarterly operating results
may fluctuate significantly as a result of factors outside of
our control, which could cause the market price of our shares of
common stock to decline.”
Liquidity and Capital Resources
Our business has historically generated high levels of cash and
we maintain large cash reserves ($92.7 million at
March 31, 2005). Cash on hand decreased from
$93.1 million at March 31, 2004 to $92.7 million
at March 31, 2005 as a result of a late payment by the
Eastern Cape provincial government. All cash balances as at
March 31, 2004 were ZAR denominated, whereas the cash
balances as at March 31, 2005 were comprised of
ZAR-denominated balances of ZAR 510 million
($81 million), U.S. dollar-denominated balances of
$12 million and euro-denominated balances of
€ 0.014 million
($0.018 million).
Surplus cash held by our South African operations is invested in
overnight call accounts in the South African money market, and
surplus cash held by our non-South African companies is invested
in the United States and European money markets.
We generally finance all operations, research and development,
working capital, capital expenditure and acquisitions through
our internally generated cash. Last year, however, we did raise
cash from a group of South African private equity funds in
connection with the Aplitec transaction. We have no long-term
indebtedness. We maintain various overdraft facilities including
a $79.2 million (ZAR 500 million) revolving credit
facility. From time to time, we borrow under these facilities on
a short-term basis when our pre-funding requirements exceed the
available cash on hand. We take the following factors into
account when considering whether to borrow under our financing
facilities:
| • | cost of capital; | |
| • | cost of financing; |
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Table of Contents
| • | opportunity cost of utilizing surplus cash; and | |
| • | availability of tax efficient structures to moderate financing costs. |
The significant increase in social welfare grant beneficiaries
in the KwaZulu-Natal and Eastern Cape provinces may require
external financing in the medium to long-term for the
pre-funding of these grants payments. We believe that our cash
reserves, and availability under our current overdraft facility
and revolving credit facility will be sufficient to fund our
activities and expansion plans for the foreseeable future.
| Cash Flows from Operating Activities |
Cash flows from operating activities for the nine months ended
March 31, 2005 totaled $15.6 million (ZAR
96.0 million) compared to $35.4 million (ZAR
247.3 million) for the nine months ended March 31,
2004. The decrease was due primarily to the late payment
mentioned above and to the taxes we paid on higher profits and
as a result of the reorganization. In addition, cash received
from customers and cash paid to suppliers and employees was
higher in the nine months ended March 31, 2005 than during
the comparable period during 2004 due to the sales to Nedbank
and the increased levels of business activity in all of our
operating segments.
Cash flows from operating activities for the year ended
June 30, 2004 were $41.8 million (ZAR
290.4 million) compared to $17.6 million (ZAR
159.8 million) for the year ended June 30, 2003. This
increase was primarily due to higher levels of revenue and
operating profit and an increase in net interest earned,
partially offset by an increase in working capital, as increased
receivables and inventory partially offset increased payables,
and by higher taxes and the payment of dividends during the year
ended June 30, 2003. The slight increase in inventory was
due to higher levels of spares stock at year end. The increase
in receivables was due to a portion of the June 2004 Eastern
Cape pre-funding owing to Net 1 by the Eastern Cape government,
as well as higher pre-payments for smart cards bought for the
Limpopo contract, which are paid for monthly, as part of the
service fee, over the duration of the contract period. Payables
increased mainly due to the bulk of the reorganization costs
that were not paid at year end.
| Cash Flows from Investing Activities |
Cash used in investing activities for the nine months ended
March 31, 2005, included capital expenditure of
$3.0 million (ZAR 18.4 million), of which
$0.4 million (ZAR 2.8 million) related to the purchase
of an additional transaction processing computer at head-office
and $1.1 million (ZAR 5.7 million) related to the
purchase of POS and pin-pad devices for use at retailers
participating in our merchant acquiring project. Cash used in
investing activities for the nine months ended March 31,
2004, included one-time costs we incurred to support the
administration and distribution of welfare grants in the Eastern
Cape province.
Cash used in investing activities for the years ended
June 30, 2004 and 2003 was $5.7 million (ZAR
39.7 million) and $7.4 million (ZAR
67.0 million), respectively. This decrease was due to a
$8.3 million (ZAR 56.9 million) capital expenditure
during the year ended June 30, 2003 related to start-up
costs on the Eastern Cape contract.
Investing activities during the year ended June 30, 2004
consisted mainly of capital expenditures of $2.8 million
(ZAR 19.4 million), a loan of $1.6 million (ZAR
11.4 million) to The Permit Group (Proprietary) Limited
(“Permit”) to enable Permit to acquire 95% of the
issued share capital of New Era Life Insurance Company Ltd., and
the acquisition of contract rights in the Limpopo province
amounting to $1.3 million (ZAR 9.0 million).
| Cash Flows from Financing Activities |
The dividend declared by Aplitec for fiscal year end
June 30, 2003 was paid in the three months ended
September 30, 2003. Net cash raised from the issue of
common stock and preferred stock of $53.7 million (ZAR
336.8 million) during the year ended June 30, 2004,
resulted from the issuance of
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shares of common stock to the Brait Group in connection with the
Aplitec transaction. The cash distribution and dividend paid to
shareholders during the year ended June 30, 2004 consisted
of $72.7 million (ZAR 456.0 million) as a result of
the Aplitec transaction and $5.1 million (ZAR
35.5 million) paid to Aplitec shareholders as a dividend
pursuant to Aplitec’s dividend policy at the time. All cash
raised from the issue of share capital during the year ended
June 30, 2003, was due to the issuance of ordinary shares
under the Aplitec employee share incentive scheme. The dividend
paid during fiscal 2003 was effected pursuant to Aplitec’s
dividend policy at the time.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the nine months ended March 31,
2005 and 2004 were approximately $3.0 million
(ZAR 18.5 million) and $2.4 million
(ZAR 16.7 million), respectively. Capital expenditures
for the years ended June 30, 2004, 2003 and 2002 were
approximately $2.8 million (ZAR 19.5 million),
$6.7 million (ZAR 60.8 million) and
$1.9 million (ZAR 19.5 million), respectively.
We operate in an environment where our contracts for the payment
of social welfare grants require substantial capital investment
to establish our operational infrastructure when a contract
commences. Further capital investment is required when the
number of beneficiaries increase to the point where the maximum
capacity of the original infrastructure is exceeded.
As mentioned above, our capital expenditures for the nine months
ended March 31, 2005 related mainly to the acquisition of a
new transaction processing computer at our corporate
headquarters and the acquisition of POS and pin-pad devices that
we lease to participating retailers. Our capital expenditure for
the nine months ended March 31, 2004 was mainly due to
expansion in all provinces, as we experienced significant growth
in the number of customers we had to service. Capital
expenditures during the year ended June 30, 2004 were
primarily due expansion in all provinces, as we experienced
significant growth in the number of customers we had to service.
Capital expenditures during the year ended June 30, 2004
were primarily due to start-up costs we incurred in connection
with the implementation of our Eastern Cape provincial contract.
Capital expenditures during the year ended June 30, 2002
related primarily to our expansion in the KwaZulu-Natal and
Limpopo provinces, where we experienced significant growth in
the number of customers we had to service.
Our other business activities require relatively little capital
investment. The most notable exception was the capital
expenditure incurred to establish the UEPS-based lending
initiative within the financial services division during the
year ended June 30, 2002.
All of our capital expenditures for the past three fiscal years
were funded through internally generated funds. We had no
outstanding capital commitments at March 31, 2005. We
anticipate that capital spending for the fourth quarter of
fiscal 2005 will relate primarily to the equipment required to
service the increased number of beneficiaries in all provinces
and the purchase of additional POS and pin-pad devices to be
leased to participating retailers. We expect to fund these
expenditures through internally generated funds.
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Contingent Liabilities, Commitments and Contractual
Obligations
We lease various premises under operating leases. Our minimum
future commitments for lease premises as well as other
commitments are as follows:
| Payments Due by Period, as of March 31, 2005 (in $ ‘000s) | ||||||||||||||||||||||||||||
| Due | Due | Due | Due | Due | More | |||||||||||||||||||||||
| Within | Within | Within | Within | Within | than | |||||||||||||||||||||||
| 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | 5 Years | Total | ||||||||||||||||||||||
|
Contractual obligations
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Long term debt obligations
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Long-term payables
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Capital lease obligations
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Operating lease obligations
|
1,642 | 1,026 | 809 | 486 | 48 | 4 | 4,015 | |||||||||||||||||||||
|
Purchase obligations
|
98 | — | — | — | — | — | 98 | |||||||||||||||||||||
Other than shown in the table above, we have no other purchase
commitments, obligations or specific capital commitments for the
next three years.
Dividends
Our future dividend policy will depend on our earnings, capital
requirements, expansion plans, financial condition and other
relevant factors. New Aplitec’s future dividend policy also
has to comply with the restrictions place by the South African
Reserve Bank as a condition of its approval of the Aplitec
transaction. These restrictions will apply until such time as
all of our special convertible preferred stock has been
converted into common stock. These restrictions provide that
dividends may be declared by the New Aplitec board of directors
only if (i) declaration of the dividend is approved by a
majority of the holders of New Aplitec B class preference
shares, (ii) all loan accounts have been paid by New
Aplitec and (iii) the dividend does not exceed 50% of New
Aplitec’s annual earnings. In addition, under South African
law, New Aplitec will only be entitled to pay a dividend if it
meets the solvency and liquidity tests set out in the South
African Companies Act. However, because the New Aplitec board
will be appointed by Net 1, Net 1 will ultimately
determine whether any dividends are declared by New Aplitec,
subject to the above conditions. Any dividends declared by New
Aplitec will be distributed to the holders of A class and
B class preference shareholders pro rata in accordance with
their respective ownership interests in New Aplitec.
Aplitec’s dividend policy in the nine months ended
March 31, 2004 and prior fiscal periods was to declare
regular annual dividend payments of between 25% to 33% of
earnings for such periods. There were no dividends declared in
the nine month period ended March 31, 2005. Dividends
declared for the year ended June 30, 2003 were paid in the
first quarter of fiscal 2004.
Acquisitions and Dispositions
We made no acquisitions or dispositions during the nine months
ended March 31, 2005 or 2004. During January 2003, Aplitec
acquired the minority interests in CPS (KwaZulu-Natal), CPS
(Northern Cape) and CPS (Northern). These acquisitions
consolidated Aplitec’s social welfare payment businesses
under a single holding company, thus improving operating and tax
efficiency. Profits (attributable to the minority interests
acquired) were recognized and consolidated from January 1,
2003. During January 2002, Aplitec sold the assets and
liabilities of its security guarding business for a total cash
consideration of $0.7 million (ZAR 4.913 million).
Equity-Accounted Investment
On April 1, 2004, Aplitec purchased a 43% interest in
Permit Group 2 (Proprietary) Limited (“Permit”). Our
balance sheet includes Permit as an equity-accounted investment.
Permit owns 95% of the common stock of New Era Life Insurance
Company (“New Era”), a provider of various insurance
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products to the South African market. In connection with this
acquisition, Aplitec loaned Permit approximately
$0.8 million at the then current South African prime
interest rate (11% at March 31, 2005) with no fixed
repayment terms. Permit used the proceeds of this loan to
purchase 43% of a 95% interest in New Era.
For the nine months ended March 31, 2005, earnings from our
equity accounted investment totaled $0.5 million (ZAR
3 million). Future earnings from our equity accounted
investment are expected to be comparable with the current
quarter’s earnings.
Employee Benefits
We do not provide retirement benefits to any of our employees.
We provide our employees with a choice of two health care
service providers to which we make the monthly contribution. We
do not provide any post-retirement health benefits.
Insurance
We annually assess our risk exposure. At March 31, 2005, we
believe that all risks were adequately covered by third party
insurers, except where we considered the cost of insurance
coverage to be excessive in relation to the probability and
extent of loss or we were unable to find any insurance
underwriters willing to accept the risks associated with certain
aspects of our business. We have confronted the latter with
respect to insurance for losses or theft of cash from our
delivery vehicles.
The main categories of our insurance are: loss or damage to
vehicles, electronic equipment and other assets; business
interruption; motor vehicle third party claims; group personal
accident; and employment practices liability.
Quantitative and Qualitative Disclosures About Market Risk
We seek to reduce our 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, we use financial instruments in order
to economically hedge our exposure to exchange rate and interest
rate fluctuations arising from our operations. We are also
exposed to 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 in order to limit our 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. As of March 31, 2005, the outstanding
foreign exchange contracts were as follows as of the dates
indicated:
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As of March 31, 2005
| Notional Amount | Strike Price | Maturity | ||||
|
USD 98,000
|
ZAR 6.0542 | September 30, 2005 | ||||
As of June 30, 2004
| Notional Amount | Strike Price | Maturity | ||||
|
EUR 16,250
|
ZAR 7.8475 | July 12, 2004 | ||||
|
EUR 202,000
|
ZAR 8.1822 | August 2, 2004 | ||||
|
EUR 16,250
|
ZAR 7.8878 | August 10, 2004 | ||||
|
EUR 16,250
|
ZAR 7.9299 | September 10, 2004 | ||||
|
EUR 16,250
|
ZAR 7.9749 | October 12, 2004 | ||||
|
EUR 263,200
|
ZAR 8.2129 | October 29, 2004 | ||||
|
EUR 4,243,000
|
ZAR 8.5225 | January 7, 2005 | ||||
|
USD 167,900
|
ZAR 6.2950 | September 22, 2004 | ||||
As of June 30, 2003
|
None
|
As of June 30, 2002
| Notional Amount | Strike Price | Maturity | ||||
|
USD 16,250
|
ZAR 12.643 | January 8, 2003 | ||||
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 two
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. We generally maintain limited investment in cash
equivalents and have occasionally invested in marketable
securities. Typically, for every 1% increase in the South
African Reserve Bank’s repo rate, our interest expense on
pre-funding social welfare grants in the KwaZulu-Natal and
Eastern Cape provinces increases by $15,594 per month,
while interest earned per month on any surplus cash increases by
$13,672 per $16.6 million (ZAR 100 million).
Credit Risk
Credit risk relates to the risk of loss that we would incur as a
result of non-performance by counterparties. We maintain credit
risk policies with regard to our counterparties to minimize
overall credit risk. These policies include an evaluation of a
potential counterparty’s financial condition, credit
rating, and other credit criteria and risk mitigation tools as
our management deems appropriate.
With respect to credit risk on financial instruments, we
maintain a policy of entering into such transactions only with
South African and European financial institutions that have a
credit rating of BBB or better, as determined by
Standard & Poor’s.
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 assigning each prospective
customer a “creditworthiness score,” which takes into
account a variety of factors such as employment status, salary
earned, other debts and total expenditures on normal household
and lifestyle expenses.
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BUSINESS
Our Company
We provide our universal electronic payment system, or UEPS, as
an alternative payment system for the unbanked and under-banked
populations of developing economies. We believe that we are the
first company worldwide to implement a system that can enable
the estimated four billion people 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. To accomplish
this, we have developed and deployed the UEPS. This system uses
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 enter into
transactions at any time with other card holders in even the
most remote areas so long as a portable offline smart card
reader is available. In addition to payments and purchases, our
system can be used for banking, health care management,
international money transfers, voting and identification.
Our technology is widely used in South Africa today. We have
over 3.3 million clients in five provinces who receive
social welfare grants using our smart cards. We have started to
implement our UEPS for employers to pay wages and provide
financial services to their employees. In addition, we are
working closely with non-governmental organizations to deploy
our new medical application into a number of hospitals and
clinics. This application of our system is used to administer
the treatment of HIV/AIDS and other high-risk diseases, record
patient progress and manage drug inventory.
Recently, Cell C (Proprietary) Limited, a mobile telephone
service provider in South Africa, chose our solution as the
transaction payment system for its planned roll-out of
approximately 52,000 public cellular pay phones that will
provide lower income consumers with telephone access at reduced
rates. We believe the implementation of this project could
provide us with up to 10,000 access points through which we will
be able to market and sell our financial products. This
deployment is part of a government initiative for the
empowerment of small businesses in rural and semi-urban areas of
South Africa.
Outside of South Africa, the Reserve Bank of Malawi has
implemented our solution as a national payment system. To date,
seven local financial institutions and BP p.l.c., a bulk
fuel supplier, are using our system for transaction switching
and settlement. We have deployed smaller, more limited versions
of our system in Burundi, Ghana, Latvia, Mozambique, Rwanda and
Zimbabwe.
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 similar to an individual bank account
in the case of financial services or an individual record
management system in the case of medical services. All
transactions that take place through our system occur between
two smart cards at the point of service, or POS, with all of the
relevant information necessary to perform and record a
transaction held on the smart cards.
The transfer of money or other information can take place
without any communication with a centralized computer since all
validation, creation of audit records, encryption, decryption
and authorization take place on, or are generated between, the
smart cards themselves. Importantly, the cards are protected
through the use of biometric fingerprint identification, which
is designed to ensure the security of funds and card holder
information. Transactions are generally settled by merchants and
other commercial participants in the system by sending the
transaction data to a mainframe computer on a batch basis.
Settlement 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.
We generate our revenues by charging transaction fees to
government agencies, employers, merchants and other financial
service providers, by providing financial services such as loans
and by selling hardware, software and related technology. In
South African rand, our revenues and operating income increased
by
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32% and 39%, respectively, from fiscal 2003 to 2004, and by 29%
and 34%, respectively, from fiscal 2002 to 2003. In South
African rand, our revenues and operating income increased 31%
and 62%, respectively, for the nine months ended March 31,
2005, as compared to the nine months ended March 31, 2004.
We believe this growth reflects the accelerating adoption of our
solution.
Market Opportunity
According to the United States Census Bureau, the world’s
population currently exceeds 6.4 billion people. Yet of
this total, it has been reported that over four billion people
earn less than the purchasing parity equivalent of two dollars
per day. In general, these people either have no bank account or
very limited access to banking services. This situation arises
when banking fees are too high relative to an individual’s
income, a bank account provides little meaningful benefit or
there is insufficient infrastructure to provide banking services
economically in the individual’s geographical market. We
refer to these people as the unbanked and the under-banked.
These individuals generally receive wages, welfare benefits or
loans in the form of cash and conduct commercial transactions,
including buying food and clothing, in cash.
The use of cash, however, presents significant problems. In the
case of recipients, they generally have no secure way of
protecting that 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, 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.
The use of cash or lack of access to a bank account can
dramatically increase the cost to, and in some cases completely
prevent, individuals from engaging in basic financial
transactions. These basic transactions include the routine
payment of insurance premiums, the transfer of money to
relatives and the use of credit. Without a bank account, it is
also difficult for an individual to obtain a loan on attractive
terms since that individual lacks a credit history and usually
cannot present a reliable means of repayment to the lender.
For governments, assistance programs face significant challenges
when dependent on the use of cash. In addition to the costs and
difficulties of using cash, corruption becomes an even more
challenging problem since there is no clear audit trail. In
fact, the absence of an electronic system for the distribution
of goods, including foodstuff or medicine, or welfare benefits
presents a significant obstacle to ensuring the fair and
reliable implementation of government policy or deployment of
foreign aid.
Traditional payment systems offered today by the major banking
institutions do not address the key requirements of the unbanked
and the under-banked populations. In addition to the high cost
of maintaining a bank account relative to a customer’s
income level, customers must generally have basic literacy,
administrative and record-keeping abilities and a minimum income
level. Additionally, banks operate through online transaction
settlement systems, which are often unavailable or costly to
implement in undeveloped areas. Finally, having a bank account
does not eliminate the need for significant quantities of cash
in many instances because customers must withdraw large sums at
one time to avoid incremental transaction fees.
Our Solution
We believe that we are the first company to enable the
affordable delivery of financial products and services to the
world’s unbanked and under-banked people. Our approach
takes full advantage of moving processing away from a
centralized point to the computer chip embedded on a smart card.
A smart card reader, or POS device, is used to enable
communication between smart cards in real-time during a
transaction and indirectly with our mainframe computer at a
later time. This architecture has significant implications in
terms of the products and services that we can deliver compared
to those offered by banking institutions or other card providers.
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First, our system enables offline transactions, which is
essential in serving the unbanked and under-banked. Second, it
means that while offline, the smart card can engage in
sophisticated transaction processing, using data encryption and
biometric fingerprint protection to ensure security. In fact,
our smart cards can calculate the interest owed to the card
holder for having funds recorded onto our system without ever
coming online. Third, with all of the software and transaction
records on the smart card, the POS device itself requires far
fewer components, circuitry and memory, substantially reducing
costs. Fourth, each transaction is recorded on both
participating smart cards, copied in subsequent transactions to
additional smart cards, and ultimately reported to our mainframe
computer. This creates a full audit trail that significantly
reduces the potential for corruption, theft and fraud. Lastly,
instead of having to build the overall system to handle peak
loads, our system further reduces costs by smoothing the
transaction flow over time.
We believe that our solution delivers benefits to each of the
users of our system, including:
Individuals. There is no minimum income requirement for
individuals to use our smart card, making our solution
universally accessible. It is also inexpensive since the overall
cost of the system is much less than widely available solutions,
including cash, bank accounts and bank cards that require online
access. Our solution additionally has the advantage of working
everywhere, including remote areas where many unbanked and
under-banked people live. Even more importantly, our solution is
secure and smart cards are replaceable. This means that
individuals do not have to fear that their money will be stolen
or that they will be charged for fraudulent transactions. Since
the smart card performs all of the required processing and
contains all of the different service features, the smart card
can be tailored to meet the needs of the individual. Card
holders can also receive interest on their card balances, a
benefit not available to them when transacting solely in cash.
We believe our solution has the potential to enhance
significantly the living standards of the unbanked and
under-banked by reducing transaction costs and providing them
with new and additional financial products and services.
Merchants and Financial Service Providers. Merchants
derive several different benefits from our system. Our system
decreases the amount of cash they must hold, improving security
and reducing expenses. In addition, it provides a record of
transactions that is useful for administrative purposes. For
instance, by providing financial services through our POS
devices, merchants benefit from new income streams at no
additional incremental cost. For formal financial service
providers, the use of smart cards provides opportunities to
directly sell products and services to a market that was
previously difficult to reach. For instance, insurance companies
can offer their products with the premium deducted directly from
the individual’s smart card. In the case of lending,
administrative costs are decreased along with the expense of
holding cash. Again, the collection of payments can occur
directly from the smart card, reducing credit risk and helping
to establish credit history.
Employers. Our system enables employers to eliminate cash
from the wage payment process. This reduces expenses by avoiding
cash handling and management, the need to insure or transport
that cash and the bank transaction fees associated with
obtaining cash in the first place. The process of paying
employees using cash is also time consuming, taking up to half a
day per pay period in some instances. The use of our system
eliminates this process and thereby increases productivity. In
addition, because cash payments are distributed in packets to
employees, disputes can arise as to the amount of cash in the
packet. Our system also eliminates this problem since the amount
reflected on the card holders’ accounts are recorded on the
back-end system and then distributed on the smart cards.
Finally, employers frequently provide additional services to
their employees out of necessity, particularly loans. Our system
enables other service providers to deliver these products.
Government Agencies. A fundamental policy goal for almost
any government is to enhance the welfare of the poorest citizens
in the country. Yet the use of cash is a poor method for
delivering social welfare grants since it is difficult to track,
and the recipients endure a range of expenses and dangers that
reduce their options. By using our system, government agencies
enjoy reduced costs in the delivery of benefits to recipients by
eliminating the use of cash while increasing the options
available to the recipient. This use of our system intrinsically
increases the welfare that government agencies can provide from
the
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same amount of taxes collected. Our system also has the
potential to increase the amount of taxes collected by bringing
informal businesses into the formal economy. The presence of a
full audit trail also means that government agencies can combat
corruption. Moreover, the use of smart cards for the delivery of
additional services, including insurance products, means that
regulatory bodies can expand their oversight of transactions for
individuals who are frequently least able to protect themselves.
In regard to medical benefits, our system provides comprehensive
inventory management and has the potential to improve the
treatment of patients significantly. For instance, we have
deployed an artificial intelligence program on our smart cards
used for the treatment of HIV/AIDS in South Africa that can be
used to adjust a patient’s prescription based on data
entered by a trained medical worker through the POS device.
Our Business Strengths
We believe our business strengths include:
Technology Leadership. We believe we are the first
company to develop, implement and operate an affordable,
flexible and secure electronic payment system for the unbanked
and under-banked that works offline. Of equal importance, our
smart cards have a broad range of additional functionality
through the use of “wallets” that can be turned on as
needed or as services become available. We can deliver these
services to the unbanked population at a fraction of the cost of
traditional systems. Our ability to implement an HIV/AIDS system
on the same smart card as financial services demonstrates the
flexibility of our approach. In addition, we have validated the
security of our smart cards along with our overall system,
forming the foundation for a trusted solution. Independent third
parties have reviewed and published our security protocols and
we have refined our system in a way to provide system integrity
over the life of the smart cards. From our inception in 1989 to
date, we have not suffered any security breaches or losses of
transactions or funds on our system.
Proven Solution. Our system is proven and has been
increasingly used. Today over 3.3 million clients in South
Africa receive monthly welfare or pension payments through our
system under contracts with five provinces. Historically,
welfare and pension recipients would only download cash from
smart cards, but these recipients increasingly choose to use
their smart cards at merchant locations, which generates
additional revenue for us. During the nine months ended
March 31, 2005, the rate of client purchases using our
smart cards rather than merely downloading the value for cash
grew at a compounded monthly growth rate of 71% while the value
of those transactions grew at a compounded monthly growth rate
of 60%. As of March 31, 2005, we had 2,406 POS devices
installed at 1,441 participating retail merchants. For the nine
months ended March 31, 2005, the total value of
transactions processed through our UEPS merchant network was
approximately $59.7 million. During the nine months
following our implementation of these retail merchant POS
devices in July 2004, the percentage of transactions which
consisted of merchant purchases, as opposed to cash downloading
only, increased from approximately 0% to approximately 23% of
the total number of processed transactions.
Versatile Application. Once an individual begins using
our smart card, we become a logical provider of a broad range of
additional products and services. For instance, a card holder
using our system for the administration of medical treatment can
also use the same smart card for receiving welfare payments or
wages as well as making purchases. Because use of each smart
card is secured biometrically, the smart card can also be used
for identification and voting. The additional uses mean that
once we have enrolled and delivered a smart card to an
individual, our revenue potential increases significantly beyond
the initial service for which that individual has signed up.
Broad Appeal that Drives Opportunities. Because our
system provides economic benefits to all participants, we
believe there are strong incentives for government agencies and
employers to adopt our system in many developing countries. Our
solution is also appealing because a single deployment enables
the delivery of a broad array of new services to those who are
potentially most in need of them, often at a lower cost than
alternative distribution methods.
Increasing Returns to Scale. The initial establishment of
our system in a province or country requires upfront
expenditures for computers, distribution infrastructure and card
holder registration. Once in place,
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though, the cost to us of supplying additional products to users
is low. For instance, if a customer receives welfare payments on
one of our smart cards and then chooses to purchase insurance
through our system, there is almost no additional expense for us
to deduct the insurance premium regularly. As a result, the
operating margin for that customer increases significantly,
offset only by any marketing or administrative costs associated
with that product.
Our Strategy
We intend to provide the leading system for the world’s
estimated four billion unbanked and under-banked people to
engage in electronic transactions globally. To achieve this
goal, we intend to pursue the following strategies:
Disciplined Approach to New Markets. We carefully
evaluate new opportunities in order to deploy our business
development resources effectively. We believe there are
significant opportunities for our system in developing
economies, such as Brazil, India, Mexico and Indonesia, where
the unbanked and under-banked comprise a majority of the
population. Where we believe it makes sense, we will use
partnerships or make acquisitions to accelerate our entry into
new markets.
Unlock Target Markets with a Key Product. The first step
in establishing our system within a new province or country is
to establish a broad base of smart card users around a single
application. One of our preferred routes is to secure contracts
to implement payment systems for government programs having
large numbers of potential card holders. We believe another
effective route will be the delivery of medical management
applications, such as for HIV/AIDS. However, we are not
dependent on government agencies to establish an initial base.
Employers are widely examining our system to address their wage
payment challenges and we are currently pursuing opportunities
to deliver this solution.
Expand Our Products Within the Markets We Serve. With the
establishment of a strong base of card holders and related
infrastructure, we can then move to providing additional
products and services. As part of broadening our card
holders’ options, we will also sell our smart card readers
and POS devices to merchants to enable them to enter into
transactions. Additionally, we will work to establish
relationships with post offices, banks and other financial
service providers with the goal of making our system ubiquitous
in the markets we serve.
Provide Products and Services Ourselves Where the Profit
Potential is Compelling. Our system can dramatically reduce
transaction costs and improve data collection for a broad set of
products and services. We intend to offer those products and
services ourselves where the profit potential is significant.
For instance, we engage in lending in South Africa. We are able
to offer this service at a lower interest rate than competitors
due to our ability to deduct interest and principal directly
from a borrower’s smart card and our knowledge of that
individual’s payment history.
Establish Partnerships or Make Acquisitions When
Appropriate. As part of our disciplined approach to growing
our presence globally, we will evaluate and enter into
partnerships where we can draw on local knowledge and
infrastructure to drive the rapid adoption of our system. We
believe that this will enable us to focus on our core strength
in technology as well as product development and delivery. In
some instances, we will make acquisitions where we believe that
our approach will enable us to gain customers and realize
operational benefits rapidly from the deployment of our more
efficient solution.
Our Technology
We developed our technology to enable the affordable delivery of
financial products and services to the world’s unbanked and
under-banked people. Our proprietary 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.
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| System Components |
Our platform consists of three fundamental components:
(1) our FTS patent, (2) our UEPS and (3) our
security protocol.
FTS Patent. The FTS patent describes a method by which
funds can be transferred from one smart card to another in a
secure and offline manner. The term “offline” refers
to transactions that are effected without the need to contact or
communicate with the issuer when the transactions occur, as the
smart cards themselves perform the authorizations required. The
FTS patent also describes how smart cards can be loaded or
re-loaded with funds and how these can be redeemed for value in
either banking or non-banking environments.
UEPS. Our UEPS is a suite of software programs that make
use of the FTS methodology to deliver an integrated information,
payment, switching and settlement environment that underpins our
transaction processing system. Our software principally runs on
three devices: the smart card, the POS device and the back-end
system mainframe. When we sell a complete system to a customer
or license our technology, we provide all of the software
required to operate the UEPS, including the smart card
functionality, the POS devices that allow our smart cards to
transact with each other in an offline manner and our back-end
system that primarily stores an audit trail of all transactions
effected.
The primary strengths of the UEPS are its affordability,
security and flexibility. The system is affordable because the
computer chips on the smart cards contain all the software
necessary to process UEPS transactions, thereby allowing the POS
devices required to conduct these transactions to contain far
fewer components and less circuitry than traditional POS
devices. There is also a reduced need for processing power and
on-board memory given that online communication is not
necessary. This eliminates the need for an internal or external
modem and its associated hardware, maintenance and call costs.
As a result, the UEPS terminals are relatively inexpensive and
do not require specialized technical expertise for installation.
The UEPS also reduces or eliminates the need for national
infrastructures, including electricity, telephone or data
transmission. The UEPS is secure because the funds in each smart
card are protected from illegal access through biometric
fingerprint technology. In addition, every transaction is
verified by the two smart cards involved in the transaction
using state-of-the-art cryptographic systems in conjunction with
protocols and techniques that we have developed. Finally, our
UEPS is flexible because transactions are completed offline,
eliminating virtually all restrictions where verified
transactions can occur.
We released the first version of our UEPS in 1991. It included
software to operate each smart card as well as the main payment
system. Later versions of our UEPS provided all of the functions
necessary to issue and manage a smart card and terminal base as
well as those needed to effect settlement between all of the
operators and participants. Our UEPS is fully traceable and
auditable. It can also provide advanced capabilities including
loss tolerance and smart card-based interest distribution.
Finally, our UEPS is scalable and capable of working in small
applications including a hospital setting as well as large
settings such as country-wide implementations.
Security Protocol. Our security protocol was designed to
prevent opportunistic fraud and enforce the correct transaction
flow. The symmetric triple data encryption standard, or DES, is
used extensively in association with a native random number
generator that ensures that all transactions are performed by
using a random session key pair. The DES encryption algorithm
can be easily modified to use alternative symmetric or
asymmetric encryption algorithms such as the Rivest, Shamir and
Adleman or elliptic curves. Each message exchanged during a
transaction names both transacting parties, includes unique
information to guarantee freshness and depends explicitly on all
the messages that occur before it.
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| Our UEPS Platform |
The following diagram depicts how our UEPS platform is
constructed.
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The UEPS we sell to clients is a platform with the potential to
provide all of the products we develop which, when grouped
together, form complete systems serving the specific needs of
various business segments. Depending on the requirements of a
particular customer, we assist the customer in the setup of its
application which is tailored to provide only the products and
services initially required, although the UEPS can later be
updated to provide additional products. We outsource the
manufacturing of the hardware components of our system,
including smart cards, POS devices, ATMs, PCs and back-end
mainframes. However, we have developed all of our application
software modules so that they will run on different hardware
platforms which allows us to be hardware-independent and to
provide our customers with the latest and most economical
hardware solutions.
Scalability. Our UEPS can be implemented in different
environments, from small closed systems to national
implementations. In closed-system environments, the UEPS
front-end equipment is personal computer-based and can therefore
be implemented at relatively low cost. In these instances, we
provide the back-end system on a transaction fee basis, thus
limiting the overall set up cost. This approach can also be used
whenever larger implementations are required but where the
customer prefers to focus on marketing and selling its products
rather than initially concentrating on operating the back-end
system. The cost to entry can thus be greatly reduced as the
operations can first become profitable before expending large
amounts of capital. On the other hand, large governmental
institutions, financial institutions or medical insurers
typically prefer to maintain control over the entire payment
system and therefore invest in a full system implementation. The
time to launch these projects tends to be longer due to the time
that is required to train the end-user to operate the system.
Once a UEPS is installed on behalf of a customer, we believe
that we are well-positioned to benefit from the scalability of
the system as minimal changes are required to be made to the
application base for the system to manage significantly greater
numbers of users. We can therefore provide additional smart
cards while leveraging the existing cost base in a market. In
addition, we have a dedicated team of technicians and developers
and an infrastructure capable of supporting a significant volume
of customers and their transactions. As a result, we expect to
benefit from economies of scale that pertain to increases in the
number of products and services using the infrastructures we
sell and/or implement.
| UEPS Smart Card Functionality |
We have combined these technologies to create a smart card
application that incorporates and controls the functionality
that is normally found on banking host systems. Our technology
reverses the traditional approach where the card acts as an
access mechanism to a host-managed account. Instead, the smart
card controls the account itself while the host system is
relegated to backing up and creating an audit trail for the
smart card base.
As a result, our technology provides extensive and flexible
functionality through a system that is practical, secure and
auditable. The following list itemizes some of the unique and
critical functions provided by our smart card technology.
Identification, Authentication, Non-Repudiation and
Affirmation of UEPS Transactions. Traditional payment
systems provide customers with paper receipts that reflect
transaction details. Customers normally keep these receipts to
reconcile their monthly account statements. During
reconciliation, customers can detect fraudulent transactions and
errors by matching account entries against their paper receipts,
which may lead to disputes, financial losses and the repudiation
of transactions. Fraud committed by people taking advantage of
the inherent security weaknesses of traditional payment systems
increases the cost of managing transactions effected through
these systems. As a result, financial institutions and other
system participants must invest significant resources to
minimize the risk associated with fraud and errors.
A fundamental element of the UEPS is that all payment and money
transfer transactions take place between two UEPS smart
cards —the smart card to be debited and the smart card
to be credited. During the transfer of value between the two
smart cards, the transaction is written to a dedicated history
file on each of the smart cards. These history files are
subsequently used to ensure settlement either directly or
through the activation of the UEPS multiple streams audit trail
feature. Thus, smart card holders can
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reconcile their monthly accounts directly from the smart
card’s transaction history file. Also, each smart card
authorizes all debit transactions through the presentation and
verification of one of the card holder’s biometric
fingerprint templates that are stored in the smart card, and
each UEPS transaction is signed by both smart cards. Taken
together, these features of the UEPS help prevent the fraudulent
creation, duplication or alteration of a transaction, as well as
any potential repudiation of a transaction. As a result, the
UEPS helps to minimize the costs associated with account
management and inquiry resolution and helps ensure that
customers do not incur losses from undetected errors, fraud or
transaction mismanagement.
Continuous Debit. People with limited economic means or
unestablished credit histories may find it difficult to obtain
access to public utility services such as telephone, fuel, water
or electricity unless they purchase pre-paid units for these
services. A pre-paid unit of service may be a liter of fuel, a
kiloliter of water, ten minutes of electricity or a two minute
local phone call, and may need to be used within a specified
period of time before it expires. Pre-paying for services can
deprive purchasers of flexibility to redeploy their funds to
meet other financial needs.
The continuous debit feature of the UEPS eliminates the need for
customers to buy pre-paid units by allowing them to use their
smart cards to pay for these services as and when they need and
use them. All a customer needs to do is to insert his smart card
into the utility equipment and the smart card will debit itself
whenever a unit of service is used. The continuous debit feature
provides significant financial flexibility to customers and can
be tailored to be used in any “pay as you go”
environment, including Internet access.
Continuous debit transactions are typically a large number of
small transactions that can quickly fill up the space on a smart
card’s transaction file. We eliminated this problem by
designing the UEPS to minimize the file space that these
transactions require by enabling subsequent transactions to
replace and aggregate with earlier ones, thereby treating
multiple transactions as one global transaction.
Multiple and Restricted Wallets. Unbanked people who keep
their cash at home risk the loss of their funds from
misplacement, theft or disasters such as floods or fires, which
can have a devastating impact on their financial lives. Keeping
funds at home does not generate any interest income and cannot
help demonstrate financial responsibility or provide collateral
security for the extension of credit. Finally, keeping funds in
cash can make it more difficult for people to segregate their
funds for specific purposes, whereas having one or more bank
accounts can facilitate budgeting for various categories of
expenses.
The multiple wallet feature allows card holders to use their
smart cards to help manage their budgets. Up to 255 wallets can
be configured and activated per card holder depending on the
electrically erasable programmable read-only memory, or EEPROM,
available on the particular smart card. Each of the wallets can
be configured to meet the specific requirements of the card
holder, and can be used for interest-generating savings,
pre-paid utilities, medication management, credit, debit orders
and for many other purposes. In addition, a wallet can be either
protected or unprotected. Protected wallets require the
biometric verification of the card holder to effect
transactions. Unprotected wallets are normally used for low
value transactions such as transportation for which speed of
processing is critical.
Since the audit trail of all transactions performed by the
active wallets is stored on the smart card’s history file,
card holders can provide third parties with a comprehensive
record of their transaction histories, which can help evidence
payments, such as insurance premiums and demonstrate a regular
income stream from wages or other sources. This audit trail can
provide unbanked people the opportunity to obtain affordable
services from formal financial service providers which might
otherwise deny or limit services to them.
Wallets can also be restricted. Restricted wallets allow
transactions to be performed only at specific merchants. For
example, if an employer desire to subsidize an employee’s
transportation costs, a wallet can be configured that permits
the holder to spend the value loaded into that wallet only at
specified transportation points. Restricted wallets can also be
used by governments to prevent social welfare grant recipients
from using payment for particular goods or services.
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Offline Loading. The use of payment systems that depend
on online authorizations is difficult to implement in developing
economies and countries that do not have advanced or reliable
telecommunication infrastructures. Online systems include
magnetic stripe-based solutions that are widely used in first
world economies and require that all transactions, including
retail sales, the dispensing of cash, the loading of value to
smart cards and the authorization of credit transactions, be
performed only at self-service terminals, or SSTs, ATMs or POS
devices that operate online. Thus, online systems cannot be used
to provide financial or banking services to the millions of
people, such as those in developing countries, that live in
geographical areas that have little or no infrastructure. Most
smart card systems therefore, such as EMV, also operate online.
We believe that this reliance on online communication has
limited the exploitation of smart card technology, has resulted
in high system implementation and operational costs and has not
addressed many of the needs of the world’s unbanked
population.
Our offline loading feature has been designed to solve these
problems associated with reliance on limited infrastructures and
allows value to be distributed through existing infrastructures
such as the postal service, fixed line telephones, cellular
phones, verbal communication and newspapers. Our solution is a
unique ten-digit signature code that the UEPS back-end system
generates to enable specific amounts to be loaded to specific
smart cards. When a ten-digit signature code is presented at any
offline POS device to the smart card for which it was created,
the code will, after validation, allow the smart card to credit
one or a number of its internal wallets in the appropriate
amount.
The offline loading function can be used to transfer funds
remotely for payments such as wages, pensions, welfare grants,
refunds and third party transfers. When a number of ten-digit
signature codes are created for a specific smart card, each
ten-digit signature code can then only be applied to that smart
card once. Ten-digit signature codes can be presented to a smart
card in a different order from the one in which the codes were
created but can be effected only by that particular smart card.
Biometric Identification. The magnetic stripe credit and
debit card systems available today use a written signature or a
PIN in an effort to verify the customer’s identity and
minimize the repudiation of transactions. However, PINs can be
compromised, magnetic stripes can be cloned and if a card is
stolen together with its PIN number, the card can be used to
transact until it is reported stolen or its offline limits are
reached. The PIN and card can also be used to gain access to
back-end account information to defraud further the genuine card
holder. Therefore, positive offline card holder verification is
critical to ensure that a payment system does not effect
fraudulent transactions. At the same time, the system must
ensure that the genuine card holder’s transactions are not
rejected.
As an alternative form of customer identification, the UEPS
supports biometrics in the form of fingerprint recognition.
Biometric scanners are used to record a customer’s
fingerprint images. The fingerprint templates that result are
stored in the holder’s smart card and used for
identification whenever the smart card is used.
Before a smart card is issued, the following fingerprint
recordation process occurs:
| • | All ten fingers are captured, with three fingerprint images captured per finger. | |
| • | The three fingerprint images for each finger are consolidated and filtered to create the best image for that finger. This results in ten-high quality fingerprint images. | |
| • | The ten fingerprint images are scored and the four highest scoring images are used to generate fingerprint templates. A fingerprint template is a unique geometric representation of one fingerprint. | |
| • | The card holder is verified against these four templates using the highest fingerprint matching threshold to ensure the best recordation process. This process assists to eliminate the false rejection of genuine card holders due to initial bad fingerprint template recordation. | |
| • | The four fingerprint templates are signed by an “issuing UEPS smart card” and stored on the card holder’s smart card. |
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When a transaction is performed, the card holder’s
fingerprints are verified against those stored on the smart
card. The verification process occurs in a secure session
between the smart card and the fingerprint scanner. During the
verification phase, a moderate matching threshold is used to
compensate for the changes in the card holder’s fingerprint
conditions.
Our biometric identification feature is designed to protect our
card holders against fraud, helps eliminate transaction
repudiation and reduces the complexity associated with hot card
management systems and hot line centers, as well as the cost of
the systems that are utilized to deal with stolen and lost cards.
Automatic Credit. The distribution of social welfare
benefits, unemployment insurance, food parcels or vouchers and
medical supplies is personnel intensive. Furthermore,
beneficiaries must present themselves regularly at designated
distribution locations in order to receive their benefits. These
requirements create a number of operational and logistical
problems, which increase the direct or indirect costs for system
owners, operators and members, including:
| • | The costs of transporting beneficiaries and payment personnel to and from distribution points; | |
| • | The time beneficiaries must spend waiting in line at distribution points rather than working or engaging in other activities; | |
| • | The need to provide adequate staff, water, toilets, medical emergency services, shelters and security at distribution points; | |
| • | The need to provide personnel to deal with beneficiary communications and inquiries; and | |
| • | The need to create itineraries and schedules for payment delivery personnel, as well as to establish distribution centers and purchase vehicles to travel to distribution points. |
Thus, governments incur significant costs in distributing social
welfare payments at fixed or movable locations, and banking
institutions must spend large sums to provide branches and ATMs
where their customers can obtain cash. Many of these costs
cannot be passed onto the client. We have developed the capacity
in the UEPS to facilitate the distribution of cash at retail
merchants in a manner that eliminates or reduces the need for
social welfare beneficiaries and customers to travel to a
specific ATM location, reduces merchants’ costs of
depositing excess cash and that enables banks to reduce their
costs associated with providing, maintaining and servicing brick
and mortar infrastructures.
We developed our automatic credit feature to allow our smart
card holders to receive regular, fixed amount payments at POS
devices that may not have the capability to perform online
functions. The participants in an automatic credit transaction
are the automatic credit initiator, the smart card holder and
the merchant. The automatic credit initiator is the issuer which
creates an automatic credit instruction for a particular wallet
of a specific card holder. The smart card holder is the
beneficiary of the automatic credit instruction which has been
approved by the initiator. The merchant is any retailer which
participates in the UEPS system and has a POS device for a card
holder to activate automatic credit instructions.
Card holders go to designated points to register for an
automatic credit instruction. While at the POS device, the
credit initiator submits an application for an automatic credit
instruction to the back-end system. The application can occur
offline or online. Once the back-end system has validated the
beneficiary’s information, it creates an automatic credit
instruction signature which is sent back to the POS device and
is then recorded on the smart card. On the day that the card
holder is due to receive a payment, the card holder inserts his
smart card into any POS device. In the event that the automatic
credit instruction is due and valid, the smart card of the card
holder is automatically loaded.
Interest on Card. Unbanked people transact mainly with
cash. One of the most fundamental disadvantages of cash is that
it cannot generate interest income for the holder and that its
value depreciates with inflation. The UEPS was designed, in
essence, to be an alternative to a formal banking account that
allows a smart card holder to earn interest on the value
contained in his various wallets. The ability to earn interest
provides an incentive for people to maintain balances on their
smart cards rather
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than convert the full balances to cash or to unload them to a
traditional banking account where they would not earn any
interest.
There are numerous possible types of interest calculations,
including simple, compound, continuous, minimum balance, average
balance, daily and monthly interest. The UEPS uses the compound
interest methodology, calculated daily on the previous
day’s closing balance. In order to calculate interest
correctly, the client smart card requires a host date
certificate, or HDC. This date originates from the back-end
system, and is updated on the merchant smart card when it
settles its transactions. The merchant smart card in turn passes
the HDC to the card holder’s smart card, which enables the
client smart card to calculate the interest for any wallet that
bears interest. The system is designed to ensure that the client
smart card only calculates the interest using the latest HDC,
and not any date given to it from an unsettled or inactive
merchant smart card. Once interest is added to an
interest-bearing wallet, a notification record is written to the
card holder’s smart card history file and forwarded to the
merchant smart card for settlement. This record informs the
back-end system of the interest amount credited.
UEPS Morphing. The UEPS is proprietary. It is designed
for a specific market that requires specific features and as
such is not compliant or compatible with other smart card
systems. If it were compatible with other systems, the
usefulness of the UEPS would be as limited as these other
systems and could not provide a solution for the unbanked
populations of the world. However, we have designed the UEPS in
such a way so that it can inter-operate with other standard
payment systems such as EMV, one of the more widely-used
standards in the banking sector. In the future, smart card
holders may wish to use their smart cards in environments that
are currently enabled for other smart card-based payment
systems. The UEPS morphing feature allows our smart cards to
transact at EMV POS devices as if our smart cards were in fact
EMV smart cards. Our card holders can thus transact at EMV POS
devices but the functionality provided at these POS devices is
limited to that offered by the EMV system. Our smart cards, when
required, can morph into the standards supported by the POS
devices thus minimizing the cost of deploying another POS
infrastructure.
Our UEPS morphing feature is not merely a collection of multiple
applications grouped together into a single smart card. This
feature also enables inter-operability between these
applications. The EMV standard is mainly an online application
that requires offline card authentication, online host
authorization and online card issuer authentication. The EMV
payment application is invoked by the POS device using the
application selection methodology. The UEPS smart card can
recognize the type of environment in which it is used through
the command structure passed to it from the ATM, SST, POS device
or any other smart card reader conducting the transaction. Once
the smart card has sensed the system in use, it immediately
morphs this application and behaves as such for the duration of
the transaction. The morphing feature is not limited to EMV, but
can also be used with CEPS, Visa Horizon and Mondex, among other
systems. It places the UEPS card holder in a unique position to
possess a single smart card, and use it at any POS device, ATM
or SST of his choice, without having to have different smart
cards for every payment application.
Automatic Debit. Currently, payees experience various
administrative problems and other challenges in collecting
payments due to them through the formal banking system for
insurance premiums, micro-loan payments and governmental
statutory deductions for items such as unemployment insurance.
In addition, collectors suffer payment losses as a result of
insufficient funds, closed accounts, or charge back
transactions, and may incur significant personnel costs for
employees to attempt to collect from non-payors. Payees may find
that their accounts are incorrectly debited, unauthorized debits
are made or they pay high fees for debit orders which are not
processed.
For unbanked people, their problems are often even greater since
their only means of payment is cash. To pay a premium, they have
to present themselves at the office of the financial service
provider and pay their premium in cash. These offices are
typically in urban areas and therefore unbanked people have to
pay for transportation in order to make their monthly payments.
Carrying substantial amounts of cash over long distances
involves risks of theft and loss.
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We created the automatic debit feature to allow a smart card to
reduce the balance in any of its active wallets on a specific
date and for a predetermined amount. This function can take
place in an offline environment at any POS device. The automatic
debit feature reduces the risks associated with collection of
insurance premiums and other regularly scheduled payments by
ensuring that any funds loaded to the smart card are first used
to service the automatic debit before being transferred for the
card holder’s general use.
The participants in an automatic debit transaction are the
automatic debit initiator, the merchant and the smart card
holder. The automatic debit initiator is the issuer which will
create an automatic debit instruction for a particular wallet of
a specific smart card holder. The merchant is any retailer which
is a participant in the system and has a POS device for a card
holder to activate automatic debit instructions. The card holder
is the person who must pay the premium or other payment.
Card holders register for automatic debit instruction at the
offices of the automatic debit initiator. While at the POS
device, they submit an application for an automatic debit
instruction to the back-end system. This can occur offline or
online. Once the back-end system has validated the
beneficiary’s information, it creates an automatic debit
instruction signature which is sent back to the POS device and
is then recorded on the smart card. On the day that the card
holder is due to pay a premium or other payment, the card holder
inserts his smart card into any POS device. In the event that
the automatic debit instruction is due, the smart card of the
card holder is automatically debited.
Multiple Streams Audit Trails for Offline UEPS
Transactions. The UEPS, as an offline system, must ensure
that all transactions effected offline are settled, at some
point in time, by the back-end system. Settlement is critical to
guarantee that no funds can be lost by card holders even when a
POS device, its paper audit trail or its merchant smart card is
lost, stolen or destroyed. Importantly, smart card transactions,
including automatic credits, automatic debits, interest
accruals, agent transfers, cash downloads and purchases, all
have a financial effect on individual smart card balances and
must therefore be settled in order to preserve system integrity.
The UEPS multiple streams audit trail functionality is designed
to ensure that the replacement smart card contains the correct
amount of funds when a lost, stolen or defective card is
replaced.
The UEPS provides the ability to activate multiple streams audit
trails through POS device profile downloading. Multiple streams
audit trails are distributed through the active smart card base
and are completely transparent to all card holders. Multiple
streams audit trails can only be implemented on smart cards
which have an adequate amount of EEPROM memory as the size of
the transaction file created on smart cards will at least
double. The multiple streams audit trails functionality is
especially useful in environments where either the POS device is
offline or may be damaged or destroyed due to the harsh
environmental conditions in which it operates or where there is
a perceived risk that the POS device may be stolen.
When a client smart card is inserted into any POS device to
perform one or more transactions, including a sale, load,
unload, automatic credit, automatic debit or interest accrual
transaction, the current transaction is written to both the
client and the merchant smart cards. The previous transaction
performed by the client smart card at another POS device is also
written to the currently transacting merchant smart card
transaction file as a “piggy back record.” The
previous transaction or transaction group written to the
merchant smart card from another client is also written to the
client smart card of the currently transacting client.
This process ensures that each transaction or transaction group
effected on a client smart card is distributed directly to a
second merchant smart card and indirectly to a third merchant
smart card. The third transfer occurs by writing the transaction
or transaction group to another client smart card which in turn
transfers the same to a different merchant smart card. The
number of different audit trails streams can be selected through
the POS device or merchant profiles.
Upon settlement of the merchant smart card, the transactions
which were performed at other merchants will therefore also be
settled. Each merchant smart card becomes the carrier for
transactions
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that have occurred at other merchants. All client smart cards
become the multiple streams that facilitate the movement of
transaction data among unrelated merchant smart cards. This
process occurs in an offline environment.
In the event of the loss or destruction of any POS device or its
associated merchant smart card or paper audit trail, all
transactions that have been “piggy backed” can be
recovered through the settlement of other merchant smart cards.
The speed at which these transactions can be recovered will
depend on how frequently the client smart cards that are used to
“piggy back” transactions have transacted at other
UEPS merchants. The multiple streams audit trails functionality
provides complete and independent audit trails that help prevent
fraud by single or colluding parties.
Transparent and Automatic Recovery for Offline UEPS
Transactions. The UEPS, as an offline system, must ensure
that all transactions effected offline complete successfully or
that, in the event of a failure, the transaction in progress can
be restarted without any loss being incurred by either the
client or merchant concerned. Failure of the POS device or the
premature removal of either of the smart cards involved during a
transaction may lead to the client smart card being debited
without the corresponding credit being reflected on the merchant
smart card. Although the premature removal of either of the
smart cards can be prevented by introducing motorized smart card
readers, the cost involved is prohibitive and the solution does
not address other possible failures due to POS device hardware
problems or power failures, which are common in areas with
unreliable power infrastructures.
The UEPS is designed to recover failed transactions through its
transparent and automatic recovery feature. This feature is
activated during the session key establishment phase that occurs
whenever two smart cards transact. During the session key
establishment phase, each smart card generates an eight-byte
natural random number and triple-DES encrypts it with its
generic UEPS key pair. These two encrypted blocks are then
exchanged by the two smart cards, and once decrypted, used by
each smart card to generate a random DES key pair. This new key
pair is used to exchange further information between the smart
cards until the transaction is completed.
During the next phase, each smart card passes to the other its
smart card unique serial number and its current transaction
counter. At this stage, the client smart card is now able to
determine if the last transaction written to its transaction
file was indeed also effected on the merchant smart card. If
not, the client smart card simply unrolls its last transaction
thus restoring the correct data image as it was prior to the
transaction. This feature can also be used whenever a POS device
is disabled for whatever reason. In this instance, the two smart
cards can simply be inserted into any other working POS device
and the two smart cards will automatically re-synchronize
themselves. Further transaction processing can then resume
normally. As a result of this feature, transactions such as
transaction cancellation and reversals can be performed offline
in a secure manner.
Mechanics of Loading, Spending and Settlement
The following describes how card holders can load value onto
their smart cards and spend the value they receive. It also
describes how merchants settle transactions with our back-end
system.
Loading. All card holders that receive social welfare
grants or whose employers participate in our system can load
their smart cards at any POS device located in merchant stores.
Card holders can load their smart cards in several different
ways. If the card holder’s electronic value was created
through the ten-digit signature code, then the card holder has
three options. He can effect an online auto load, in which case
the POS device connects in real time to the back-end system,
which then forwards any available ten-digit signature codes
present in the account of the card holder. These codes will be
loaded to the smart card automatically. If the communications
network is erratic or unreliable, ten-digit signature codes can
be downloaded to the POS device of a nearby participating
merchant where and when the network is operational. The card
holder can then perform an offline auto load whereby any
ten-digit signature codes present in the POS device will be
loaded to his smart card. If a network connection is not
available, the card holder can key in his ten-digit signature
code and amount to be loaded. In all scenarios the smart card
will be credited only if the ten-digit signature code is
decrypted successfully by the smart
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card. If the card holder’s smart card is initialized with
one or a number of automatic credit instructions, the smart card
will credit itself as we describe under “Automatic Credit
feature.”
Spending. Once value has been loaded to a smart card,
card holders may purchase goods or services, make cash
withdrawals, initiate money transfers, request automatic loans,
effect third party payments and invoke automatic credits and
debit orders, all offline at any participating merchant store.
To perform a transaction, the card holder inserts his smart card
into the top smart card reader of the POS device and selects the
appropriate function. Biometric fingerprint identification is
required for most functions to protect card holders against the
unintended or fraudulent usage of their funds. A printed receipt
displays the details of the transaction performed and includes
other system audit trail information.
Settlement. As spending on a UEPS smart card occurs
offline, the settlement of the merchant transactions with the
back-end system needs to take place within the two day
“window settlement” period provided for in the
contract, or as and when the merchant smart card becomes full.
Settlement can be performed online or offline. Merchants who
have access to a network infrastructure can use the settlement
option on their POS devices to connect to the back-end system
and settle their merchant smart cards online. During the
settlement process, merchants choose whether to have the funds
settled deposited to a traditional bank account or transferred
to a client smart card.
Once the merchant selects the settlement option, the
transactions are stripped off the merchant smart card, and the
accumulated transaction values, less the transaction fees which
the merchant is contractually required to pay to us, are paid to
the merchant. Payment occurs either through the country’s
traditional banking clearing system, by check or is credited to
the merchant’s client smart card for immediate or future
use. The last option is extremely beneficial for rural merchants
who purchase their goods from larger wholesalers. Their funds
are, upon settlement, immediately available. Therefore, they can
purchase goods using their client smart card and/or withdraw
cash at other participating merchants. Merchants who do not have
access to a network infrastructure can insert their merchant
smart card into any POS device that has online connectivity and
perform the settlement process. Many merchants can share any POS
device.
If a merchant does not have access to a communication network,
the merchant can use our “milking” function with a
“milking” smart card. This smart card has greater
functionality than a regular smart card and therefore requires a
large memory chip for storing multiple transactions, ‘hot
card’ files, a freshness certificate, and any other
variables, including fees and/or interest rates that need to be
updated on merchant smart cards which operate in deep rural
areas. The milking smart card is inserted in the bottom smart
card reader of a POS device and the merchant inserts the
merchant smart cards to be ‘milked’ into the top smart
card reader. During this settlement process, the transactions
are stripped from the transaction history file of the merchant
smart card and at the same time, the new hot card file,
freshness certificate, fee structure, interest rates and any
other parameter that requires modification are updated. The
milking smart card is then physically handed over to the central
office in order to update the back-end system. At the time of
settlement, all transactions are stripped from the merchant
smart card, aggregated and paid into the nominated bank account
of the merchant. Merchants can select their client smart card as
their nominated account, in which case the amount to be paid is
added to the merchant’s client smart card.
We have designed and developed a dual functionality smart card
called the Net1 Combi-Card for use in rural environments and for
very small merchant stores or hawkers. Hawkers are typically
small merchants that sell food or merchandise from a stand on
the side of road or on a pavement. This smart card is
initialized with both merchant and client functionality. While
trading, the merchant section of the smart card is used for
transaction storage which once settled will allow the merchant
to use the same smart card to perform purchases or any other
financial function.
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Our Products
The following table summarizes each of our smart card to smart
card, or S2S, products, including
| • | the market introduction date; | |
| • | the key features of the product; | |
| • | the features of our UEPS technology which each product uses; | |
| • | the types of fees we charge or currently plan to charge for the product; and | |
| • | the target markets for the product: |
| Year of | ||||||||||
| Market | ||||||||||
| Product | Introduction | Features | Types of Fees | Target Markets | ||||||
| S2S Pension and Welfare | • 2000-2004 |
• Ten-Digit Signature Codes — Offline and
Online Loading • Automatic Credit • Multiple Audit Trail • Mutual Authentication • Transparent and Automatic Recovery • Biometric Identification |
• Loading Fee per Beneficiary • Sales of Smartcards • Registration and Enrollment |
• Government • Social Welfare Grant Beneficiaries |
||||||
| S2S Wage Payment | • 2005 |
• Ten-Digit Signature Codes — Offline and
Online Loading • Multiple Wallets • Restricted Wallets • Multiple Audit Trails • Mutual Authentication • Transparent and Automatic Recovery • Biometric Identification • Interest Calculations |
• Wage Loading Fee per Employee per Month • Equipment Sales per Payroll Clerk plus POS Terminals for the Payment of Wages in the Field or Factory • Sales of Smartcards • Mass Registration and Enrollment per Employee if Performed by us • Monthly Smart Card Account Fee per Employee per Month |
• Employers • Employees |
||||||
| S2S Medical Management, Patient Monitoring and Distribution | • 2005 |
• Multiple Wallets • Restricted Wallets • Multiple Audit Trails • Mutual Authentication • Transparent and Automatic Recovery • Biometric Identification |
• Technology Processing Fee per Smart Card per Month
(Volume Based) • UEPS Software Fee (Volume Based) • Database Capturing Module per Patient • Patient License Fee per Hospital/ Clinic/ Health Care Facility • Equipment Sales for Hospital/ Clinic and Health Care Facility • Sales of Smartcards |
• Non-Governmental Organizations • Government Paid Contractors • Governments |
||||||
| S2S Retail and Wholesale | • 2004 |
• Ten-Digit Signature Codes — Offline and
Online Loading • Automatic Credit • Multiple Wallets • Restricted Wallets • Multiple Audit Trails • Mutual Authentication • Transparent and Automatic Recovery • Biometric Identification • Interest Calculations • Settlement — Offline and Online |
• Merchant Transaction Fee • Cash Withdrawal Fee from UEPS Card Holders Excluding Social Grant Recipients • Hardware Equipment Sales or Rentals • Smart Card Sales • Installation & Training Fee • Reports and Banking Fees • Monthly Card Account Fee per Retailer per Month |
• Retailers • Wholesale Retailers • UEPS Client Card Holders |
||||||
| S2S Insurance System | • 2004 |
• Multiple Audit Trails • Mutual Authentication • Transparent and Automatic Recovery • Biometric Identification • Settlement — Offline and Online |
• Insurance Merchant Transaction Fee • Debit Order Collection Fee • Hardware Equipment Sales or Rentals • Smartcard Sales • Installation and Training Fee • Reports and Banking Fees |
• Insurance Underwriter/ Broker (External Insurance Merchants) | ||||||
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The following describes in more detail how our S2S products work
and the benefits of each product.
| S2S Pension and Welfare |
S2S Pension and Welfare provides a secure and affordable
transacting channel between social welfare grant beneficiaries,
governmental agencies and formal businesses. Through this
product, we distribute social welfare benefits to the unbanked
and under-banked populations, and allow the recipients of these
benefits to transact with formal businesses.
How it works. We enroll social welfare grant
beneficiaries by issuing them a UEPS smart card that digitally
stores their biometric fingerprint templates on the smart card,
enabling them to access their social welfare grants securely at
any time or place. The smart card, with its pre-printed and
unique serial number, or USN, is issued to the beneficiary on
site. Optical fingerprint sensor technology identifies and
verifies beneficiaries. The fingerprint reader is programmed to
create a random cryptographic session between itself and an
inserted smart card, thereby limiting the possibility of
fraudulent storage and replay of digital templates.
The smart card provides the holder with access to all of the
UEPS functionality, which includes the ability to have the smart
card funded with wage, pension or welfare payments, make retail
purchases, enjoy the convenience of pre-paid facilities and
qualify for a range of affordable financial services, including
insurance and short-term loans. The smart card also offers the
card holder the ability to make debit order payments to a
variety of third parties, including utility companies, schools
and retail merchants, with which the holder maintains an
account. The card holder can also use the smart card as a
savings account. Depending on a country’s specific
requirements, holders load their smart card using one of two
methods — ten-digit signature code creation or
automatic credit. We describe both of these methods under
“Our Technology — UEPS Smart Card
Functionality — Offline Loading” and “—
Automatic Credit.”
When the ten-digit signature code method is used, the government
agency submits to us a simple payroll file containing the
beneficiary’s identity number and the value of the grant.
We then process this file and, using the identification number
of each beneficiary, create a ten-digit signature code. The
ten-digit signature code can only be loaded on to the smart card
for which it was created. These ten-digit signature codes can be
distributed to the memory of POS devices or other compatible
devices, including fixed or mobile ATM dispensers or remote
personal computers, by accessing a communication network such as
satellite, X.25, TCP/ IP or GPRS-GSM. Thereafter, the
beneficiary can load the smart card offline. If a GPRS—GSM
communication network is available, the beneficiary can load the
smart card online.
The beneficiary simply inserts a smart card into the POS device
and is prompted to present his fingerprint. If the fingerprint
matches the one stored on the smart card, the smart card is
loaded with the ten-digit signature code created for that
particular smart card. The POS device then prints a receipt that
outlines the amount of the grant paid to the beneficiary.
The automatic credit feature allows a smart card holder to
receive regular, fixed-amount payments such as welfare grants or
other benefits, food parcels, meal vouchers and/or medical
supplies at POS devices that operate offline. Automatic credit
instructions are recorded on the smart card at the time they are
granted by the issuer. Each automatic credit instruction
recorded embodies a number of parameters such as the amount and
the wallet to be credited, the frequency at which the credit
should occur and the commencement and expiration date of the
instruction.
When the beneficiary inserts a smart card into a POS device or
any other compatible device, the automatic credit feature will
be automatically invoked. During this process, each automatic
credit instruction previously recorded on the smart card will be
reviewed. If all related parameters such as timing, commencement
and expiration date are all correct the smart card is credited
with the funds due. When this happens, the transaction is
recorded immediately on the merchant smart card present in the
POS device at the time that the beneficiary’s smart card is
credited. Since the electronic funds have been created offline,
automatic credit transactions must be forwarded to the back-end
system through a merchant settlement or through our multiple
audit trail facility. We are able to claim the actual funds
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loaded to beneficiaries’ smart cards from the government
agency at the end of each business day because the back-end
system is informed of all of the electronic values created.
Benefits. Our S2S Pension and Welfare system provides
numerous benefits to government agencies and beneficiaries. The
system offers provincial governments a reliable service at a
reasonable price. For beneficiaries, our smart card offers
convenience, security, affordability and flexibility. 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 identification technology helps prevent fraud. Their
personal security risks are reduced since they do not have to
safeguard their cash. Beneficiaries have access to affordable
financial services, can save and earn interest on their smart
cards and can perform money transfers to friends and relatives
living in other provinces. Finally, beneficiaries pay no
transaction charges to load their smart cards, perform balance
inquiries, make purchases or downloads or effect monthly debit
orders. For us, the system allows us to reduce our operating
costs by reducing the amount of cash we have to transport.
| S2S Wage Payment |
S2S Wage Payment allows an employer to pay employee wages
electronically, either online or offline, by transferring the
precise amount of the wage payment directly onto a smart card,
thus eliminating the need for the employer to store and handle
cash at the workplace. We originally designed this product for
unbanked and under-banked workforces and their employers.
However, employers of employees who often have bank accounts
have expressed interest in this product as well, which we
attribute to its affordability, convenience and security.
How it works. Employees of participating employers
receive smart cards which we issue to them. We download a
ten-digit signature code for each employee wage payment to a POS
device, and the employer takes the POS device to the pay site on
payday. The employee inserts his smart card into the POS device
which then searches for any ten-digit signature codes created
for that particular smart card. Once the POS device locates and
decrypts the ten-digit signature code, it immediately loads the
smart card with the wage payment. The POS device prints a
receipt which acts as a pay stub by including the amount of the
wage paid and any deductions made. The receipt also indicates
the balance of the “savings” wallet, if available. The
process takes up to six seconds from insertion of the smart card
to completion of printing. Personal identification through
finger print authentication is not necessary to perform a load
as the ten-digit signature code is uniquely linked to the USN
number of the employee’s smart card.
Benefits. S2S Wage Payment provides numerous benefits to
employers and to employees. For employers, the system helps to
increase productivity in the work environment and reduce
administration and labor costs associated with the management,
transportation, delivery and general handling of cash.
Electronic payment requires less time than manual distribution
of cash pay packets, thereby reducing the amount of employee
downtime. Employers in rural and semi-rural areas no longer need
to incur the inconvenience and expense of transporting their
employees to urban areas to enable them to receive their wages
from ATMs nor to have to advance funds whenever these ATMs run
out of cash. In addition, the system is configurable for each
employer so that the database can be split up into departmental
or company sub-databases, if required.
Further, employers of unbanked and under-banked employees are
frequently put into a position of having to provide savings,
loans, burial insurance and other financial services to their
workers. With S2S wage payment, the employee can opt to have a
portion of his wage loaded directly to a separate savings wallet
on the smart card. Interest is calculated on the current daily
balance and paid monthly to the card holder. The card holder can
also qualify for an affordable loan, provided by us or another
participating service provider, which is loaded onto his smart
card. The smart card informs the back-end system of the monthly
loan repayment which is applied against the wage after loading
the amount due to the smart card. Finally, instead of the
employer having to negotiate the most cost effective burial
insurance for his employees, he can take advantage of the
insurance we negotiate with selected insurance companies on
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behalf of many employers. The issuance of the insurance policy
is recorded in the chip of the smart card. For employees, S2S
wage payment offers all of the benefits described above under
“S2S Pension and Welfare.” Additional benefits include
fees for cash withdrawal that are typically lower than bank
charges for the same transaction.
| S2S Medical Management |
Our S2S Medical Management product applies the UEPS technology
in a non-financial environment to facilitate the management,
distribution and control of the anti-retroviral, or ARV, drugs
used to combat HIV/ AIDS. The system is designed to operate in
the deepest rural areas where no meaningful infrastructure
exists. It is also designed to form a basis for the
implementation of other drug distribution programs.
Governments and charitable organizations face many challenges in
the distribution and control of ARV drugs. Patients who do not
strictly adhere to the required drug regimen for the rest of
their lives face the risk of drug resistance, which can lead to
death. The toxicity of ARV drugs requires effective patient
monitoring. Data needs to be collected to evaluate the
effectiveness of drugs available for treatment.
How it works. We issue smart cards to participating
hospitals, dispensaries and doctors and to their AIDS/ HIV
patients. The smart cards use biometric fingerprint
identification technology and act as portable electronic medical
record books that allow patients to be serviced anywhere without
relying on centralized systems and communications networks. The
smart cards carry all patient-related information, including
personal details, drug regimens, prescriptions, visitation
history, doctor’s details, dispensary information and other
data. This data allows us to populate and update databases that
track each patient’s progress, each doctor’s
performance, each and every prescription dispensed and each
dispensary’s drug inventory levels. The system monitors
patient activities, and is designed to ensure the integrity of
data, reduce fraud, manage drug inventories and, control drug
delivery, ensure patient anonymity and privacy, and distribute
payment for goods and services. Each day, all registration
information, changes to patient information, and information
regarding drug dispensation is encrypted and communicated to our
back-end system for batch processing. Once validated, this
information is forwarded directly to a confidential server
managed by the government and/or funding organizations.
Benefits. S2S Medical Management offers many benefits to
government organizations, medical professionals and health care
workers, and patients. For government organizations, the system
helps save money by improving the efficiency of ARV drug
distribution and by reducing the potential for fraud and
falsification of data. For medical professionals and health care
workers, the system facilitates the real time but offline
registration of patients and the storage of crucial patient
information, such as the patient’s last visit date, changes
in information such as height and weight and the most recent
prescription. For patients, the portability of the electronic
medical record allows them to be treated anywhere, without
relying on centralized systems and communications networks. The
system, which is provided free of charge to the patient, is
designed to ensure patient privacy. Finally, our technology
preserves the patient’s information, even if the smart card
is lost.
| S2S Retail and Wholesale |
Our S2S Retail and Wholesale product enables retailers,
wholesalers and financial service providers to effect commercial
transactions with one another and with unbanked and under-banked
customers. Many merchants who service the unbanked and
under-banked operate in underdeveloped areas where traditional
financial institutions and their products are unavailable or
limited due to the lack of communication infrastructures. In
addition, these merchants do not meet the selection criteria
imposed by financial service providers, including banks and
credit card companies, either for financial reasons or because
they cannot meet or adhere to the rules and regulations these
formal institutions demand. The system permits participants,
which include merchants, wholesalers and financial service
providers to effect payments for goods and services, and to
dispense cash from one smart card to another in a secure offline
manner. The system is designed to eliminate unauthorized use by
ensuring that all transactions are biometrically
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approved by the card holders. The system guarantees integrity by
providing an audit trail for each transaction that is stored on
both the customer and merchant smart cards.
How it works. The participants in this system are
merchants whom we enroll and consumers who are smart card
holders. When we enroll a merchant, we issue a smart card to the
merchant that contains its profile as well as the store’s
merchant reference number and install an appropriate POS device
that takes into account the type of power and communications
infrastructure available at the merchant’s location. The
POS device is either battery-operated or uses a municipal power
supply. All our POS devices can use GSM/ GPRS, TCP/IP, X.25 or
satellite networks to perform loading and settlement functions.
The smart card is inserted in the bottom smart card reader of
the POS device to perform on-line transactions with customers.
We sign a contract with each merchant that is tailored to the
needs of each merchant, reflecting the number of stores to be
serviced and the specific hardware we agree to install. We
provide each merchant with installation, system implementation
and training. We also provide merchants with our marketing
material for display at their locations so that their customers
know that the merchant offers our services. The transactions
stored on merchant smart cards cannot be overwritten until they
have been settled by using our offline “milking”
facility or connecting online to the back-end system.
Benefits. S2S Retail and Wholesale provides numerous
benefits to merchants and to customers. A growing smart card
base offers merchants a larger number of customers who can shop
in their stores. The system also provides them with the
opportunity to realize new income streams from the fees they
collect by providing at their locations our broad range of
financial services and products, including cash downloads, money
transfers, loans and burial insurance. Finally, their security
risks and expenses associated with handling cash can be
significantly reduced, including banking charges and
communications costs. The benefits of the system for customers
are a combination of the ones we describe above under “S2S
Pension and Welfare” and “S2S Wage Payment.”
| S2S Insurance |
Our S2S Insurance intermediary product enables unbanked and
under-banked consumers to obtain affordable and reliable burial
insurance policies. In South Africa, cultural reasons make
burial insurance important to many people. Our system enables
insurance companies to access this customer base. The insurance
industry is subject to various laws and regulations which are
designed to protect policyholders and our system ensures
compliance with these laws and regulations by utilizing the key
features of the UEPS technology.
How it works. In order to participate in the system, card
holders and insurance brokers must be enrolled in our system.
The broker enrollment procedure is similar to the procedure we
use for merchants. The insurance broker’s merchant smart
card is created centrally and loaded with the broker’s
burial insurance product options. Individual brokers receive
smart cards which digitally store their biometric fingerprint
templates on the smart card. After completion of the enrollment
process, we issue an insurance merchant smart card to the
insurance broker. We provide the insurance broker with
installation, implementation and training.
When an applicant applies for an insurance policy, the insurance
broker explains relevant information, including the different
policy options, waiting options and the 30-day “cooling
off” period. The 30-day “cooling off” period
allows the policy holder who has decided to buy a policy issued
by another insurance company to change is mind and to keep the
original policy instead. The system informs all parties
involved, including the brokers for the previous insurer and the
new insurer that the client is in a 30-day cooling off period.
This makes the insurance broker of the previous insurer aware of
the client’s intention, and allows the insurance broker to
contact the client in an effort to keep the client.
When a broker sells a policy to a client, the first check
performed by the smart card is to ascertain if the client has
already signed up for a similar product, which may be
accomplished offline. If not, the client accepts the new policy
by presenting his fingerprint for verification by the smart
card. The broker also presents his fingerprint to prove that he
sold the policy and thereby allow him to receive his sales
commission. The system then writes the policy number and
details, including the amount of the premium,
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to the card holder’s smart card. This reduces the risk of
future disputes regarding the policy. When a insured individual
dies, the beneficiary presents the identity document, the
insured’s smart card and death certificate, and the
original policy document. This information is checked against
the information stored on the smart card by simply inserting the
deceased’s smart card into a POS device and printing the
data associated with burial policy information. If valid, the
claim is paid out to the beneficiary immediately.
Benefits. Our S2S Insurance intermediary product offers
numerous benefits to insurance brokers and policyholders. For
brokers, the system provides improved access to its potential
client base, minimizes the risks associated with fraud through
biometric fingerprint identification, facilitates legal
compliance and provides a secure channel for collection of
premiums. In addition, brokerage commissions can be managed
through the system. The benefits for policyholders are generally
the same as for customers as described above under “S2S
Retail and Wholesale.” In addition, because the system
reduces premium collection risk to the insurance company, it
provides consumers with access to more affordable insurance
products of a higher quality than would otherwise be available.
Sources of Revenue
We have structured our business and our business development
efforts around four related but separate approaches to deploying
our technology. In our most basic approach, we act as a
supplier, selling our equipment, software, and related
technology to a customer. As an example, in Malawi we sold a
complete UEPS to the Central Bank, which owns and operates the
resulting transaction settlement system. The revenue captured
through this approach is reflected in our Hardware, software and
related technology sales segment.
We have found that we have greater revenue opportunities,
however, by acting as service provider instead of a supplier. In
this approach we own and operate the UEPS ourselves, charging
one-time and ongoing 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 provincial
governments and employers on a fixed basis, but charge a fee on
an ad valorem basis for goods purchased using our smart card.
The revenue associated with this approach is captured in our
Smart card accounts, Transaction-based sales and Financial
services 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 where the profit potential is
compelling. For instance, we act as a lender today. 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 captured
in our Financial services segment.
Finally, we are willing to enter into business partnerships or
joint ventures to introduce our solution to new markets. Here we
take an equity position in the business while acting as a
supplier of technology. In evaluating these types of
opportunities, we intend 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 will own the UEPS,
including the back-end system. We plan to 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.
Sales and Marketing
Our marketing and sales strategy continues to evolve as we gain
more and more market penetration. We currently focus our
activities on the deployment of our POS device infrastructure in
the rural areas of South Africa. These devices provide us and
our card holders with service points at which they can transact
and sign up for many financial services. The more of these
points of service we deploy, the better our
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service delivery to our card holders. To achieve this, we are
promoting the use of our POS devices in many different
applications which, once implemented, provide further access
points at which we can market and sell our products. As a
result, we are involved in the facilitation of telephone service
and the pre-payment for water and electricity service.
We continue to develop our pension and welfare application as
the customer base it generates allows us to gain critical mass
as an issuer. Once we achieve critical mass, it should be far
easier to acquire new merchants and other related organizations
that wish to market and sell their products to and through our
smart card base. We believe that success in one area of
operations and market penetration will favorably affect others.
We have also commenced our activities in the distribution and
management of medical products to HIV/ AIDS patients. This
initiative assists us to acquire a new client and retail base
such as hospitals, clinics and dispensaries. The smart cards we
issue to these patients can operate the entire suite of UEPS
products. Therefore, we believe that this new customer base will
assist us in increasing our revenues.
We continue to engage institutions that can on the one hand
benefit directly from our technology and on the other hand
provide us with more clients and points of service to facilitate
the use of our facilities and the cross selling of our products.
Our international strategy is changing rapidly. In the past, we
did not drive markets directly as we were not ready structurally
to take on contracts in many countries of the world. We now
intend to target the unbanked market of developing economies
aggressively through partnerships, joint ventures and the
acquisition of synergistic but profitable businesses. This new
strategy focuses on identifying, defining and activating an
entry point in a specific country to commence operations. Once
our system is implemented, we will then introduce our products
and services to grow revenue and increase profit margins.
We intend to identify partners that are already operating
businesses and infrastructures in various countries in order to
benefit from their initiatives to introduce our operating
platforms. We believe that our partners will benefit through the
implementation of our technology and through the new income
streams that our technology can activate.
We are currently revamping our business, sales, finance and
information technology divisions in such a way as to facilitate
our objectives.
Competition
In addition to competition that we face from the use of cash,
checks, credit and debit cards, existing payment systems and the
providers of financial services, we have identified a number of
other products currently being produced that use smart card
technology in connection with a funds transfer system and the
companies that promote them. These include EMV, a system that is
being promoted by Visa International Service Association,
MasterCard International and Europay International; Mondex
International Limited, a subsidiary of MasterCard; and Proton
World International N.V., a subsidiary of STMicroelectronics
Belgium N.V. In South Africa, and specifically in the payment of
social welfare grants, our competitors also include AllPay
Consolidated Investment Holdings (Pty) Ltd., which is
responsible for social welfare payments in the Free State,
Gauteng and Western Cape provinces and a small portion of the
Eastern Cape province, and Empilweni Payout Services, which is
responsible for payments in the Mpumalanga province.
The incumbent South African retail banks recently announced a
joint initiative to create a common banking product to offer to
the significant portion of South Africa’s population that
does not have access to traditional banking services, or the
unbanked. This bank account, generally referred to as the
“Mzansi” account, was introduced in October 2004 and
offers limited transactional capabilities at reduced charges,
when compared to the accounts traditionally offered by these
banks. We believe that currently there are approximately one
million Mzansi account holders. The social welfare beneficiaries
who are currently paid through our smart card system may elect
to use these accounts to receive their grants.
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We also may face competition from companies to which we have
licensed rights to our technology, including Visa and BGS Smart
Card Systems AG. Moreover, as our product offerings increase and
gain market acceptance, banks in South Africa and other
jurisdictions in which we operate may seek governmental or other
regulatory intervention if they view us as infringing on their
funds transfer businesses.
Research and Development
Our business activities and product offerings depend on our
proprietary UEPS software. As a result, we have a large group of
software engineers and developers who are constantly revising
and improving the core UEPS software and its functionality.
We believe that our smart card system is the most advanced
system of its kind in the world today. However, we use a number
of hardware platforms that are not proprietary to us and which
are continuously being improved. These platforms include smart
cards micro-controllers, POS devices, biometric readers and
other back-end computer hardware. We continually work to take
advantage of these improvements in our attempt to stay at the
head of the competitive curve. A faster micro-controller on a
smart card may allow us to process transactions faster and with
more security. A larger memory smart card allows us to store
more transactions and to load larger software applications.
Larger memories also allow our smart cards to be used for more
than one application at a time, thus eliminating the cost and
the management of multiple smart card systems.
Our smart card system is designed to manage tokens of value such
as cash, credit, savings, medical history, identification
criteria, finger print templates and insurance policies.
Security is therefore of prime importance as any breach would
result in the loss of our system integrity. This would be
followed by a loss of confidence and credibility that would
jeopardise our growth and market penetration. We therefore
continue to advance our security protocols and algorithms to
combat the potential attacks that have currently been
identified. These include crypto-analysis techniques as well as
reverse engineering. Attacks such as the latest DPA or
differential power analysis must also be circumvented.
We continue our research in new and more secure algorithms, such
as the RSA or Rivest, Shamir and Adleman as well as new
competitive asymmetric algorithms such as elliptic curves. We
develop and implement these techniques ourselves and own the
software that we create.
Lastly, we continue to study the needs of our target market and
develop new UEPS features that satisfy these needs. As our UEPS
system is implemented in more and more developing countries, we
create greater connectivity between our systems to subsequently
activate international transactions and cross-border money
transfers.
Intellectual Property
Our success depends in part on our ability to develop and
maintain a competitive intellectual property advantage over
potential competitors in the electronic financial services
industry. We believe that we have developed the first payment
system based on technology that is protected by our FTS patents.
We rely on know-how, including trade secrets and other
confidential information, continuing technological innovation
and licensing opportunities to further develop our proprietary
position. Our ability and the ability of our licensors to obtain
intellectual property protection for the UEPS technology and
related processes, including any improvements to and
developments of them, to operate without infringing the
intellectual property rights of others and to prevent others
from infringing our intellectual property rights will be
important factors to our success.
The FTS patents, which include aspects of the UEPS technology,
have issued in the United States, Hong Kong, South Africa,
Botswana, Namibia and Swaziland. The FTS patent in the United
States was granted as U.S. Patent No. 5,175,416 on
December 29, 1992. The patent was reissued as
U.S. Patent No. RE36,788 on July 25, 2000, and
will expire on May 17, 2011. It currently remains in full
force and effect, and we are not aware of any challenges to its
enforceability. The FTS patent in Hong Kong was
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granted on December 11, 1998, and will expire in 2010. The
Hong Kong FTS patent is jointly owned by us and the estate of a
co-inventor. The FTS patents in South Africa, Botswana, Namibia
and Swaziland were granted on September 25, 1991,
March 9, 1993, April 7, 1993 and December 9,
1992, respectively. These patents remain in full force and
effect, and we are not aware of any challenges to their
enforceability. The FTS patent will expire in 2007 in Namibia
and in 2009 in South Africa, Botswana and Swaziland.
A European FTS patent was filed in October 1990 and granted in
December 1994. The European Patent Convention provides for an
opposition period of nine months following the grant of a
European patent, and six parties filed an opposition to the
grant of the FTS patent. The case was heard before a Board of
the Opposition Division in March 1998 and the patent was upheld.
Following this decision, a number of the original opponents
filed an appeal. The oral proceedings for the appeal were heard
on October 10, 2002 and the Appeal Board reversed the
earlier decision. The formal written decision from the Appeal
Board was received on December 24, 2002. Consequently, the
European patent has been revoked and there is no possibility of
any further appeal.
As a result of this ruling, BGS, the local system operator in
the Commonwealth of Independent States, has stopped paying us
any patent royalties. However, our business plan and forecast do
not account for such royalties as a source of revenue in the
medium to long-term, as the key to our operations in Europe is
based on our know-how and ability to exploit the technology
rather than on the European patent. Accordingly, we do not
expect this ruling to have a material adverse effect on us in
the future.
Aspects of the UEPS technology are described in U.S. Patent
No. RE36,788. This patent, entitled “Funds Transfer
System,” is directed to a method of transferring funds
between financial institutions via a smart card. In particular,
the method includes linking a smart card (first device) to a
first financial institution, debiting an account held at the
financial institution and recording a corresponding credit value
in the smart card. The smart card is then linked to a second,
similar device, wherein the credit value in the smart card is
reduced and a corresponding credit value is recorded in the
second device. The second device is then linked to a second
financial institution, wherein the credit value in the second
device is reduced and a corresponding credit value is recorded
in an account held at the second financial institution. The
smart card and the second device each store at least a portion
of a program which is run in a synchronized interactive manner
between the devices.
In 1997, we entered into a technology license agreement with
Visa International Service Association, or Visa. Under that
agreement, Visa purchased a non-exclusive, perpetual, worldwide
license to our technology rights that are defined in the
agreement to mean all of our then-current worldwide patent
rights, copyrights, mask work rights, trade secrets and any
other intellectual property rights relating to our UEPS
technology. This Visa license includes an exclusive, perpetual,
worldwide license under our patents, as defined in the
agreement, licensed to Visa that is exclusive to the financial
services industry, as defined in the agreement. The agreement
defines patents as meaning our current worldwide patents and
patent rights, including U.S. Patent No. 5,171,416,
including without limitation, enhancements, improvements and
expansions to all of the licensed patents and any foreign patent
applications corresponding to any patent associated with any of
our products or services that use technology related to
financial services or can be used in the financial services
industry. The agreement defines financial services industry as
persons or companies that are directly or indirectly making
loans; taking deposits; selling, brokering, or factoring
securities, insurance, mortgages or receivables; and providing
payment services, such as issuing charge cards, credit cards,
payment cards, debit cards or any other system that could
compete with such payment methods. Our Visa agreement grants
back to us the non-exclusive right under our Visa-licensed
patents to make, use and sell our payment systems and other
products in the financial services industry as defined in the
agreement. In our Visa agreement, Visa agrees not to grant a
sublicense for any payment system to any entities in the
financial services industry who are not members of Visa already
if such entity already has a right to use such payment systems
from us. The agreement permits Visa to sublicense our licensed
technology rights to any of its members, any entity in the
financial services industry or any entity outside of the
financial services industry that provides products to Visa or
its sublicensees. The agreement prohibits us from licensing our
technology rights, not just our licensed patents, to any of
Visa’s competitors,
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including MasterCard, Europay, American Express Company,
Discover Financial Services, Diners Club International Credit
Card Co., Carte Blanche Card or JCB International Credit Card
Co. or any of their parents, subsidiaries or affiliates. We have
also licensed our foreign FTS patents in South Africa, Botswana,
Namibia and Swaziland to Visa, Nedbank and First National Bank
of South Africa.
The patent position of companies like ours is generally
uncertain and involves complex legal and factual questions. Our
ability to maintain and solidify a proprietary position for our
technology will depend on our success in obtaining effective
claims and enforcing those claims once granted. The FTS patents
and related patents that may issue in the future, or those
licensed to us, may be challenged, invalidated or circumvented,
which could limit our ability to stop competitors from marketing
our product or the length of term of patent protection that we
may have for our processes. In addition, the rights granted
under any issued patents may not provide us with proprietary
protection or competitive advantages against competitors with
similar technology. Because of the extensive time required for
development and testing of a potential product, it is possible
that, before any of our products can be commercialized, any
related patent may expire or remain in force for only a short
period following commercialization, thereby reducing any
advantage of the patent.
We hold trademarks in South Africa, Botswana, Namibia, Lesotho,
Swaziland and France.
We own the exclusive copyrights in the current version of the
UEPS programs, subject to any copyrights in preexisting
materials in earlier versions of the UEPS programs that are
jointly owned by us and other parties under various agreements.
Effective October 1, 1990, we entered into an agreement
with Metrolink (Proprietary) Limited, a Nedbank subsidiary,
assigning Metrolink the then-current copyrights in the UEPS
programs with respect to South Africa, Namibia, Botswana,
Lesotho, Swaziland, Mozambique and Zimbabwe. Under this
agreement with Metrolink, we retained the worldwide copyright
rights in the UEPS programs outside of the seven listed
countries, and acquired the worldwide copyright rights in the
Metrolink system (later known as the Megalink system) for all
countries outside of the same seven listed countries.
In July 1997, we confirmed our joint ownership with Nedbank of
the copyright ownership in the then-current UEPS programs on a
worldwide basis and agreed with Nedbank that neither Nedbank nor
we had any obligation to share with each other any income or
other monies either of us derived from the UEPS software. Then,
on July 11, 2000, we agreed again in several written
agreements with Nedbank that all copyrights in the then-current
UEPS programs as of June 2000 would be jointly owned by Nedbank
and us. Since July 2000, there have been no further agreements
respecting copyright ownership in the UEPS programs. We are the
sole copyright owner of all original material in the UEPS
programs developed by us since July 2000. Under our Nedbank
agreements, Nedbank also acquired the right to request a license
of our South African and U.S. FTS patents and of all technology
and know-how relating to the UEPS described in those earlier
patents from us for entities partly owned by Nedbank that are
located anywhere within South Africa and neighboring countries.
Under these licenses, Nedbank would pay us a license fee, with
us supplying smart cards or being paid a royalty if the cards
are obtained from a third party. We believe that these potential
Nedbank-requested licenses are related to our UEPS programs that
were in effect as of July 2000. Our various agreements with
Nedbank include covenants restricting us from licensing our
technology rights to banks in various territories without
Nedbank’s approval. Nedbank has agreed to waive certain
rights in our agreements with Nedbank provided that Nedbank,
prior to October 30, 2005 and pursuant to the public
offering of our common stock, is able to dispose of 6,652,819 of
the shares of our common stock that Nedbank owns.
Employees
As of April 30, 2005, we had approximately 1,900 employees,
of whom approximately 181 were part of our management,
approximately 1,258 were employed in transaction-based
activities, approximately 310 were employed in financial
services and approximately 140 were employed in smart card,
hardware, software and related technology sales and corporate
activities. As of April 30, 2005, approximately 36%, or 109
of 300, of our employees in the Northern Province who were
performing transaction-based activities
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were members of the South African Commercial Catering and Allied
Workers Union, or SACCAWU. We believe we have a good
relationship with our employees and SACCAWU.
Properties
We do not own any administrative or manufacturing facilities. We
lease properties throughout South Africa and our corporate
headquarters are located in Johannesburg. The headquarters of
our subsidiaries are located at the same address. Our
subsidiaries lease one manufacturing facility, relating to the
transaction-based activities segment, and 121 depots in South
Africa, 55 of which relate to the transaction-based activities
segment and 66 of which relate to the financial services
segment. The leases expire at various dates through the year
2006 and 2010, respectively. We believe we have adequate
facilities for our current business operations.
Legal Proceedings
There are no 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.
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CORPORATE HISTORY
We were incorporated in Florida in May 1997. Until June 7,
2004, we were a development stage company and our business
consisted only of acquiring a license to the U.S. FTS
patent and obtaining an exclusive marketing agreement for the
UEPS technology outside South Africa, Namibia, Botswana and
Swaziland. On June 7, 2004, through a newly-formed
subsidiary, New Aplitec, we acquired substantially all of the
assets and assumed all of the liabilities of Aplitec, a public
company listed on the JSE Securities Exchange South Africa.
Aplitec owned the FTS patent in South Africa, Namibia, Botswana
and Swaziland and one of its subsidiaries was the other party to
the marketing agreement described above. The primary purpose of
the Aplitec transaction was to consolidate into one company the
intellectual property rights relating to the FTS patent and the
UEPS technology, to establish a first-mover advantage in
developing economies for the commercialization of the UEPS
technology, and to exploit market opportunities for growth
through strategic alliances and acquisitions. In the Aplitec
transaction, the former shareholders of Aplitec obtained a
majority voting interest in Net 1. The Aplitec acquisition is
described in more detail below.
Between 1998 and 2000, Aplitec made three strategic acquisitions
for the purpose of building a critical mass of smart card users.
In May 1998, Aplitec acquired Net1 Southern Africa (Proprietary)
Limited, a supplier of smart cards and terminals which serviced
the POS terminal network of Nedbank, a major South African
banking group. This transaction has allowed us to develop a
relationship with Nedbank.
In 1999, Aplitec acquired CPS, a company engaged in the
distribution of social welfare grants on behalf of several of
the provincial governments of South Africa. This transaction
enabled Aplitec to convert CPS’s customer base of
approximately 1.5 million people from a cash distribution
system to a smart card-based system, and to acquire a logistics
and implementation infrastructure. Aplitec began converting
grant beneficiaries shortly after the acquisition. Conversion
has allowed us to eliminate a portion of the costs we incur in
connection with the distribution of cash, and thus to reduce our
operating costs. The conversion has also provided us with the
opportunity to sell products and services to these same
customers. We have BEE partners with shareholdings in one of
CPS’s subsidiaries.
During the course of 1999 and 2000, Aplitec acquired Moneyline
(Proprietary) Limited and New World Finance (Proprietary)
Limited, each of which was engaged in the microlending business.
Microlending involves extending cash loans for periods ranging
from 30 days to several months. Aplitec made these
acquisitions primarily for the purpose of gaining exposure to an
additional base of potential smart card users in order to deploy
its microlending administration and payment products. We have
actively engaged in converting traditional microlending
customers to UEPS-based lending, which has also helped us
improve the profit margins on our lending business by reducing
the expenses associated with non-collection of traditional
microloans.
After completing these three acquisitions, we sought to create
an infrastructure of POS terminals that would permit businesses
and merchants to engage in smart card transactions with their
card holder base. In June 2004, we implemented a “merchant
rollout” in the Northern Cape province of South Africa,
supplying merchants with smart cards and POS terminals in order
to permit smart card holders to transact with one another. With
the increasing opportunity to conduct transactions using smart
cards, by June 30, 2004, approximately 60% of welfare and
pension beneficiaries in the Northern Cape province had kept
value on their cards on at least one occasion rather than
immediately converting their entire payments to cash. With the
subsequent rollout of terminals at selected merchants in other
provinces of South Africa, more beneficiaries have started using
their smart cards for transacting with merchants.
At the same time that we were building the UEPS infrastructure
and distributing our smart cards, we were also seeking to expand
the range of products and services available to smart card
holders. In 2001, we developed a suite of financial services
targeted at social welfare beneficiaries, utilizing our issued
base of smart cards as a delivery channel. Our black empowerment
partners in the various South African provinces market these
products, which include micro-loans, insurance and distribution
of food parcels, under various brand names —
StarChoice in the KwaZulu-Natal province and Smart Life in the
Northern Cape province. We currently have approximately 102,000
customers in these two provinces, to whom we make loans on which
we earn interest and to whom we sell insurance policies on
behalf of insurers for
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which we collect both a commission for the sale of a policy and
a fee for the monthly premium deduction. According to research
by the FinMark Trust, 29% of all South Africans have a form of
burial saving or insurance policy, but the collection of policy
premiums remains a problem for insurance companies due to the
limited penetration of bank accounts. However, using the UEPS
technology allows automatic deduction of premiums from a
person’s smart card at pre-designated times. Going forward,
we plan to grow and develop this business under different brands
by launching new products and by introducing the service to
social welfare beneficiaries in the other provinces where we
administer social welfare grants and to employees utilizing our
wage payment system.
We have also begun to expand our business into other countries.
We are currently at different stages of establishing UEPS card
holder bases and POS device infrastructures in Malawi,
Mozambique, Zimbabwe, Ghana, Rwanda, Burundi and Latvia.
The Aplitec Transaction
On June 7, 2004, we acquired the business of Aplitec for a
purchase price of approximately $127.5 million. Under the
exchange control regulations of the South African Reserve Bank,
South African reinvesting shareholders were not permitted to
hold our securities directly. Therefore, in order to comply with
these regulations, these reinvesting shareholders received,
through an interest in a South African trust, securities of New
Aplitec, consisting of B class loan accounts and B class
preference shares. The A class loan accounts and A class
preference shares of New Aplitec are held by Net 1. These
reinvesting holders also obtained the right to receive, for no
additional consideration, shares of our special convertible
preferred stock which are held by a Cayman Islands trust. We
refer to the B class loan accounts, B class preference shares
and special convertible preferred stock that we and New Aplitec
issued in the transaction as the “linked units.” The
special convertible preferred stock is convertible on a
one-for-one basis into our common stock upon the occurrence of a
trigger event, and holders are entitled to vote on an
as-converted basis. Upon conversion of the special convertible
preferred stock into shares of our common stock upon the
occurrence of a trigger event, the linked unit holder cedes to
Net 1 the B class loan accounts and B class preference
shares that were part of the linked unit. A trigger includes any
of the following events: (1) giving of a conversion notice
by a linked unit holder, (2) the abolition or relaxation of
the South African Reserve Bank exchange control regulations or
(3) the liquidation of New Aplitec or Net 1.
We describe our special convertible preferred stock and the New
Aplitec B class loans and B class preference shares in more
detail under “Description of Capital Stock.”
In connection with the Aplitec transaction, the total number of
outstanding shares of our capital stock, after giving effect to
the one-for-six reverse stock split, increased from
2.6 million shares prior to the transaction to
54.7 million after the transaction. Of these
54.7 million shares, we issued 32.2 million shares of
our special convertible preferred stock. Our special convertible
preferred stock is structured so as to be economically
equivalent to common stock and has substantially the same rights
as our common stock. The rights of our common stock and special
convertible preferred stock are described in more detail under
“Description of Capital Stock.” During the period from
the completion of the Aplitec transaction through March 31,
2005, an equivalent of 4,635,931 shares of special
convertible preferred stock were converted into an equal number
of shares of common stock, and the number of outstanding shares
of special convertible preferred stock was correspondingly
reduced. Our current shareholder base comprises the reinvesting
Aplitec shareholders, Net1’s shareholders prior to the
Aplitec transaction and shareholders that have purchased shares
of common stock from these shareholders in market or private
transactions.
The Aplitec acquisition was funded by a group of private equity
funds managed by the Brait Group, Southern Cross Capital Limited
and FF&P Asset Management Limited. In order to provide us
with the cash to purchase the assets of Aplitec through New
Aplitec, these private equity funds purchased
17,610,238 shares of our common stock, after giving effect
to the one-for-six reverse stock split, for a purchase price of
$52.8 million concurrently with the transaction.
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The following chart presents our organizational structure and
business units after giving effect to the Aplitec transaction
and all conversions of our special convertible preferred stock
into common stock through March 31, 2005:
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GOVERNMENT REGULATION
The following are the material regulations that apply to our
business operations in South Africa. As our business moves into
other jurisdictions, we may be subject to other regulations and
laws.
The Electronic Communications and Transactions Act 25 of
2002
All providers of cryptography products and services must be
registered with the South African Department of Communications
in order to lawfully provide cryptography services or products
in South Africa. This registration requires that the provider of
cryptography products and services furnish certain information
and pay certain fees. The information to be furnished and the
fees to be paid will be detailed in regulations to be furnished
by the Minister of Communications. Draft regulations were
published for public comment on September 1, 2004. When the
regulations are established, we will have to be registered as a
provider of cryptography products and services and any failure
on our part to do so will constitute an offense under the
ECT Act.
If we provide authentication products and services in support of
advanced electronic signatures, then we may wish to be
accredited as an authentication service provider under the
ECT Act. Accreditation is voluntary and there is no
prohibition on providing authentication products and services in
the absence of accreditation, except that it is an offense to
claim to be an accredited authentication provider without having
been accredited.
Banks Act No. 94 of 1990
No person is entitled to conduct the business of a bank in the
Republic of South Africa unless such person is a public company
and is registered as a bank under the Banks Act.
The “business of a bank” means the soliciting of or
advertising for deposits or acceptance of deposits from the
general public as a regular feature of the business in question.
A portion of our current wage payment business activities in the
unbanked market requires us to be registered as a bank in South
Africa. We are in the process of applying for the appropriate
banking license. While we believe that we will be able to obtain
this license, there is a possibility that our application may
not be successful or that a grant of the license may be delayed.
Financial Advisory and Intermediary Services Act, 2002
The Financial Advisory and Intermediary Services Act, 2002,
requires persons who give advice regarding the purchase of
financial products or who act as intermediaries between
financial product suppliers and consumers in South Africa to
register as financial service providers. We have applied for a
license under the act in order to continue to provide advice and
intermediary services in respect of the financial products on
which we advise and the payment processing services we provide
in South Africa on behalf of insurers and other financial
product suppliers.
National Credit Bill, 2004
The National Credit Bill, 2004, if promulgated as legislation,
will regulate payroll deductions generally and the prioritized
processing of payments on amounts deposited by or for the
benefit of a consumer. We would be required to adhere to the
general provisions of the Bill in making payroll deductions or
processing payments on a prioritized basis on behalf of
employers or credit providers and under credit agreements.
Section 61. This section of the Bill prohibits
credit providers and providers of payment processing or
clearance facilities from unfairly discriminating, directly or
indirectly, against any person on any grounds set out in
section 9(3) of the South African Constitution or
Chapter 2 of the Promotion of Equality and Prevention of
Unfair Discrimination Act 4 of 2000. In respect of an
alleged contravention of Section 61,
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any person contemplated in Section 20(1) of the Promotion
of Equality and Prevention of Unfair Discrimination Act 4
of 2000 may either:
| • | institute proceedings before an equality court under Chapter 4 of the Promotion of Equality and Prevention of Unfair Discrimination Act; or | |
| • | make a complaint to the National Credit Regulator under Section 138 of the Bill. |
A person contemplated in Section 20(1) is any person acting
in his own interest, or on behalf of another person who cannot
act in his own name, or as a member of or in the interests of a
group or class of persons, or in the public interest, or any
association acting in the interests of its members, or the South
African Human Rights Commission or the Commission on Gender
Equality.
Section 90. Under this section, a provision of a
credit agreement is unlawful if it purports to direct or
authorize any person engaged in processing payments to give
priority to payments for the credit provider over any other
person. Any credit agreement that contains a provision that is
unlawful under Section 90 is void as from the date that the
agreement took effect or, in the case of an amended agreement,
the date that the amendment took effect.
Section 124. This section provides that it is only
lawful for a charge to be made against an asset or account of a
consumer if the consumer has specifically named the asset or
account by written authorization. The written authorization must
provide the name of the obligation, the amount of the debt and
the dates upon which the charge is effective.
Section 126. Under this section, no person who
provides payment processing services may:
| • | deny payment to any person entitled to payment by these means or unfairly discriminate in granting priority of payment among persons entitled to payment by these means; | |
| • | give priority to one credit provider over another in accepting similar means to make payment for processing; or | |
| • | assign any collection, group, batch or subset of similar means to make payment for priority processing over any other similar means to make payment. |
A person who contravenes this section is guilty of an offense.
Any person convicted of an offense under the Bill will be
subject to a fine and/or imprisonment for a period not exceeding
one year.
Usury Act 73 of 1968
The Usury Act applies to money-lending transactions. The purpose
of the Act is two-fold. It regulates the limitation of finance
charges relating to such transactions and the disclosure of
finance charges. The legislation has therefore put a ceiling on
the rate that a creditor can recover as finance charges.
However, microlending qualifies as a Usury Act exemption under
Section 15A of the Usury Act. This applies to loan amounts
of under ZAR 10,000 to be repaid in periods shorter than
36 months. Micro-lenders are required, under a notice in
the South African Government Gazette of June 1999, to be
registered lenders with the Micro Financing Regulatory Council
and to comply with the rules set out in the Gazette notice. We
do not exceed the ZAR 10,000 limit and, as such, are exempt
from this legislation.
Broad-Based Black Economic Empowerment Act 53 of 2003
The South African government, over the past five years, has been
developing an economic indigenization program referred to as
black economic empowerment, or BEE. BEE is regulated pursuant to
an Act of the South African Parliament, namely the Broad-Based
Black Economic Empowerment Act 53 of 2003, or the BBBEE
Act. The BBBEE Act recognizes two distinct mechanisms for
the achievement of BEE objectives: (1) codes of
good practice issued under the Act and (2) sectoral
transformation charters developed by specific industry sectors
and which may be recognized by the Minister of Trade and
Industry if they have been developed by the major stakeholders
in the relevant industry and advance the objectives of the
BBBEE Act. Draft codes of good practice have recently been
published for public comment, but
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none of them is, as yet, enforceable. The information and
communication technology sector, or ICT sector, and the
financial services sector have both developed sectoral
transformation charters, but they have not yet been published in
the Government and, consequently, they do not currently enjoy
any formal status. The ICT sector has attempted to ensure as
great a degree of comparability between its sectoral
transformation charter and the draft codes of good practice,
thereby assuring the probable publication of that charter in the
Government Gazette by the Minister of Trade and Industry. By
contrast, there are no indications that the financial services
sector has made any attempt to achieve significant alignment
between its transformation charter and the draft codes of good
practice. Once the codes of good practice become law, all
businesses in South Africa will be subject to those codes unless
they form part of a sector in respect of which the Minister of
Trade and Industry has published an industry charter in the
Government Gazette as a code of good practice. The current
uncertainty as to the final form of the regulatory regime poses
a risk, but there are indications that the regime will be
settled in the next 12 months. We are likely to be subject
to the ICT sector’s charter if this document is published
in the Government Gazette as a code of good practice. This
charter applies, among others, to companies that manufacture
equipment for, or provide services relating to, the electronic
capturing, transmission and display of data and information.
Compliance with the charter is not enforced through civil or
criminal sanction, but only through its effect on the ability to
secure contracts in the public and private sectors. One of the
components of BEE is that a certain percentage of ownership by
black South Africans or historically disadvantaged South
Africans of our South African business should be achieved over a
period of time which is generally thought to be ten to
15 years. Although BEE is not expropriatory in nature,
there may be a dilutive effect to current shareholders in the
South African business and there may be a cost associated with
increasing the level of black shareholders or historically
disadvantaged South Africans.
Exchange Control Regulation
South Africa’s exchange control regulations restrict the
export of capital from South Africa, the Republic of Namibia and
the Kingdoms of Lesotho and Swaziland, known collectively as the
Common Monetary Area. Transactions between South African
residents, including companies, and non-residents of the Common
Monetary Area are subject to exchange controls enforced by the
South African Reserve Bank. In October 2004, the South African
exchange control regulations were liberalized by the abolishment
of exchange control limits on new investments outside of South
Africa by South African companies. However, according to the
circular giving notice of this liberalization, the South African
Reserve Bank retains an oversight function, the exact nature of
which is not entirely clear from the circular. According to the
circular, South African companies investing outside of South
Africa must now apply to the South African Reserve Bank only for
monitoring purposes and for the approval of the South African
Reserve Bank pursuant to existing foreign direct investment
criteria, including demonstrated benefit to South Africa. The
South African Reserve Bank reserves the right to stagger capital
outflows relating to very large investments outside of South
Africa by South African companies, so as to manage any potential
impact on the foreign exchange market. Also, these
liberalization measures permit South African companies to
retain, outside of South Africa, dividends received in relation
to shares held by them in non-South African companies.
South African exchange controls are expected to continue for the
foreseeable future. The South African government, however, has
committed itself to gradually relaxing exchange controls, and
significant relaxations have occurred in recent years.
Nevertheless, under the current exchange control regulations,
our management may be limited in its ability to consider
strategic options and our shareholders may not be able to
realize the premium over the current trading price of our shares.
Although Net 1 is a U.S. corporation and is not itself
subject to these regulations, the ability of New Aplitec to
raise and deploy capital outside the Common Monetary Area is
restricted. As of March 31, 2005, approximately 87% of our
cash and cash equivalents were held by New Aplitec and its
subsidiaries. During the year ended June 30, 2004 and the
nine months ended March 31, 2005, substantially all of our
revenues were generated by New Aplitec and its subsidiaries. In
particular, New Aplitec will generally not be permitted to
export capital from South Africa or to hold foreign currency
without the approval of the
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South African Reserve Bank, unless such export of capital or
foreign currency holding is permitted by the October 2004
liberalization measures. This restriction may affect New
Aplitec’s ability to pay dividends to Net 1. Moreover,
although the requirement that the South African Reserve Bank
approve investments by South African companies outside of South
Africa has been resolved, this requirement could restrict our
future international expansion.
South African Reserve Bank approval is required for New Aplitec
to receive loans from and repay loans to non-residents of the
Common Monetary Area. In addition, New Aplitec may not use
income earned in South Africa to repay or service foreign debts,
without the South African Reserve Bank approval. Repayment of
principal and interest on such loans will usually be approved at
the time of the granting of such loans, where the payment is
limited to the amount borrowed and a market related rate of
interest. New Aplitec will also need South African Reserve Bank
approval to raise capital involving a currency other than ZAR,
which approval may be provided subject to conditions. Thus,
unless we can obtain funding at the Net 1 level, these
restrictions could prevent us from obtaining adequate funding on
acceptable terms for acquisitions and other business
opportunities outside South Africa.
SASSA
The South African government passed legislation during 2004 for
the creation of SASSA. The primary purpose of SASSA is to
consolidate at the central government level the administration
of social welfare grants, which is currently performed primarily
at the provincial level. SASSA commenced operations on
April 1, 2005. SASSA may appoint a single contractor to
perform the distribution of social welfare grants on a national
basis, following the expiration of the various contracts entered
into by the individual provinces.
Social Assistance Act 59 of 1992
This Act provides for the rendering of social assistance to
persons, national councils and welfare organizations. Under this
Act, the Minister for Welfare and Population Development pays
social grants to certain identified persons. The Act provides
guidelines for the application of the grants, but makes no
reference to the manner in which grants are paid or who may be
utilized for this purpose. However, the Act empowers the
Minister to make regulations as to the method of payment of
grants and any other matter which the Minister deems necessary
or expedient to achieve the objects of the Act. To date, no
regulations relevant to us or our operations have been made. The
South African government has tabled an amended Social Assistance
Act 13 of 2004 which has not yet been promulgated. This new
Social Assistance Act, when promulgated, will provide for the
administration of social assistance and payment of social grants
for the establishment of an inspectorate for the provision of
social assistance. The new Act will also empower the Minister of
Social Development to make regulations regarding uniform norms
and standards for service delivery and any other matter which it
is necessary to prescribe for the proper administration and
implementation of the Act. The precise nature of these
provisions is unclear.
Privacy Laws
Our collection, storage and processing, and any disclosure of,
customer and employee personal information must comply with
South Africa’s privacy laws.
The concept of personal data protection arises out of the
traditional right to privacy, which has an established history
under South African common law and is now entrenched in the Bill
of Rights to the Constitution of the Republic of South Africa
Act 108 of 1996. In this regard, section 14 of the South
African Constitution provides that everyone has the right to
privacy, which includes the right not to have their person, home
or property searched; their possessions seized or the privacy of
their communications infringed. A person’s right to privacy
may be infringed by the unauthorized collection of personal
information, as well as any unauthorized disclosure of such data.
Chapter 8 of the Electronic Communications and Transactions
Act 25 of 2002, or the ECT Act, provides for a voluntary
mechanism for data protection in respect of entities dealing
with certain personal
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information obtained through electronic transactions.
Section 51 sets out the principles applicable to the
electronic collection, processing, storage and disclosure of
personal information and which should be followed by entities
involved in obtaining information through electronic
transactions. Although Chapter 8 of the ECT Act is
voluntary in application, persons who do not adhere to the
provisions of Chapter 8 when dealing with personal
information, which is defined in very broad terms, obtained
through electronic transactions may be found to have violated
the privacy rights of such persons. This is due to the fact that
the South African courts might apply the standards detailed in
Chapter 8 of the ECT Act as guidelines in determining
whether a particular act constitutes an unjustifiable
infringement of the right to privacy. In any event, the
unauthorized disclosure of private facts may give rise to a
damages claim under the common law if such disclosure is
contrary to accepted community standards.
At present, South Africa has not enacted specific data
protection legislation, but such legislation may be passed
within the next two years. The South African Law Commission is
investigating proposed data protection legislation and has
invited public comment on the appropriate form that such
legislation should take.
The Interception and Monitoring Prohibition Act 127 of 1992,
soon to be replaced by the Regulation of Interception of
Communications and Provision of Communication-Related
Information Act 70 of 2002, also prohibits the intentional
monitoring, including recording, of communications by means of
monitoring devices so as to gather confidential information. The
contravention of this prohibition may give rise to criminal
liability.
In addition, certain South African privacy laws apply to our
HIV/ AIDS programs. In particular, a number of South African
court decisions have stated that any disclosure of a
person’s HIV status constitutes an unconstitutional
infringement of that person’s right to privacy. In
furtherance of this principle, on December 1, 2000, the
Department of Labour published a Code of Good Practice on the
Key Aspects of HIV/ AIDS and Employment. This code specifically
provides that all persons with HIV or AIDS have the legal right
to privacy and that if an employee voluntarily discloses his or
her HIV status to an employer, then the employer may not
disclose the status to others without the employee’s
express written consent. Furthermore, under the Basic Conditions
of Employment Act 75 of 1997, the record of any medical
examination performed in terms of that Act must be kept
confidential and may be disclosed only in accordance with
medical ethics, if required by law or a court order, or if the
employee concerned has consented in writing to the disclosure of
that record. It is also an offense, except in certain specified
circumstances, for a person to disclose information acquired in
terms of the Basic Conditions of Employment Act and which
relates to the financial or business affairs of another person.
Any privacy laws that may be enacted in the future could
adversely affect the way we do business. In addition, any
failure by us to comply with any existing or future privacy laws
could have a material adverse effect on our financial condition,
cash flows or results of operations.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information about our directors
and executive officers as of July 15, 2005:
| Name | Age | Position | ||||
|
Dr. Serge C.P. Belamant
|
51 | Chief Executive Officer, Chairman of the Board and Director | ||||
|
Antony Charles Ball
|
46 | Director | ||||
|
Chad Leonard Smart
|
32 | Director | ||||
|
Herman Gideon Kotze
|
34 | Chief Financial Officer and Director | ||||
|
Brenda Stewart
|
46 | Senior Vice President — Marketing and Sales | ||||
|
Nitin Soma
|
37 | Senior Vice President — Information Technology | ||||
|
Christopher Stefan Seabrooke
|
52 | Director | ||||
|
Alasdair Jonathan Kemsley Pein
|
45 | Director | ||||
|
Paul Edwards
|
51 | Director | ||||
|
Florian P. Wendelstadt
|
38 | Director (upon appointment after closing of the General Atlantic private placement) | ||||
Dr. Serge C.P. Belamant has been a director
since our inception in May 1997 and has been our chief executive
officer since October 2000. He is also a member of our executive
committee. From June 1997 to present, Dr. Belamant also
served as chief executive officer and a director of Aplitec.
Dr. Belamant has been chairman of the board of Directors
since February 2003. From 1996 to 1997, Dr. Belamant served
as a consultant in the development of COPAC, Chip Off-Line
Pre-Authorized Card, a Visa product. From October 1989 to
September 1995, Dr. Belamant served as the managing
director of Net 1 (Pty) Limited, a privately owned South African
company specializing in the development of advanced technologies
in the field of transaction processing and payment systems.
Dr. Belamant also serves on the board of a number of other
companies that are closely related to the smart card business.
Dr. Belamant spent ten years working as a computer
scientist for Control Data Corporation where he won a number of
international awards. Later, he was responsible for the design,
development, implementation and operation of the Saswitch ATM
network in South Africa that rates today as the third largest
ATM switching system in the world. Dr. Belamant has
patented a number of inventions besides the FTS ranging from
biometrics to gaming-related inventions. Dr. Belamant has
more than twenty-five years of experience in the fields of
operations research, security, biometrics, artificial
intelligence and online and offline transaction processing
systems. Dr. Belamant holds a PhD in Information Technology
and Management.
Antony Charles Ball has been a director since June
2004. Mr. Ball was the Brait Group’s chief executive
from March 2000 until June 2005 when he became the Brait
Group’s executive chairman. Mr. Ball has led the
raising and governance of the Brait Group’s private equity
funds and is responsible for a number of the Brait Group’s
private equity investments. Mr. Ball served as joint Deputy
Chairman of the Brait Group from 1998 to March 2000. Prior to
joining Brait, Mr. Ball was the chief executive of Capital
Partners, which was the predecessor company to Brait and which
pioneered the private equity market in South Africa, from 1991
to 1998. Mr. Ball began his career with Deloitte &
Touche Consulting (1986-1991), where he co-founded its Strategy
Group. Mr. Ball is a member of the boards of Brait S.A.,
Brait South Africa Limited, New Aplitec and The Reclamation
Group (Pty) Limited. Mr. Ball has been designated as a
director by SAPEF pursuant to a contractual arrangement. See
“Certain Relationships and Related Party
Transactions — SAPEF Common Stock Purchase
Agreement.”
Chad Leonard Smart has been a director since June
2004. Mr. Smart has been a principal of Brait’s
Private Equity Funds, where he has been involved in numerous
private equity transactions. Mr. Smart joined Brait Private
Equity in 1998. Prior to assuming his current position,
Mr. Smart was a Manager at Pricewaterhouse from 1995 to
June 1998, where he covered a full spectrum of financial
services activities including mergers and acquisitions.
Mr. Smart is qualified in South Africa as a Chartered
Accountant and
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is also a Chartered Financial Analyst. He is a member of the
board of Brait South Africa Limited, New Aplitec and The
Reclamation Group (Pty) Limited. Mr. Smart has been
designated as a director by SAPEF pursuant to a contractual
arrangement. See “Certain Relationships and Related Party
Transactions — SAPEF Common Stock Purchase
Agreement.”
Herman Gideon Kotze has been a director,
secretary, treasurer and our chief financial officer since 2004.
He is also a member of our executive committee. Mr. Kotze
is a Chartered Accountant who joined us in November 1998 as a
strategic financial analyst. He was appointed to the board of
Aplitec as Group Financial Director in January 2000.
Mr. Kotze served his articles from 1993 to 1997 at KPMG in
Pretoria, where he was the audit manager for several major
corporations in the manufacturing, mining, retail and financial
services industries. During 1998, he joined the Industrial
Development Corporation of South Africa Limited, or IDC, as a
business analyst. His main duties at the IDC were the evaluation
and investigation of ventures requiring funding from the IDC,
from small manufacturing concerns to huge multinational
projects, as well as the structuring and implementation of loan
and equity products for these concerns.
Brenda Stewart has served as our Senior Vice
President of Marketing and Sales since June 2004. She is also a
member of our executive committee. Mrs. Stewart’s
primary function is to manage all marketing and sales activities
for us. Her secondary function is to oversee implementation and
operation of specific projects such as Malawi and Mozambique as
well as our pension and welfare systems. Mrs. Stewart was a
director of Net 1 Investment and a director of Net 1 Holdings
which were subsidiaries of Aplitec until June 2004.
Mrs. Stewart joined Aplitec in 1997, and has worked with
Dr. Belamant for over 20 years at various companies
including, Volkskas Industrial Bank, SASWITCH and Net 1 Southern
Africa, Net 1 Solutions and Net 1 Investment.
Nitin Soma has served as our Senior Vice President
of Information Technology since June 2004. He is a member of our
executive committee. Mr. Soma joined Aplitec in 1997. He
specializes in transaction switching and interbank settlements.
Mr. Soma represented Nedcor Bank in assisting with the
technical specifications for the South African Interbank
Standards. He is also responsible for the ATM settlement process
to balance ATM’s with the host as well as balance the host
with different card users. Mr. Soma designed the Stratus
Back-End System for Aplitec, and is responsible for the Nedbank
Settlement System for the Point of Sales Devices. Mr. Soma
has over 10 years of experience in the development and
design of smart card payment systems.
Christopher Stefan Seabrooke was appointed to our
board of directors in January 2005. Mr. Seabrooke has been
the Chief Executive of Sabvest Limited, an investment and
finance group listed on the JSE Securities Exchange in South
Africa. Mr. Seabrooke has served on over 20 boards of
listed companies and just completed his term of office as
Chairman of the South African State Theater. Mr. Seabrooke
has degrees in Economics and Accounting from the University of
Natal and an MBA from the University of Witwatersrand.
Alasdair Jonathan Kemsley Pein was appointed to
our board of directors in February 2005. Mr. Pein manages
the portfolio investment interests of the Brenthurst Group.
Mr. Pein has been a partner of Southern Cross Capital LLC
since its inception in 2001. Southern Cross Capital manages
investment funds for Brenthurst Limited, an investment holding
company for the Oppenheimer family interests. From 1995-2001,
Mr. Pein was President and CEO of Task (USA), Inc., a New
York based investment company. Between 1989 and 1994,
Mr. Pein worked in London for Bankers Trust International
mergers and acquisitions team and then Gilbert Eliot Corporate
Finance. Mr. Pein is a qualified South African chartered
accountant and completed his articles with Deloitte &
Touche, South Africa in Johannesburg in 1987. Mr. Pein has
been designated as a director by SAPEF pursuant to a contractual
arrangement. See “Certain Relationships and Related Party
Transactions — SAPEF Common Stock Purchase
Agreement.”
Paul Edwards was appointed to our board of
directors in July 2005. In January 2005, Mr. Edwards
accepted the position of Non-Executive Chairman of Starcomms, a
Nigerian fixed-wireless telecommunications operator. Prior to
that, Mr. Edwards served as the executive chairman of
Chartwell Capital Group, a privately owned financial services
group with offices in South Africa, London and other European
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financial centers. Prior to that, Mr. Edwards was the Chief
Executive of M-Cell. Between 1999 and 2001, Mr. Edwards was
the Chief Executive of the Johnnic Group in South Africa.
Between 1995 and 1999, Mr. Edwards was Chief Operating
Officer of MEASAT Broadcast Network, a Malaysian-based regional
pay television operator. Between 1993 and 1995, Mr. Edwards
was Executive Vice President of satellite television broadcaster
Star TV, based out of Hong Kong, with responsibility for
developing and launching pay television services across Asia.
Between 1989 and 1993, Mr. Edwards was Chief Executive of
Multichoice, Africa’s leading pay television operator.
Between 1985 and 1989, Mr. Edwards led a buy-out of Dun and
Bradstreet South Africa and became Chairman and Chief Executive.
Between 1983 and 1985, Mr. Edwards become a founder member
of the Spencer Stuart Management Advisory Services and was
responsible for the banking and insurance software application
division.
Florian P. Wendelstadt will be appointed to our
board of directors after the closing of the private placement to
General Atlantic, which is expected to occur concurrently with
the offering. Mr. Wendelstadt is a Managing Director of
General Atlantic LLC, a private equity firm that invests in
information technology and IT-enabled businesses on a global
basis, and has been with General Atlantic since 1997.
Mr. Wendelstadt also serves as a director of Liberata plc
and Saxo Bank A/S. Mr. Wendelstadt has a BA in Economics
from Passau University in Germany and an MBA from the European
School of Management.
| Composition of the Board of Directors; Election and Removal of Directors |
We currently have seven directors. We intend to appoint
Florian P. Wendelstadt, Managing Director of General
Atlantic LLC, as our new eighth director pursuant to the stock
purchase agreement among certain investment entities affiliated
with General Atlantic, certain selling shareholders and us. See
“Certain Relationships and Related Party
Transactions — General Atlantic Private
Placement.” In accordance with our by-laws, the number of
directors comprising our board of directors will be determined
from time to time by our board of directors. Each director is to
hold office until his or her successor is duly elected and
qualified. A director’s term will expire at the next annual
meeting of the shareholders following his or her election. A
director will continue to serve, despite the expiration of the
term, until a successor is elected and qualified, or until the
number of directors is decreased.
| Committees of the Board of Directors |
Our board has formed audit, remuneration and corporate
governance and nominating committees. Messrs. Seabrooke,
Pein and Edwards are “independent” as defined in the
rules of the SEC and the Nasdaq National Market as that term
relates to membership on the board and the various board
committees. Messrs. Ball and Smart are
“independent” as defined in the rules of the Nasdaq
National Market, but are not eligible to serve on our audit
committee under SEC rules. The board has determined that
Mr. Seabrooke is an “audit committee financial
expert” as defined in the rules of the SEC.
| Audit Committee |
The audit committee consists of Messrs. Seabrooke, Pein and
Edwards, each of whom is an independent director. The audit
committee:
| • | monitors our accounting and financial reporting process and internal control system; | |
| • | appoints and replaces independent outside auditors from time to time, determines their compensation and other terms of engagement and oversees their independence, qualifications and work; | |
| • | oversees the performance of our internal audit function; and | |
| • | oversees our compliance with legal, ethical and regulatory matters. |
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| Remuneration Committee |
Our remuneration committee consists of Messrs. Seabrooke,
Pein and Ball, each of whom is an independent director. The
remuneration committee reviews and makes recommendations to the
board of directors regarding the following matters:
| • | development and implementation of our compensation policies, strategies, plans and programs, and disclosure relating to these matters; | |
| • | compensation-related matters outside the ordinary course, including employment contracts, change-in-control provisions and severance arrangements; | |
| • | compensation of our chief executive officer and the other executive officers of us and our subsidiaries and the remuneration of our board of directors; and | |
| • | performance reviews of individual executives and related matters. |
| Corporate Governance and Nominating Committee |
Our corporate governance and nominating committee consists of
Messrs. Seabrooke, Pein and Edwards, each of whom is an
independent director. The principal duties and responsibilities
of the corporate governance and nominating committee are as
follows:
| • | establish criteria for board and committee membership and recommend to our board of directors proposed nominees for election to the board of directors and for membership on each committee of the board of directors; | |
| • | monitor our procedures for the receipt and consideration of director nominations by shareholders and other persons and for the receipt of shareholder communications directed to our board of directors; | |
| • | make recommendations regarding proposals submitted by our shareholders; and | |
| • | make recommendations to our board of directors regarding management succession planning, corporate governance matters and practices. |
| Compensation Committee Interlocks and Insider Participation |
No member of our compensation committee has ever been our
officer or employee. None of our executive officers currently
serves, or has served during the last completed fiscal year, on
the compensation committee or board of directors of any other
entity that has one or more executive officers serving as a
member of our board of directors or compensation committee.
| Director Compensation |
Mr. Seabrooke receives $65,000 per year for his services as
a non-executive director. During the year ended June 30,
2004, Messrs. Ball and Smart each received options to
acquire 41,667 shares of our common stock at an exercise
price of $3.00 per share. Mr. Edwards will receive
approximately $37,000 per year for his services as a
non-executive director. Each of Messrs. Seabrooke, Pein and
Edwards received options to acquire 41,667 shares of our
common stock at an exercise price of $3.00 per share when
they joined our board. We reimburse our directors for
out-of-pocket expenses incurred in connection with their
attendance at our board meetings.
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| Executive Compensation |
Summary Compensation Table
The following table sets forth information relating to all
compensation awarded to, earned by or paid by us during the last
three fiscal years, to: (1) our chief executive officer;
and (2) each of our three other executive officers:
| Annual Compensation(1) | |||||||||||||||||||||||||||||||||
| Salary | Bonus | All Other | |||||||||||||||||||||||||||||||
| Fiscal | ZAR | US$ | ZAR | US$ | Options/ | ZAR | US$ | ||||||||||||||||||||||||||
| Name and Principal Position | Year | ‘000 | ‘000 | ‘000 | ‘000 | Securities | ‘000 | ‘000 | |||||||||||||||||||||||||
|
Dr. Serge C.P. Belamant, Chief Executive
|
2004 | 1,725 | 249 | 500 | 72 | A | — | — | |||||||||||||||||||||||||
|
Officer, Chairman of the Board and
|
2003 | 1,425 | 157 | 400 | 44 | — | — | — | |||||||||||||||||||||||||
|
Director
|
2002 | 1,050 | 103 | 0 | 0 | — | — | — | |||||||||||||||||||||||||
|
Herman Gideon Kotze, Chief Financial
|
2004 | 1,050 | 151 | 250 | 36 | A | — | — | |||||||||||||||||||||||||
|
Officer and Director
|
2003 | 855 | 94 | 180 | 20 | — | — | — | |||||||||||||||||||||||||
| 2002 | 690 | 68 | 50 | 5 | — | — | — | ||||||||||||||||||||||||||
|
Brenda Stewart, Senior Vice-President —
|
2004 | 900 | 130 | 200 | 29 | A | — | — | |||||||||||||||||||||||||
|
Sales and Marketing
|
2003 | 725 | 80 | 130 | 14 | — | — | — | |||||||||||||||||||||||||
| 2002 | 608 | 60 | 50 | 5 | — | — | — | ||||||||||||||||||||||||||
|
Nitin Soma, Senior Vice-President —
|
2004 | 812 | 117 | 160 | 23 | B | — | — | |||||||||||||||||||||||||
|
Information Technology
|
2003 | 670 | 74 | 120 | 13 | — | — | — | |||||||||||||||||||||||||
| 2002 | 552 | 54 | 30 | 3 | — | — | — | ||||||||||||||||||||||||||
| (1) | There has been no other annual or long-term compensation awarded to, earned by, or paid by us to the persons listed in this table. |
| (A) | 333,334 other stock-based awards at $0.00 (ZAR 0.00) and 83,334 options at US$3.00 (ZAR 18.84) |
| (B) | 250,000 other stock-based awards at $0.00 (ZAR 0.00) and 83,334 options at US$3.00 (ZAR 18.84) |
Option Grants in Last Fiscal Year
The following table sets forth information concerning our grant
of options/ Other Stock-Based Awards, or OSBAs, to purchase
shares of our common stock during the fiscal year ended
June 30, 2004 to (1) our chief executive officer; and
(2) each of our three most highly compensated executive
officers.
| Potential | ||||||||||||||||||||||||||||||||
| Realizable | ||||||||||||||||||||||||||||||||
| Value at | ||||||||||||||||||||||||||||||||
| Percent of | Assumed | |||||||||||||||||||||||||||||||
| Total | Annual Rates | |||||||||||||||||||||||||||||||
| Options/ | of Stock Price | |||||||||||||||||||||||||||||||
| Number of | Number of | OSBAs | Appreciation | |||||||||||||||||||||||||||||
| Securities | Securities | Granted | for Option/ | |||||||||||||||||||||||||||||
| Underlying | Exercise or | Underlying | Exercise or | to | OSBAs Term | |||||||||||||||||||||||||||
| Options | Base Price | OSBAs | Base Price | Employees | in US$ ‘000 at | |||||||||||||||||||||||||||
| Granted | of Options | Granted | OSBAs | in Fiscal | Expiration | |||||||||||||||||||||||||||
| Name | (#) | (US$/Sh) | (#) | (US$/Sh) | Year | Date | 5% | 10% | ||||||||||||||||||||||||
|
Dr. Serge C.P. Belamant
|
83,334 | 3.00 | 333,334 | 0.00 | 14.33 | % | June 6, 2014 | 2,036 | 3,242 | |||||||||||||||||||||||
|
Herman Gideon Kotze
|
83,334 | 3.00 | 333,334 | 0.00 | 14.33 | % | June 6, 2014 | 2,036 | 3,242 | |||||||||||||||||||||||
|
Brenda Stewart
|
83,334 | 3.00 | 333,334 | 0.00 | 14.33 | % | June 6, 2014 | 2,036 | 3,242 | |||||||||||||||||||||||
|
Nitin Soma
|
83,334 | 3.00 | 250,000 | 0.00 | 11.47 | % | June 6, 2014 | 1,629 | 2,594 | |||||||||||||||||||||||
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Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table provides information regarding stock options
exercised during our 2004 fiscal year by our named executive
officers and the number of shares of our common stock
represented by outstanding options held by our named executive
officers as of June 30, 2004. The dollar values in the
table are calculated based upon the last sale price of our
common stock on June 30, 2004 as quoted on the OTCBB, which
was $11.52 per share, as adjusted to reflect the reverse stock
split, less the exercise price of the options, and multiplying
the result by the number of underlying shares.
| Number of Shares | Value of Unexercised | |||||||||||||||||||||||
| Underlying Unexercised | In-the-Money | |||||||||||||||||||||||
| Shares | Value | Options/OSBAs at June 30, | Options/OSBAs at June 30, | |||||||||||||||||||||
| Acquired on | Realized | 2004 (# ‘000) | 2004 (US$ ‘000) | |||||||||||||||||||||
| Exercise | (US$ | |||||||||||||||||||||||
| Name | (#) | ‘000) | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
|
Dr. Serge C.P. Belamant
|
— | — | 67 | 350 | 768 | 4,032 | ||||||||||||||||||
|
Herman Gideon Kotze
|
— | — | 67 | 350 | 768 | 4,032 | ||||||||||||||||||
|
Brenda Stewart
|
— | — | 67 | 350 | 768 | 4,032 | ||||||||||||||||||
|
Nitin Soma
|
— | — | 50 | 283 | 614 | 3,072 | ||||||||||||||||||
As the issue of the OSBAs and stock options were a condition
precedent to the Aplitec transaction, the directors, in June
2004, issued 1,453,490 OSBAs for no cash consideration and
1,453,490 stock options at an exercise price of $3.00 per
share to directors and other employees. Dr. Belamant,
Mr. Kotze and Ms. Stewart received 333,334 OSBAs and
83,334 stock options, respectively, and Mr. Soma received
250,000 OSBAs and 83,334 stock options.
| Restraint of Trade Agreements |
We have restraint of trade agreements with each of our executive
officers, Dr. Serge C.P. Belamant, Messrs. Herman
Kotze and Nitin Soma and Ms. Brenda Stewart. The terms of
these agreements provide that upon the termination of the
executive’s employment, the executive is restricted, for a
period of 24 months, from soliciting business from certain
customers, working or holding interest in our competitors or
participating in a competitive activity within the territories
where we do business.
| Employee Benefit Plans |
2004 Stock Incentive Plan
Our 2004 Stock Incentive Plan permits us to grant to our
employees, directors and consultants incentive stock options,
nonqualified stock options, stock appreciation rights,
restricted stock, performance-based awards and other awards
based on our common stock, as more fully described below.
| Administration |
Our remuneration committee administers the 2004 Stock Incentive
Plan and is referred to below as the “committee.” The
committee may delegate its authority under the 2004 Stock
Incentive Plan in whole or in part to a subcommittee thereof.
The committee consists, unless otherwise determined by the board
of directors, (1) during any period that we are subject to
Section 16 of the U.S. Securities Exchange Act of
1934, solely of at least two non-employee directors, and
(2) during any period that we are subject to
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code, solely of at least two outside directors.
The committee determines who receives awards under the 2004
Stock Incentive Plan, as well as the form of the awards, the
number of shares underlying the awards, and the terms and
conditions of the award consistent with the terms of the 2004
Stock Incentive Plan. The committee is authorized to interpret
the 2004 Stock Incentive Plan, to establish, amend and rescind
any rules and regulations relating to the 2004 Stock Incentive
Plan, and to make any other determinations that it deems
necessary or desirable for the administration of the 2004 Stock
Incentive Plan. The committee also may correct any defect,
supply any omission or reconcile any inconsistency in the 2004
Stock Incentive Plan in the manner and to the extent that the
committee deems it necessary or desirable.
| Term |
No awards may be granted under the 2004 Stock Incentive Plan
after May 8, 2014, but awards granted before then may
extend beyond that date.
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| Shares Reserved for Awards and Limits on Awards |
Our shareholders initially approved issuance of up to
2,906,980 shares of common stock in connection with awards
granted under the 2004 Stock Incentive Plan, of which
1,453,490 shares may be issued with respect to stock
options, and 1,453,490 shares may be issued in respect of
other stock-based awards, which may include grants of restricted
shares. The maximum number of shares for which stock options and
stock appreciation rights, or for which other stock-based awards
may be granted during a calendar year to any participant is
436,047, which is approximately 30% of the total number of
shares that may be used with respect to stock options or
stock-based awards under the 2004 Stock Incentive Plan. As of
March 31, 2005, the committee has granted stock options for
all 1,453,490 of the shares available for award under stock
options, none of which have been exercised and all of which are
outstanding as of that date. In addition, as of March 31,
2005, the committee has granted other stock-based awards in
respect of all 1,453,490 shares available for such awards
to certain key employees.
The number and kind of shares of common stock issued or reserved
pursuant to the 2004 Stock Incentive Plan or outstanding awards,
the maximum number of shares issuable pursuant to awards, the
exercise price for awards, and other affected terms of awards,
are subject to adjustment on account of stock splits, stock
dividends, reorganizations, recapitalizations, mergers,
consolidations, spin-offs and other corporate events. Shares
covered by awards that expire, terminate or lapse without
payment are available again for the grant of awards under the
2004 Stock Incentive Plan, as well as shares that are used by
the holder to pay withholding taxes or as payment for the
exercise price of an award, if permitted by the committee. No
further awards may be granted under the 2004 Stock Incentive
Plan unless any of these events occurs or our shareholders
approve the issuance of additional shares under the plan.
Although as of March 31, 2005 we did not have any shares
available for issuance under our 2004 Stock Incentive Plan, we
intend to authorize additional shares under our 2004 Stock
Incentive Plan or under a successor plan and will need to seek
shareholder approval to authorize the additional shares.
In the event of certain events, including stock sales, mergers,
and sales of substantial assets, the committee may, but shall
not be obligated to, cancel outstanding awards for fair value,
waive vesting requirements, provide for the issuance of
substitute awards, and/or provide that, for a period of time
prior to such corporate event, options will be exercisable for
all shares subject to the option and that upon the occurrence of
the corporate event the options will terminate.
| Stock Options |
The 2004 Stock Incentive Plan permits the committee to grant our
employees incentive stock options, which qualify for special tax
treatment in the United States, and permits the committee to
grant our employees, directors and consultants nonqualified
stock options. The committee will establish the duration of each
option at the time it is granted. The maximum duration of an
incentive stock option is ten years after the date of grant. The
committee establishes the exercise price of each option at the
time it is granted. With the exception of the initial grants of
nonqualified stock options to certain members of management that
were made at an exercise price of $3.00 per share, the
exercise price of all stock options granted under the 2004 Stock
Incentive Plan may not be less than the fair market value of the
underlying common stock on the date of grant. The committee may
establish vesting and performance requirements that must be met
prior to the exercise of options. Unless otherwise determined by
the committee, stock options become exercisable ratably, on an
annual basis, over a period of five years, commencing with the
first anniversary of the grant date.
The exercise price of stock options may be paid in cash by the
holder. Stock option grants may include provisions that permit
the option holder, to the extent permitted by the committee, to
exercise all or part of the holder’s options, or to satisfy
withholding tax liabilities, by tendering mature shares of our
common stock already owned by the option holder for at least six
months, or another period consistent with the applicable
accounting rules, with a fair market value equal to the exercise
price. Stock option grants also may include provisions that
permit the option holder, to the extent permitted by the
committee and only if there is a public market for the shares,
to exercise all or part of the holder’s options through a
cashless exercise procedure, which requires the delivery of
irrevocable instructions to a broker to sell the
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shares obtained upon exercise of the option and promptly deliver
to us the proceeds of the sale equal to the exercise price of
the common stock being purchased.
| Stock Appreciation Rights |
The 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 our common
stock, as determined by the committee, equal in value to the
excess of the fair market value of the shares covered by the
right over the grant price.
| Other Stock-Based Awards |
The 2004 Stock Incentive Plan also permits the committee to
grant awards that are valued by reference to, or otherwise based
on the fair market value of, our common stock. These awards are
in such form and subject to such conditions as the committee may
determine, including the satisfaction of performance goals, the
completion of periods of service or the occurrence of events.
We have issued other stock-based awards in respect of 1,250,002
of the 1,453,490 shares available for such awards to
Dr. Belamant, Herman Gideon Kotze, Brenda Stewart and Nitin
Soma on June 8, 2004. These grants of other stock-based
awards for no cash consideration are subject to such risks of
forfeiture and other restrictions as determined by the committee
at the time of grant. These stock-based awards become
exercisable ratably, on an annual basis, over a period of five
years, commencing with the grant date.
| Performance Standards and Section 162(m) |
In general, Section 162(m) of the Code prevents the
deductibility for U.S. income tax purposes of compensation
in excess of one million dollars paid in any taxable year to an
individual who on the last day of that year is the
company’s chief executive officer or is among its four
other most highly compensated executive officers, except that a
deduction may be taken for compensation that qualifies as
performance-based compensation under Section 162(m).
Options granted at fair market value under the 2004 Stock
Incentive Plan ordinarily will satisfy the performance-based
requirements of Section 162(m), however the stock options
granted to date to key members of management at $3.00 per
share will not satisfy the performance-based requirements. If
restricted stock or performance-based awards are intended to
satisfy Section 162(m) deductibility requirements, payments
under such awards must be conditioned on attainment of
pre-established objective performance measures that have been
established and certified by a committee of outside directors
and approved by shareholders. The performance criteria under the
2004 Stock Incentive Plan include: consolidated earnings before
or after taxes, net income, operating income, earnings per
share, book value per share, return on shareholders’
equity, expense management, return on investment, improvements
in capital structure, profitability, profit margins, stock
price, market share, revenues, costs, cash flow, working
capital, and return on assets. Performance criteria for
performance-based awards under the 2004 Stock Incentive Plan may
relate to any combination of the total corporation, a
subsidiary, and/or any business unit. Performance targets may be
set at a specific level or may be expressed relative to measures
at comparison companies or a defined index. The committee will
establish specific targets for recipients. The other stock-based
awards granted to date to key members of management will not
satisfy the performance–based requirements.
| Transferability |
Unless otherwise determined by the committee, awards granted
under the 2004 Stock Incentive Plan may not be transferred or
assigned by the holder otherwise than by will or the laws of
descent and distribution.
| Amendment |
Our board may amend the 2004 Stock Incentive Plan at any time,
provided that no amendment will be made without the consent of
the affected holder that diminishes the rights of the holder of
any award, and except that the board may amend the plan in such
manner as it deems necessary to permit awards to meet the
requirements of the Internal Revenue Code or other applicable
laws. No amendment to the 2004 Stock Incentive Plan by our board
may be made without the approval of shareholders if it would
increase the total number of shares reserved for issuance under
the 2004 Stock Incentive Plan or change the maximum number of
shares for which awards may be granted to participants, except
for such changes in accordance with the 2004 Stock Incentive
Plan’s adjustment provisions described above.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SAPEF Common Stock Purchase Agreement
Pursuant to the common stock purchase agreement, dated
January 30, 2004, between us and SAPEF III International
G.P. Limited (or its nominees), SAPEF III is entitled to
designate three nominees to our board of directors. SAPEF
III’s current designees are Antony Ball, Chad Smart and
Alasdair Pein. We are currently negotiating with SAPEF III
certain registration rights with respect to the shares of common
stock owned by SAPEF III.
General Atlantic Private Placement
On July 18, 2005, we entered into a stock purchase agreement
among certain selling shareholders and certain investment
entities affiliated with General Atlantic, a private investment
group, whereby those affiliated entities agreed to purchase from
those selling shareholders an aggregate of $75.0 million of
shares of our common stock at the public offering price of this
offering. The closing of the private placement is expected to
occur concurrently with the closing of this offering. We have
agreed to grant registration rights which will provide, under
certain circumstances and subject to certain limitations, rights
with respect to the registration under the Securities Act of our
shares held by investment entities affiliated with General
Atlantic. These registration rights will provide that the
General Atlantic investment entities will first be entitled to
exercise demand registration rights one year after the
closing of this offering. We are currently negotiating the
remaining terms of these registration rights. After the private
placement, we will add one seat to our board of directors and
cause to be elected to the board of directors one person
designated by General Atlantic, who shall initially be
Florian P. Wendelstadt.
Nedbank
We have a credit facility with Nedbank, pursuant to which
Nedbank has agreed to provide us with a revolving credit
facility of up to ZAR 500,000,000, or approximately
$76.9 million. Borrowings under the facility bear interest
at Nedbank’s prime lending rate minus 200 base points.
The facility is cross-guaranteed by all of our subsidiaries and
is secured by our accounts receivable and intercompany loans
receivable. The facility has no termination date but is reviewed
annually by Nedbank. To date, as a group we have not made any
borrowings under the credit facility.
Nedbank beneficially owns approximately 14.9% of the outstanding
shares of our voting stock. We provide Nedbank with POS devices
and other pay processing hardware. In addition, we have a
software development and maintenance contract with Nedbank and
provide other sundry services. During our 2004 fiscal year, we
earned $1.6 million under the software development and
maintenance contract, $0.9 million in hardware sales and
$0.1 million from other sundry services. During the first
nine months of 2005, we earned $1.5 million under the
software development and maintenance contract and
$10.4 million in hardware sales. Included in our accounts
receivable as of June 30, 2004 was $1.0 million due
from Nedbank.
In July 2005, we entered into an agreement with Nedbank pursuant
to which Nedbank has agreed to waive certain intellectual
property rights in our agreements with Nedbank provided that
Nedbank, prior to October 30, 2005, and pursuant to the
offering of our common stock, is able to dispose of 6,652,819 of
the shares of common stock that Nedbank owns.
Other Related Transactions
For services provided related to our acquisition of Aplitec,
Brait received a capital raising fee of $3.7 million and a
further corporate finance fee of $0.2 million. Brait
exercised its option to purchase an equivalent of
833,333 shares of common stock for an exercise price of
$3.00 per share as partial payment for the services
rendered. The remaining amount was paid in cash in July 2004.
Antony Ball is a director and an officer of Brait S.A. and
certain of its affiliates, including without limitation, Brait
International and those affiliates that manage SAPEF and South
Afican Private Equity Trust III, or SAPET. Chad Smart is
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an officer of Brait S.A. and certain of its affiliates,
including without limitation, Brait International and those
affiliates that manage SAPEF and SAPET. Each of
Messrs. Ball and Smart is a member of our board of
directors.
From July 2002 to April 2004, Net1 Holdings S.a.r.l. made
payments on our behalf to various creditors, including
attorneys, accountants and financial advisors. Included in our
trade and other payables as of June 30, 2004 was
$0.3 million due to Net1 Holdings S.a.r.l. In October
2004, the amount payable to Net1 Holdings S.a.r.l. was paid
in full. As of June 30, 2004, Net1 Holdings S.a.r.l.
owned of record the equivalent of 1,420,097 shares of our
common stock. Dr. Belamant is the chief executive officer
of Net1 Holdings S.a.r.l. and can vote all of its shares.
Pursuant to a board resolution dated January 29, 2002,
approximately $0.4 million, approximately $0.2 million
in 2003, of consulting fees payable to our former chief
executive officer Claude Guerard were postponed until we had
sufficient funds. In July 2004, the amount payable to
Mr. Guerard was paid in full.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents, as of the date of this prospectus
and as adjusted to reflect the sale of shares of common stock in
this offering by:
| • | each person or group of affiliated persons which, to our knowledge, owns beneficially more than 5% of our outstanding shares of common stock or more than 5% of our outstanding special convertible preferred stock; | |
| • | each of our directors and named executive officers; | |
| • | all of our directors and executive officers as a group; and | |
| • | each selling shareholder participating in this offering. |
Beneficial ownership of shares is determined in accordance with
SEC rules and generally includes any shares over which a person
exercises sole or shared voting or investment power. The
information set forth below, including ownership percentages and
voting power percentages, is based on an aggregate of
27,175,135 shares of common stock outstanding as of
March 31, 2005 and an aggregate of 27,525,259 shares
of special convertible preferred stock outstanding as of
March 31, 2005, both with and without exercise of the
underwriter’s over-allotment option. All shares of common
stock underlying special convertible preferred stock owned by
each person and common stock underlying stock options or other
stock-based awards that are presently exercisable or exercisable
within 60 days of the date of this prospectus by each
person are deemed to be outstanding and beneficially owned by
the person holding the special convertible preferred stock,
stock options and other stock-based awards respectively, for the
purpose of computing the ownership percentage of that person,
but are not considered outstanding for the purpose of computing
the percentage ownership of any other person. The number of
shares used in computing the beneficial ownership percentages in
the columns entitled “Shares Beneficially Owned After this
Offering and Concurrent Private Placement Assuming No Exercise
of the Over-Allotment Option” and “Shares Beneficially
Owned After this Offering and Concurrent Private Placement
Assuming Full Exercise of the Over-Allotment Option”
reflects the 9,186,163 of shares of special convertible
preferred stock converted, and 245,193 stock options exercised,
in connection with this offering. In addition, we have indicated
in footnote disclosure for each of the persons named in the
table the beneficial ownership percentage of such person
immediately prior to the offering and after the offering, both
with and without exercise of the underwriters’
over-allotment option, computed as if the shares of common stock
underlying all outstanding shares of special convertible
preferred stock were outstanding. Each share of our outstanding
special convertible preferred stock votes together with our
common stock on a one vote per share basis.
Unless otherwise indicated, to our knowledge, each person listed
in the table below has sole voting and investment power with
respect to the shares shown as beneficially owned by such
person, except to the extent applicable law gives spouses shared
authority. Except as otherwise noted, each shareholder’s
address
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is c/o Net 1 UEPS Technologies, Inc., President Place,
4th Floor, Cnr. Jan Smuts Avenue and Bolton Road, Rosebank,
Johannesburg, South Africa.
| Shares Beneficially | Shares Beneficially | |||||||||||||||||||||||||||||||
| Owned After this | Owned After this | |||||||||||||||||||||||||||||||
| Offering and | Offering and | |||||||||||||||||||||||||||||||
| Concurrent Private | Concurrent Private | |||||||||||||||||||||||||||||||
| Shares Sold | Placement | Placement | ||||||||||||||||||||||||||||||
| Shares Beneficially | During this | Assuming No | Assuming Full | |||||||||||||||||||||||||||||
| Owned | Offering | Shares Sold to | Exercise of the | Exercise of the | ||||||||||||||||||||||||||||
| Immediately Prior | Assuming No | General Atlantic | Over-Allotment | Over-Allotment | ||||||||||||||||||||||||||||
| to this Offering | Exercise of the | Affiliate in | Option | Option | ||||||||||||||||||||||||||||
| Over-Allotment | Concurrent Private | |||||||||||||||||||||||||||||||
| Name of Beneficial Owner | Number | % | Option(1) | Placement(1) | Number | % | Number | % | ||||||||||||||||||||||||
|
Directors, Officers and 5%
Shareholders: |
||||||||||||||||||||||||||||||||
|
Dr. Serge C.P. Belamant(2)
|
3,099,411 | 10.6 | % | 190,903 | 561,885 | 2,346,623 | 6.2% | 2,346,623 | 5.9% | |||||||||||||||||||||||
|
Herman Gideon Kotze(3)
|
150,000 | * | 150,000 | — | — | — | — | — | ||||||||||||||||||||||||
|
Antony Charles Ball(4)
|
8,334 | * | — | — | 8,334 | * | 8,334 | * | ||||||||||||||||||||||||
|
Chad Leonard Smart(4)
|
8,334 | * | — | — | 8,334 | * | 8,334 | * | ||||||||||||||||||||||||
|
Christopher Stefan Seabrooke(4)
|
8,334 | * | — | — | 8,334 | * | 8,334 | * | ||||||||||||||||||||||||
|
Alasdair Jonathan Kemsley Pein(4)
|
8,334 | * | — | — | 8,334 | * | 8,334 | * | ||||||||||||||||||||||||
|
Paul Edwards(4)
|
8,334 | * | — | — | 8,334 | * | 8,334 | * | ||||||||||||||||||||||||
|
Florian P. Wendelstadt(5)
|
— | * | — | — | — | * | — | — | ||||||||||||||||||||||||
|
Brenda Stewart(3)
|
150,000 | * | 150,000 | — | — | — | — | — | ||||||||||||||||||||||||
|
Nitin Soma(6)
|
161,905 | * | 116,666 | — | 45,239 | * | 45,239 | * | ||||||||||||||||||||||||
|
Brenthurst Private Equity II Limited(7)
|
2,008,212 | 7.4 | % | 27,841 | 338,826 | 1,641,545 | 4.5% | 1,641,545 | 4.3% | |||||||||||||||||||||||
|
Brenthurst Private Equity South Africa I Limited(7)
|
1,013,273 | 3.7 | % | 15,186 | 184,814 | 813,273 | 2.2% | 813,273 | 2.1% | |||||||||||||||||||||||
|
South African Private Equity Fund III, L.P.(8)
|
14,443,572 | 53.1 | % | 219,338 | 2,669,376 | 11,554,858 | 31.6% | 11,554,858 | 30.4% | |||||||||||||||||||||||
|
South African Private Equity Trust III(8)
|
208,073 | * | 3,160 | 38,455 | 166,458 | * | 166,458 | * | ||||||||||||||||||||||||
|
Brait International Limited(8)
|
833,334 | 3.1 | % | 12,655 | 154,012 | 666,667 | 1.8% | 666,667 | 1.8% | |||||||||||||||||||||||
|
Nedbank Limited(9)
|
8,152,819 | 23.1 | % | 6,652,819 | — | 1,500,000 | 3.9% | 1,500,000 | 3.8% | |||||||||||||||||||||||
|
Nedbank Rainmaker Equity Fund(10)
|
1,787,103 | 6.2 | % | 238,857 | — | 1,548,246 | 4.1% | 1,548,246 | 3.9% | |||||||||||||||||||||||
|
Investment entities affiliated with General Atlantic LLC(5)
|
— | * | — | — | 3,947,368 | 10.8% | 3,947,368 | 10.4% | ||||||||||||||||||||||||
|
Directors and Executive Officers as a group (9 persons)(11)
|
3,602,983 | 12.2 | % | 610,204 | 561,885 | 2,430,894 | 6.4% | 2,430,894 | 6.1% | |||||||||||||||||||||||
|
Other Selling Shareholders Converting Special Convertible
Preferred Stock(12):
|
||||||||||||||||||||||||||||||||
|
Shuttleworth Family Holding
|
452,491 | 1.6 | % | 101,786 | — | 350,705 | * | 350,705 | * | |||||||||||||||||||||||
|
Old Mutual-Symmetric Aggressive
|
331,863 | 1.2 | % | 85,500 | — | 246,363 | * | 246,363 | * | |||||||||||||||||||||||
|
Allan Gray Balanced Fund
|
623,545 | 2.2 | % | 623,545 | — | — | — | — | — | |||||||||||||||||||||||
|
Allan Gray Equity Fund
|
492,066 | 1.8 | % | 492,066 | — | — | — | — | — | |||||||||||||||||||||||
|
Employees Selling Shares obtained through the Exercise of
Stock Options(13):
|
||||||||||||||||||||||||||||||||
| * | Less than one percent |
| (1) | Dr. Belamant, CI Trustees Limited for the San Roque Trust, Brenthurst Private Equity II Limited, Brenthurst Private Equity South Africa I Limited, South African Private Equity Fund III, L.P., South African Private Equity Trust III and Brait International Limited have entered into a stock purchase agreement with investment entities affiliated with General Atlantic LLC and us pursuant to which these shareholders have agreed to sell in a private placement to these investment entities an aggregate of $75.0 million of our common stock at the public offering price. The closing of the private placement is expected to occur simultaneously with the closing of the offering. The number of shares to be sold in the offering and in the private placement assumes that the public offering and private placement price will be $19.00 per share, the midpoint of the range shown on the cover page of this |
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| prospectus. Each of these selling shareholders intends to sell an aggregate of 20% of its or his beneficially owned shares in a combination of the offering and the private placement. Thus, to the extent that the public offering and private placement price is greater than $19.00 per share, the number of shares sold by each of the selling shareholders in the private placement will decrease and the number of shares sold by them in the offering will increase. Conversely, if the public offering and private placement price is less than $19.00 per share, the number of shares sold by each of the selling shareholders in the private offering will increase and the number of shares sold by them in offering will decrease. | |
| (2) | CI Law Trustees Limited for the San Roque Trust dated 8/18/92 owns 1,017,132 shares of common stock. Dr. Serge C.P. Belamant as proxy of CI Law Trustees can vote all of CI Law Trustees’ shares. The amount also includes 1,932,279 special convertible preferred shares beneficially owned by Dr. Belamant that are convertible into common stock upon the occurrence of a trigger event. Also included in the amount are 133,334 shares which are exercisable or will become exercisable within the next 60 days under the 333,334 other stock-based awards that are exercisable in five equal installments beginning June 7, 2004. The amount also includes 16,667 shares which are exercisable or will become exercisable within the next 60 days under the 83,334 options that are exercisable in five equal installments beginning June 7, 2005. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding, Dr. Belamant’s beneficial ownership percentages would be 5.7%, 4.3% and 4.2%, respectively, which also reflects Dr. Belamant’s applicable voting power percentages. |
| (3) | Represents 133,334 shares which are exercisable or will become exercisable within the next 60 days under the 333,334 other stock-based awards that are exercisable in five equal installments beginning June 7, 2004. Also includes 16,667 shares which are exercisable or will become exercisable within the next 60 days under the 83,334 options that are exercisable in five equal installments beginning June 7, 2005. |
| (4) | Represents 8,334 shares which are exercisable or will become exercisable within the next 60 days under the 41,667 options that are exercisable in five equal installments beginning June 7, 2005. |
| (5) | The investment entities affiliated with General Atlantic are General Atlantic Partners 80, L.P., or GAP LP, GapStar, LLC, or GapStar, GAP Coinvestments III, LLC, or GAPCO III, GAP Coinvestments IV, LLC, or GAPCO IV, and GAPCO GmbH & Co. KG, or GAPCO KG. General Atlantic is the general partner of GAP LP and the sole member of GapStar. The Managing Members of each of GAPCO III and GAPCO IV are Managing Directors of General Atlantic. The general partner of GAPCO KG is GAPCO Management GmbH, and the Managing Directors of General Atlantic make investment decisions with respect to GAPCO KG and GAPCO Management GmbH. GAP LP, GapStar, GAPCO III, GAPCO IV, GAPCO KG, General Atlantic and GAPCO Management GmbH, or GA Group, are a “group” within meaning of Rule 13d-5 under the Securities Exchange Act of 1934, as amended. Mr. Wendelstadt is a Managing Director of General Atlantic and a Managing Member of each of GAPCO III and GAPCO IV. The address of the GA Group (other than GAPCO KG and GAPCO Management GmbH) is c/o General Atlantic Service Corporation, 3 Pickwick Plaza, Greenwich, Connecticut 06830 USA. The address of GAPCO KG and GAPCO Management GmbH is Koenigsallee 62, 40212 Duesseldorf, Germany. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding, General Atlantic’s beneficial ownership percentages would be 7.2% and 7.0%, respectively, which also reflects General Atlantic’s applicable voting power percentages. |
| (6) | Represents 100,000 shares which are exercisable or will become exercisable within the next 60 days under the 250,000 other stock-based awards that are exercisable in five equal installments beginning June 7, 2004, as well as 45,239 special convertible preferred shares that are convertible into common stock upon the occurrence of a trigger event. Also includes 16,667 shares which are exercisable or will become exercisable within the next 60 days under the 83,334 options that are exercisable in five equal installments beginning June 7, 2005. |
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| (7) | Pursuant to a Schedule 13D, dated June 7, 2004, filed by Brenthurst Private Equity II Limited, Brenthurst Private Equity South Africa I Limited, Brenthurst Limited, Theseus Limited, and Maitland Trustees Limited, Brenthurst Private Equity II Limited beneficially owns 1,833,334 shares of common stock and Brenthurst Private Equity South Africa I Limited beneficially owns 1,000,000 shares of common stock. As the controlling shareholder, Brenthurst Limited may be deemed to be the beneficial owner of securities held by Brenthurst Private Equity II Limited and Brenthurst Private Equity South Africa I Limited. As the parent company of Brenthurst, Theseus Limited may be deemed to be the beneficial owner of securities held by Brenthurst. As the parent company of Theseus, Maitland Trustees Limited may be deemed to the beneficial owner of securities held by Theseus. Brenthurst, Theseus and Maitland disclaim beneficial ownership of the securities, except to the extent of its pecuniary interest. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding, the beneficial ownership percentages of Brenthurst Private Equity II Limited would be 3.7%, 3.0% and 2.9%, respectively, and the beneficial ownership percentages of Brenthurst Private Equity South Africa I Limited would be 1.9%, 1.5% and 1.4%, respectively, which amounts reflect the applicable voting power percentages. |
| The registered address of Brenthurst Private Equity II Limited and Brenthurst Private Equity South Africa I Limited is 9 Columbus Centre, Pelican Drive, Road Town, Tortola, British Virgin Islands. |
| (8) | The securities are held of record by SAPEF. As the general partner of SAPEF, SAPEF III International G.P. Limited may be deemed to be the beneficial owner of the securities held by SAPEF. |
| The registered address of SAPEF is Walker House P.O. Box 908, George Town, Grand Cayman, Cayman Islands and the registered address of Brait International is Suite 305, Third Floor, Caudan Waterfront, Port Louis, Mauritius. | |
| Pursuant to a Schedule 13D, dated June 7, 2004, filed by SAPEF, Brait International Limited, SAPEF III International G.P. Limited, Capital Partners Group Holdings Limited, and Brait S.A., SAPEF beneficially owns 14,443,572 shares of common stock, and Brait International Limited beneficially owns 833,334 shares of common stock. As a shareholder of SAPEF III International G.P. Limited, and as the parent company of Brait International, Capital Partners Group Holdings Limited may be deemed to be the beneficial owner of securities held by each of SAPEF III International G.P. Limited and Brait International. As the parent company of Capital Partners Group Holdings Limited, Brait S.A. may be deemed to be the beneficial owner of securities held by Capital Partners Group Holdings Limited. SAPEF III International G.P. Limited, Capital Partners Group Holdings Limited and Brait S.A. disclaim beneficial ownership of the securities, except to its pecuniary interest. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding, the beneficial ownership percentages of SAPEF would be 26.4%, 21.0% and 20.5%, respectively, and the beneficial ownership percentages of Brait International Limited would be 1.5%, 1.2% and 1.2%, respectively, which amounts reflect the applicable voting power percentages. | |
| As the Trustee of SAPET, Brait Capital Partners Trustee (Pty) Ltd, or BCP Trustees, may be deemed to be the beneficial owner of the securities held by BCP Trustees. As a shareholder of BCP Trustees, Brait South Africa Ltd, or BSA, may be deemed to be a beneficial owner of the shares held by SAPET. As the shareholder of BSA, Brait S.A. may be deemed to be the beneficial owner of securities held by BSA. BCP Trustees and Brait S.A. disclaim beneficial ownership of the securities, except to its pecuniary interest. |
| (9) | Pursuant to a Schedule 13G, dated June 30, 2004, filed by Nedbank Limited, Nedbank Limited beneficially owns 8,152,819 special convertible preferred shares. Nedbank Limited’s registered address is 135 Rivonia Road, Sandown, 2196, South Africa. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding, the beneficial ownership percentages of Nedbank Limited would be 14.9%, 2.7% and 2.7%, respectively, which amounts reflect the applicable voting power percentages. |
| (10) | Pursuant to a Schedule 13G, dated June 30, 2004, filed by Nedbank Rainmaker Equity Fund, Nedbank Rainmaker Equity Fund beneficially owns 1,787,103 special convertible preferred shares. |
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| Nedbank Rainmaker’s registered address is BoE Clocktower, Clocktower Precinct, V & A Waterfront, Cape Town, 8000, South Africa. If the common stock underlying all outstanding shares of special convertible preferred stock were deemed outstanding the beneficial ownership percentages of Nedbank Rainmaker would be 3.2%, 2.8% and 2.7% respectively, which amounts reflect the applicable voting power percentages. | |
| (11) | Represents an aggregate of 500,000 shares which are exercisable or will become exercisable within the next 60 days under the 1,250,002 other stock-based awards that are exercisable in five equal installments beginning June 7, 2004. Also includes 108,334 shares which are exercisable or will become exercisable within the next 60 days under the 541,667 options that are exercisable in five equal installment beginning June 7, 2005. Also includes 1,977,517 special convertible preferred shares. |
| (12) | Holders of an aggregate of approximately 1,866,416 shares of special convertible preferred stock, other than holders included under directors, officers and 5% shareholders, will sell shares in this offering. Except as set forth in the table, each of such holders beneficially owns less than 1% of our outstanding common stock. |
| (13) | Employees, excluding officers and directors, owning options that are exercisable for an aggregate of approximately 245,000 shares of common stock. None of such employees beneficially owns more than 1% of our outstanding common stock. |
The South African Invitation to Participate
An invitation to participate was distributed in South Africa on
June 17, 2005, which invited holders of our linked units to
offer for sale in this offering their shares of our common stock
issuable upon conversion of the special convertible preferred
stock these holders are entitled to receive upon giving of an
irrevocable exercise form to the trustee of the South African
trust. As described under “Corporate
History — The Aplitec Transaction,” the
South African trustee holds for the benefit of the linked unit
holders the New Aplitec B class loan accounts and
B class preference shares which are part of the linked
units. Our invitation to participate was sent only to holders of
linked units who have mailing addresses in South Africa as
reflected on the records of the South African trustee. We did
not recommend that any holders of linked units participate in
this offering, and we are not purchasing any of the shares of
common stock offered in this offering.
The selling shareholders in this offering include holders of
linked units who accepted the invitation to participate and gave
the conversion notice to the trustee of the South African trust.
Each holder of linked units who has elected to participate in
this offering has deposited with the trustee of the South
African trust an irrevocable exercise form instructing the
trustee of the South African trust to convert up to a specified
number of special convertible preferred shares, effective only
upon the closing of this offering.
The successful completion of these transactions by us, the
selling shareholders and the trustee is a condition precedent to
the underwriters’ obligations to purchase any shares in the
offering.
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DESCRIPTION OF CAPITAL STOCK
General
Our articles of amendment to the articles of incorporation
authorize the issuance of 83,333,333 shares of common
stock, par value $0.001 per share, and
50,000,000 shares of preferred stock, par value
$0.001 per share.
Common Stock
Outstanding Shares. As of March 31, 2005, we
had 27,175,135 shares of common stock issued and
outstanding.
Voting Rights. Each holder of our 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
our 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.
Holders of shares of our common stock do not have preferential,
subscriptive or preemptive rights with respect to any securities
or any conversion rights. Our common stock is not subject to
redemption.
Rights to Dividends and on Liquidation, Dissolution or
Winding Up. Holders of our common stock are entitled to
receive dividends and other distributions when declared by our
board of directors out of funds available. Payment of dividends
and distributions is subject to certain restrictions of Florida
law, including the requirement that after making any
distribution we must be able to meet our debts as they become
due in the usual course of our business.
Upon voluntary or involuntary liquidation, dissolution or
winding up, holders of our 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 preemptive 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 nonassessable.
The rights of holders of common stock may be adversely affected
by the rights of holders of preferred stock that is outstanding
or that may be issued in the future.
Additional Issuances of Common Stock. Additional
shares of our authorized common stock may be issued from time to
time, as determined by our board of directors and without
approval from our shareholders, except as required by applicable
rules or laws.
Preferred Stock
Our board of directors may authorize the issuance of preferred
stock from time to time, each of which class or series will have
those voting powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations
or restrictions as specified by the board of directors. The
board of directors may cause shares of preferred stock to be
issued in public or private transactions for any proper
corporate purpose.
Special Convertible Preferred Stock
Outstanding Shares. In June 2004, in connection
with the Aplitec transaction, we issued the equivalent of
32,161,190 shares of special convertible preferred stock
convertible into 32,161,190 shares of common stock. As of
March 31, 2005, 4,635,931 shares had been converted
into common stock, leaving 27,525,259 shares of special
convertible preferred stock issued and outstanding.
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Our special convertible preferred stock ranks:
| • | on parity, without preference and priority, to our common stock with respect to dividend rights (except as described below) or rights upon liquidation, dissolution or winding up; and | |
| • | junior in preference and priority to each other class or series of preferred stock or other equity security of ours under terms that may be determined by the board of directors to expressly provide that such other security will rank senior in preference or priority to the special convertible preferred stock with respect to dividend rights or rights upon liquidation, dissolution or winding up. |
Voting Rights. Holders of our special convertible
preferred stock have the right to receive notice of, attend,
speak and vote at general meetings, and are entitled to vote on
all matters on which holders of common stock are entitled to
vote. Holders of special convertible preferred stock vote
together with the holders of common stock as a single class.
Each holder of special convertible preferred stock present in
person, or the person representing such holder, is entitled to a
number of votes equal to the number of shares of common stock
that would be issued upon conversion of the special convertible
preferred stock held by such holder on the record date.
We may not take any of the following actions without the prior
vote or written consent of our holders representing at least a
majority of the then outstanding shares of special convertible
preferred stock, voting together as a separate class:
| • | any increase (including by way of merger, consolidation or otherwise) in the total number of authorized or issued shares of special convertible preferred stock; or | |
| • | any amendment, alteration or change to the powers, designations, preferences, rights, qualifications, limitations or restrictions of the special convertible preferred stock in the articles of incorporation in any manner that adversely affects the holders of such stock. |
Dividends. Provided that shares of special
convertible preferred stock are outstanding, our board will
determine immediately prior to the declaration of any dividend
or distribution (1) the portion, if any, of our assets
available for such dividend or distribution that is attributable
to funds or assets from New Aplitec, regardless of the manner
received, or the South African Amount, and (2) the portion
of such funds or assets that is not from New Aplitec, or the
Non-South African Amount. The South African Amount will not
include amounts received from New Aplitec due to its
liquidation, distribution or dividend after an insolvency or
winding up.
Provided that shares of special convertible preferred stock are
outstanding, (1) any dividends or distributions of
Non-South African Amounts must be paid pro rata to all holders
of common stock and special convertible preferred stock, and
(2) any dividends or distributions of South African Amounts
can be paid only to holders of common stock. Our board has
complete discretion to declare a dividend or distribution with
respect to South African Amounts or Non-South African Amounts.
Conversion. Special convertible preferred stock is
convertible into shares of common stock on a one-for-one basis
upon the occurrence of a trigger event, which is defined as any
one of the following events: (1) notification by the
reinvesting shareholder of the intention to convert some or all
of such holder’s special convertible preferred stock;
(2) the abolition or relaxation of Excon regulations such
that South African residents would be permitted to directly hold
shares of non-South African companies; or (3) our
liquidation, insolvency or other winding up. With each converted
share of special convertible preferred stock that is to be
converted, we will receive:
| • | 7.368421056 New Aplitec B class preference shares; and | |
| • | such holder’s interest in the New Aplitec B loan accounts, which is equal to (1) the aggregate principal amount of New Aplitec B loans, plus any accrued interest, minus any repayment or previous transfer of New Aplitec B loans, divided by (2) the number of the shares of special convertible preferred stock outstanding at such time. |
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No fractional shares of common stock shall be issued upon
conversion of the special convertible preferred stock, unless
our board of directors shall otherwise determine to issue
fractional shares. In lieu of fractional shares, we will pay
cash equal to such fractional amount multiplied by the fair
market value per share of common stock on the date of
conversion. If more than one share of special convertible
preferred stock is being converted at one time by the same
holder, then the number of full shares issuable upon conversion
will be calculated on the basis of the aggregate number of
shares converted at that time.
We will reserve and keep available out of our authorized but
unissued shares of common stock the full number of shares of
common stock deliverable upon the conversion of all outstanding
special convertible preferred stock.
Upon conversion, all rights with respect to shares for special
convertible preferred stock will cease. Converted shares will be
cancelled and have the status of authorized but unissued
preferred stock, without designation as to series until such
shares are once more designated as part of a particular series
by the board of directors.
Transfer Restrictions. Special convertible
preferred stock may not be sold, assigned, transferred, pledged,
or encumbered, except to us upon conversion into shares of
common stock. The shares of special convertible preferred stock
may not be held by any person other than the Cayman Trust for
the benefit of the South African Trust and indirectly for the
benefit of reinvesting shareholders, or directly by the South
African Trust for the benefit of reinvesting shareholders in
connection with a conversion into common stock.
Liquidation, Dissolution and Winding Up. In the
event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding-up, all outstanding shares of
special convertible preferred stock will automatically convert
and holders will be entitled to receive pari passu with holders
of common stock, any assets distributed for the benefit of its
shareholders.
Director Qualifications
Neither Florida law nor our articles of incorporation require
that directors be residents of Florida nor that they be
shareholders to qualify to serve as directors.
Number of Directors
Our by-laws provide that the members of the board of directors
may not be less than one nor more than ten but give authority to
amend the by-laws and increase or decrease the number of
directors to the board of directors.
Meetings of Shareholders
Florida law requires corporations to hold an annual meeting for
the election of directors and the transaction of any other
business. The annual meeting must be convened and held in
accordance with the corporation’s by-laws. Our by-laws do
not fix a time or method for convening an annual meeting.
| Special Meetings |
Under Florida law, a special meeting of shareholders of a
Florida corporation may be called by the board of directors, by
persons authorized in the corporation’s articles of
incorporation or by-laws, or by holders of not less than 10% of
all shares entitled to vote at the meeting unless a different
percentage, that does not exceed 50%, is specified in the
articles of incorporation. Our by-laws provide that special
meetings of shareholders may be called by majority vote of our
board of directors, the chief executive officer or president or
by at least 10% of the shares of stock entitled to vote at the
meeting.
| Notice of Shareholder Meetings |
Under Florida law and our by-laws, notice of shareholder
meetings must be provided to shareholders of record not less
than ten days nor more than 60 days prior to the date set
for such meeting. Our by-laws provide that a matter may be
properly considered before a meeting of shareholders only if
(1) the matter is included in the notice of meeting
provided to shareholders at the direction of the board of
directors, (2) the matter is otherwise properly brought
before the meeting by our board of directors or (3) the
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matter is properly brought before the meeting by a shareholder.
In order to properly bring any business before the annual
meeting, a shareholder must provide timely notice to the
secretary containing certain required information in accordance
with the notice provisions contained in our by-laws.
Anti-Takeover Provisions of our Articles of Incorporation and
By-Laws
Our articles of incorporation and bylaws include certain other
provisions that may have an anti-takeover effect or the effect
of delaying or preventing changes in our control or our
management including the following:
| • | Our board of directors currently may issue up to 50,000,000 shares of preferred stock, with such designations, preferences, cumulative, relative, participating, optional or other rights, limitations or restrictions as fixed by our board of directors, which could include the right to approve an acquisition or change in control. | |
| • | Our articles of incorporation do not provide for cumulative voting for directors. The absence of cumulative voting may make it more difficult for shareholders owning an aggregate of less than a majority of our stock to elect directors to our board. | |
| • | Our by-laws currently provide that our board of directors can increase or decrease the number of directors by amendment to the by-laws, and vacancies, including vacancies resulting from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors. | |
| • | Our by-laws provide that shareholders who desire to bring business before an annual or special meeting of shareholders must comply with certain advance notice provisions. These advance notice provisions also apply to the nomination of any person for election as a director. |
These provisions may be deemed to have an anti-takeover effect
and may discourage, delay, defer or prevent transactions
involving an actual or potential change in control of us or our
management, including transactions that might otherwise result
in a premium over the market price for shares held by our
shareholders.
Amendment to our Amended Articles of Incorporation
On June 13, 2005, we amended our amended articles of
incorporation to effect a one-for-six reverse stock split of our
capital stock pursuant to Section 607.10025 of the FBCA.
Upon the effectiveness of the reverse stock split, each six
shares of our capital stock outstanding were automatically
combined into one share of our capital stock, which resulted in
a decrease of our authorized capital stock to
83,333,333 shares of common stock with a par value of
$0.001 per share and 50,000,000 shares of preferred
stock with a par value of $0.001 per share. In lieu of
issuing fractional shares of common stock or special convertible
preferred stock, we issued new shares of common stock or special
convertible preferred stock, respectively, rounded up to the
nearest whole share.
Listing
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol “UEPS.”
Transfer Agent and Registrar
The Bank of New York is our transfer agent and registrar for our
common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been a limited public market
for our common stock. We cannot predict the effect, if any, that
sales of our common stock or the availability of our common
stock for sale will have on the market price of our common stock
prevailing from time to time. Sales of shares of our common
stock in the public market, or the perception that those sales
may occur, could cause the prevailing market price to decrease
or to be lower than it might be in the absence of those sales or
perceptions. These factors could also make it more difficult to
raise funds through future offerings of common stock.
Sale of Restricted Shares
Upon the closing of this offering, we will have an aggregate of
54,945,589 shares of common stock and special convertible
preferred stock outstanding. The shares of common stock sold in
this offering will be freely tradable without restriction or
further registration under the Securities Act. However, if
shares are purchased by “affiliates,” as that term is
defined in Rule 144 under the Securities Act, their sales
of shares of common stock would be subject to volume limitations
and other restrictions that are described below. In addition, an
aggregate of approximately 33,766,194 shares of common
stock outstanding or issuable in the future upon conversion of
special convertible preferred stock are freely tradeable without
restriction or further registration under the Securities Act.
Our shares of common stock, outstanding upon closing of this
offering or issued in the future on conversion of shares of
special convertible preferred stock will be eligible for sale
into the public market as follows:
| Approximate | ||||
| Number of Shares | Description | |||
| 33,766,194 | After the date of this prospectus, freely tradeable shares under the Securities Act, of which 3,850,738 shares are subject to lock-up agreements. | |||
| 21,082,765 | After 180 days from the date of this prospectus, except as otherwise discussed below, the lock-up period will expire, and these additional shares of common stock will be saleable, subject, in some cases, to holding periods and volume limitations. | |||
| 3,947,368 | After one year from the date of this prospectus, tradeable shares under Rule 144. | |||
Rule 144
In general, under Rule 144 as currently in effect, a person
who is one of our affiliates or has purchased “restricted
securities” and has beneficially owned those shares of
common stock for at least one year, would be entitled to sell,
within any three-month period, a number of shares that does not
exceed the greater of:
| • | 1% of the total number of our shares of common stock then outstanding, which is expected to equal approximately 366,065 shares of common stock immediately after the closing of this offering; or | |
| • | the average weekly trading volume of our shares of common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. |
Sales under Rule 144 are also subject to other requirements
regarding the manner of sale, notice filing and the availability
of current public information about us.
Rule 144(k)
Under Rule 144(k) as currently in effect, a person who has
not been an affiliate of ours at any time during the
90 days preceding a sale and who has beneficially owned our
shares of common stock for at least two years, including the
holding period of any owner other than an affiliate, is entitled
to sell those shares without regard to volume limitations,
manner of sale provisions or information requirements under
Rule 144. Therefore, unless subject to a lock-up agreement
or otherwise restricted, these shares may be sold immediately
upon the closing of this offering.
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Stock Options and Other Stock-Based Awards
As of March 31, 2005, options to
purchase 1,453,490 shares of common stock were issued
and outstanding, of which options to
purchase 290,698 shares of common stock are currently
exercisable. As of March 31, 2005, other stock-based awards
in respect of 1,453,490 shares of common stock for no cash
consideration were issued and outstanding, of which 581,396
other stock-based awards are currently exercisable. We intend to
file a Form S-8 registration statement prior to the closing
of this offering or as soon as practicable after the closing of
this offering.
Registration Rights
We have agreed to grant to SAPEF and Brenthurst Private
Equity II Limited and their respective affiliates, and to
the investment entities affiliated with General Atlantic,
certain registration rights with respect to the shares of common
stock owned by them. The registration rights that we will grant
to the investment entities affiliated with General Atlantic will
provide that these entities will first be entitled to exercise
demand registration rights one year after the closing of this
offering. We are currently negotiating the remaining terms of
these registration rights and expect to enter into these
agreements shortly after completion of the offering.
Lock-Up Agreements
We, each of our directors and executive officers, certain
selling shareholders who, prior to this offering, owned more
than 10,000 linked units representing approximately
1,357 shares and certain of our other shareholders have
agreed, with limited exceptions, that we and they will not,
without the prior written consent of Morgan Stanley &
Co. Incorporated and J.P. Morgan Securities Inc. on behalf
of the underwriters, during the period ending 180 days
after the date of this prospectus, among other things, directly
or indirectly, offer to sell, sell or otherwise dispose of any
of our shares of common stock or file a registration statement
with the SEC relating to the offering of any of our shares of
common stock. Certain of the selling shareholders, who in the
aggregate will beneficially own after this offering
approximately 2.8% of our common stock, assuming full conversion
of our special convertible preferred stock, are organized as
unit investment trusts. These unit investment trusts may be
required to sell all or a portion of our shares beneficially
owned by the trust if the manager of the trust changes or if a
holder in the trust redeems its interest in the trust. To the
extent that the governing documents of the unit investment trust
require the sale of our shares under these circumstances, the
lock-up restrictions do not apply to these selling shareholders.
However, in the event that either (1) during the last
17 days of the 180-day restricted period, we issue an
earnings release or material news or a material event relating
to us occurs or (2) prior to the expiration of the 180-day
restricted period, we announce that we will release earnings
results during the 16-day period beginning on the last day of
the 180-day period, then the “lock-up” restrictions,
subject to certain exceptions, will continue to apply until the
expiration of the 18-day period beginning on the date of the
earnings release or the occurrence of the material news or
material event.
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ENFORCEABILITY OF CIVIL LIABILITIES
A significant portion of our assets and the assets of our
directors and executive officers and some of the experts named
in this prospectus are located outside the United States. In
addition, most of the members of our board of directors, all of
our executive officers and several of our experts named in this
prospectus are residents of South Africa or other foreign
countries. As a result, it may not be possible for you to effect
service of process, within the United States or elsewhere
outside South Africa, upon our non-U.S. directors, our
officers or several of our experts. Moreover, any judgment
obtained against us or any of these foreign persons 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. Further, if a foreign judgment is enforced
by a South African court, it will be payable in South African
currency. Also, under South Africa’s Exchange Control laws,
the approval of the South African Reserve Bank 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 also may be difficult
for you to assert U.S. securities law claims in original
actions instituted in South Africa.
A foreign judgment is not directly enforceable in South Africa,
but constitutes a cause of action which will be enforced by
South African courts provided that:
| • | the court which pronounced the judgment had jurisdiction to entertain the case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts; | |
| • | the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it); | |
| • | the judgment has not lapsed; | |
| • | the recognition and enforcement of the judgment by South African courts would not be contrary to public policy, including observance of the rules of natural justice which provide that no award is enforceable unless the defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal; | |
| • | the judgment was not obtained by fraudulent means; | |
| • | the judgment does not involve the enforcement of a penal or revenue law; and | |
| • | the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act, 1978 (as amended), of South Africa. |
It is 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. 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 is contrary to public policy
would depend on the facts of the case. Exorbitant,
unconscionable, or excessive awards will generally be contrary
to public policy. South African courts cannot review the merits
of a foreign judgment and cannot act as a court of appeal or
review over the foreign court. South African courts will usually
implement their own procedural laws and, where an action based
on an international contract is brought before a South African
court, the capacity of the parties to the contract may under
certain circumstances be determined in accordance with South
African law. 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 be authenticated in
a prescribed manner for the purpose of use in South African
courts. It is not possible therefore for an investor to seek to
impose criminal liability in a South African court arising from
a violation of United States federal securities laws.
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MATERIAL U.S. FEDERAL TAX CONSEQUENCES
FOR NON-U.S. HOLDERS OF COMMON STOCK
This is a general summary of material U.S. federal income
and estate tax considerations with respect to your acquisition,
ownership and disposition of common stock. The discussion of
income tax considerations applies if you are a beneficial owner
of shares and are not:
| • | a citizen or resident of the United States; | |
| • | a corporation created or organized in, or under the laws of, the United States or any political subdivision of the United States; | |
| • | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; | |
| • | a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust; or | |
| • | a trust that existed on August 20, 1996, was treated as a U.S. person on August 19, 1996, and elected to be treated as a U.S. person. |
The discussion of estate tax considerations applies to
individuals who are not U.S. citizens or residents for
estate tax purposes.
If a partnership, whether organized in the U.S. or abroad,
holds our common stock, then the tax treatment of partners
generally will depend on the status of the partners.
Partnerships which hold our common stock and partners in such
partnerships should consult their own tax advisors.
This summary does not address all of the U.S. federal
income and estate tax considerations that may be relevant to you
in light of your particular circumstances or if you are a
beneficial owner subject to special treatment under
U.S. income tax laws, including a “controlled foreign
corporation,” “passive foreign investment
company,” foreign tax-exempt organization, financial
institution, broker or dealer in securities or former
U.S. citizen or resident. This summary does not discuss any
aspect of state, local or non-U.S. taxation. This summary
is based on current provisions of the Internal Revenue Code, or
the Code, Treasury regulations, judicial opinions, published
positions of the U.S. Internal Revenue Service, or IRS, and
all other applicable authorities, all of which are subject to
change, possibly with retroactive effect.
We urge prospective non-U.S. shareholders to consult their
tax advisors regarding the U.S. federal, state and local
and the non-U.S. income and other tax considerations of
acquiring, holding and disposing of shares of our common stock.
Dividends
In general, any distributions we make to you with respect to
your shares of common stock that constitute dividends for
U.S. federal income tax purposes will be subject to
U.S. withholding tax at a rate of 30% of the gross amount,
unless you are eligible for a reduced rate of withholding tax
under an applicable income tax treaty and you provide proper
certification of your eligibility for such reduced rate, usually
on an IRS Form W-8BEN. A distribution will constitute a
dividend for U.S. federal income tax purposes to the extent
of our current earnings and profits for the year of the
distribution or accumulated earnings and profits through the
date of the distribution, in each case as determined under the
Code. Any distribution not constituting a dividend will be
treated first as reducing your basis in your shares of common
stock and, to the extent it exceeds your basis, as gain from the
disposition of your shares of common stock, which is discussed
below.
Dividends we pay to you that are effectively connected with your
conduct of a trade or business within the United States, and, if
certain income tax treaties apply, are attributable to a
U.S. permanent establishment maintained by you, generally
will not be subject to U.S. withholding tax if you comply
with applicable certification and disclosure requirements.
Instead, such dividends generally will be subject to
U.S. federal income tax, net of certain deductions, at the
same graduated individual or corporate rates applicable to
U.S. persons. If you are a corporation, effectively
connected income may also be subject to a “branch profits
tax” at a rate of 30%, or such lower rate as may be
specified by an applicable income tax
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treaty. Dividends that are effectively connected with your
conduct of a trade or business, but that under an applicable
income tax treaty are not attributable to a U.S. permanent
establishment maintained by you, may be eligible for a reduced
rate of U.S. withholding tax under such treaty, provided
you comply with certification and disclosure requirements
necessary to obtain treaty benefits.
Sale or Other Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax on any gain realized upon the sale or other disposition of
your shares of common stock unless the gain is effectively
connected with your conduct of a trade or business within the
United States, and, under certain income tax treaties, is
attributable to a U.S. permanent establishment you maintain.
Gain that is effectively connected with your conduct of a trade
or business within the United States generally will be subject
to U.S. federal income tax, net of certain deductions, at
the same rates applicable to U.S. persons. If you are a
corporation, the branch profits tax also may apply to such
effectively connected gain. If the gain from the sale or
disposition of your shares is effectively connected with your
conduct of a trade or business attributable to a permanent
establishment you maintain in the United States, your gain may
be exempt from U.S. tax under a treaty.
Information Reporting and Backup Withholding
We must report annually to the IRS the amount of dividends or
other distributions we pay to you on your shares of common stock
and the amount of tax we withhold on these distributions
regardless of whether withholding is required. The IRS may make
copies of the information returns reporting those dividends and
amounts withheld available to the tax authorities in the country
in which you reside pursuant to the provisions of an applicable
income tax treaty or exchange of information treaty.
The United States imposes a backup withholding tax, currently at
a rate of 28%, on dividends and certain other types of payments
to U.S. persons. You will not be subject to backup
withholding tax on dividends you receive on your shares of
common stock if you provide proper certification, usually on an
IRS Form W-8BEN, of your status as a non-U.S. person
or you are a corporation or one of several types of entities and
organizations that qualify for exemption, or an exempt recipient.
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale of your shares of common stock outside the United States
through a foreign office of a foreign broker that does not have
certain specified connections to the United States. However, if
you sell your shares of common stock through a U.S. broker
or the U.S. office of a foreign broker, the broker will be
required to report the amount of proceeds paid to you to the IRS
and also backup withhold on that amount unless you provide
appropriate certification, usually on an IRS Form W-8BEN,
to the broker of your status as a non-U.S. person or you
are an exempt recipient. Information reporting, and backup
withholding if the appropriate certification is not provided,
also apply if you sell your shares of common stock through a
foreign broker deriving more than a specified percentage of its
income from U.S. sources or having certain other
connections to the United States.
Any amounts withheld with respect to your shares of common stock
under the backup withholding rules will be refunded to you or
credited against your U.S. federal income tax liability, if
any, by the IRS if the required information is furnished in a
timely manner.
Estate Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for U.S. federal
estate tax purposes, of the United States at the time of his or
her death will be included in the individual’s gross estate
for U.S. federal estate tax purposes and therefore may be
subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise. Current law provides that
the maximum federal estate tax rate will be reduced over an
eight-year period beginning in 2002 and the tax will be
eliminated for estates of decedents dying after
December 31, 2009. In the absence of renewal legislation,
these amendments will expire and the federal estate tax
provisions in effect immediately prior to 2002 will be
reinstated beginning in 2011.
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UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc., Robert W.
Baird & Co. Incorporated, Jefferies & Company,
Inc. and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed to purchase, and the
selling shareholders have agreed to sell to them, severally, the
number of shares indicated below:
| Name | Number of Shares | |||||
|
Morgan Stanley & Co. Incorporated
|
||||||
|
J.P. Morgan Securities Inc.
|
||||||
|
Robert W. Baird & Co. Incorporated
|
||||||
|
Jefferies & Company, Inc.
|
||||||
|
Thomas Weisel Partners LLC
|
||||||
|
Subtotal
|
||||||
|
Total
|
||||||
As joint book-running managers on behalf of the underwriting
syndicate, Morgan Stanley & Co. Incorporated and
J.P. Morgan Securities Inc. will be responsible for
recording a list of potential investors that have expressed an
interest in purchasing common stock as part of this offering.
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from the selling shareholders
and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and
accept delivery of the shares of common stock offered by this
prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any such shares
are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters’
over-allotment option described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of
$ a
share under the public offering price. After the initial
offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate of 1,477,500 additional shares of common stock at
the public offering price set forth on the cover page of this
prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered by this
prospectus. To the extent the option is exercised, each
underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the
additional shares of common stock as the number listed next to
the underwriter’s name in the preceding table bears to the
total number of shares of common stock listed next to the names
of all underwriters in the preceding table. If the
underwriters’ option is exercised in full, the total price
to the public would be
$ ,
the total underwriters’ discounts and commissions would be
$ ,
total proceeds to us would be
$ and
total proceeds to the selling shareholders would be
$ .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol “UEPS.”
We, each of our directors and executive officers, certain of
those selling shareholders who, prior to this offering, owned
more than 10,000 linked units representing approximately
1,357 shares and certain other of
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our shareholders have agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated and
J.P. Morgan Securities Inc. on behalf of the underwriters,
we and they will not, during the period ending 180 days
after the date of this prospectus:
| • | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for our common stock; or | |
| • | enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock; |
whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not
apply to:
| • | the sale of shares to the underwriters; | |
| • | our issuance of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; | |
| • | transactions by any person other than us relating to the shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; or | |
| • | the sale of shares by a unit investment trust that is required to sell all or a portion of our shares owned by the trust if the manager of the trust changes or if a holder in the trust redeems its interest in the trust. | |
Following this offering, an aggregate of approximately 2.8% of
our common stock, assuming full conversion of our special
convertible preferred stock, will be beneficially owned by
certain selling shareholders in this offering that are unit
investment trusts.
The 180-day restricted period described above is subject to
extension such that, in the event that either (1) during
the last 17 days of the 180-day restricted period, we issue
an earnings release or material news or a material event
relating to us occurs or (2) prior to the expiration of the
180-day restricted period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the 180-day period, then the “lock-up”
restrictions described above will, subject to limited
exceptions, continue to apply until the expiration of the 18-day
period beginning on the date of the earnings release or the
occurrence of the material news or material event.
The estimated offering expenses payable by us, in addition to
the underwriting discounts and commissions, are approximately
$2.1 million, which includes legal, accounting and printing
costs and various other fees associated with registering and
listing the common stock.
The following tables show the underwriting discounts and
commissions that the selling shareholders are to pay to the
underwriters in connection with this offering and such amounts
payable by us assuming full exercise of the underwriters’
over-allotment option to purchase additional shares of our
common stock.
Paid by the Selling Shareholders
|
Per share
|
$ | ||||
|
Total
|
$ | ||||
Paid by us (assuming full exercise of the over-allotment
option)
|
Per share
|
$ | ||||
|
Total
|
$ | ||||
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In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. As an
additional means of facilitating the offering, the underwriters
may bid for, and purchase, shares of common stock in the open
market to stabilize the price of the common stock. The
underwriting syndicate may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases
previously distributed common stock to cover syndicate short
positions or to stabilize the price of the common stock. These
activities may raise or maintain the market price of the common
stock above independent market levels or prevent or retard a
decline in the market price of the common stock. The
underwriters are not required to engage in these activities, and
may end any of these activities at any time. These activities
may be effected on The Nasdaq National Market or otherwise.
A prospectus in electronic format may be made available on the
web sites maintained by one or more underwriters. The
underwriters may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the lead co-managers
to underwriters that may make Internet distributions on the same
basis as other allocations.
From time to time, Morgan Stanley & Co. Incorporated
has provided, and continues to provide, investment banking
services to us, and it is acting as placement agent in
connection with the private placement of our shares to
investment entities affiliated with General Atlantic LLC for
which it will receive placement fees.
From time to time, J.P. Morgan Securities Inc. has
provided, and continues to provide, investment banking services
to us, and it is acting as placement agent in connection with
the private placement of our shares to investment entities
affiliated with General Atlantic LLC for which it will receive
placement fees.
We, the selling shareholders and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the shares of common stock and other legal
matters in connection with this offering with respect to
U.S. law will be passed upon for us by DLA Piper Rudnick
Gray Cary US LLP, New York, New York. Certain legal matters in
connection with this offering with respect to U.S. law will
be passed upon for the underwriters by Davis Polk &
Wardwell, London, England. Certain legal matters in connection
with this offering with respect to South African law will be
passed upon for us by Cliffe Dekker Inc.
EXPERTS
Our consolidated financial statements as of June 30, 2004
and the year then ended and included in this prospectus have
been audited by Deloitte & Touche (South Africa), an
independent registered public accounting firm, as stated in
their report appearing herein (which report expresses an
unqualified opinion and includes explanatory paragraphs
referring to the restatement of the segment information
disclosures as well as the restatement of earnings per share and
diluted earnings per share) and is included in reliance upon the
report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Aplitec as of
June 30, 2002 and 2003 and for each of the years in the
two-year period ended June 30, 2003 included in this
prospectus have been audited by PKF (Jhb) Inc., registered
auditors and chartered accountants, as independent auditors, as
stated in their report appearing herein and is included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act of 1933, as amended, with
respect to the shares of common stock that are being offered by
this prospectus. This prospectus, which is a part of the
registration statement, does not contain all of the information
set forth in the registration statement and the exhibits and
schedules to the registration statement. Refer to the
registration statement, exhibits and schedules for further
information with respect to the shares of common stock offered
by this prospectus. Statements contained in this prospectus
regarding the contents of any contract or other documents are
only summaries. With respect to any contract or document filed
as an exhibit to the registration statement, you should refer to
the exhibit for a copy of the contract or document, and each
statement in this prospectus regarding that contract or document
is qualified by reference to the exhibit. The registration
statement, including all exhibits, may be inspected and copied
at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public
from the SEC’s website at www.sec.gov.
We are subject to the information reporting requirements of the
Securities Exchange Act of 1934 and, in accordance with the
Exchange Act, we file reports, proxy statements and other
information with the SEC. Our reports, proxy statements and most
other information that we file with the SEC may be inspected and
copied at the address stated above.
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NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| F-37 | ||||
| F-38 | ||||
| F-39 | ||||
| F-40 | ||||
| F-41 | ||||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the accompanying consolidated balance sheet of
Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2004 and the related
consolidated statements of income, shareholders’ equity and
cash flows for the year then ended. 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 audit. The financial statements of the
Company for the years ended June 30, 2003 and 2002, before
the restatement for changes to segment information described in
Note 15 to the financial statements, and the restatement
resulting from the reverse stock-split described in Note 11
to the financial statements were audited by other auditors.
Scope
We conducted our audit in accordance with 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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 audit provides a reasonable basis for our
opinion.
Audit opinion
In our opinion, such consolidated financial statements, referred
to above, present fairly, in all material respects, the
financial position of the Company at June 30, 2004 and the
results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed above, the financial statements of the Company as
of June 30, 2003 and 2002 and for the years then ended were
audited by other auditors. As described in Notes 15 and 11,
these financial statements have been restated to give effect to
certain changes in segmental information and to reflect the
one-for six reverse stock split, which became effective on
June 13, 2005. We audited the adjustments referred to in
Note 15 that were applied to restate the disclosures of
2004, 2003 and 2002 segment information in the accompanying
financial statements to give retroactive effect to the change in
reportable segments as well as the adjustments referred to in
Note 11 that were applied to the capital stock accounts,
all share data and earnings per share data for the three years
ended June 30, 2004 to give retroactive effect to the
reverse stock split.
In respect of the 2003 and 2002 years: our procedures for the
segmental information included (1) comparing the adjustment
amounts of segment revenues, operating income, and assets to the
Company’s underlying analysis obtained from management, and
(2) testing the mathematical accuracy of the
reconciliations of segment amounts to the consolidated financial
statements; our procedures in respect of the reverse stock split
included (1) comparing the amounts shown in the earnings
per share disclosures for 2003 and 2002 to the Company’s
underlying accounting analysis obtained from management,
(2) comparing the previously reported shares outstanding
and income statement amounts per the Company’s accounting
analysis to the previously issued financial statements, and
(3) recalculating the revised shares to give effect to the
reverse stock split and testing the mathematical accuracy of the
underlying analysis. In our opinion, such adjustments have been
properly applied. However, we were not engaged to audit, review,
or apply any procedures to the 2003 and 2002 financial
statements of the Company other than with respect to such
adjustments, and accordingly, we do not express an opinion or
any other form of assurance on the 2003 and 2002 financial
statements taken as a whole.
| /s/ Deloitte & Touche (South Africa) | |
|
|
|
| Chartered Accountants (SA) | |
| Johannesburg, Republic of South Africa |
October 8, 2004 (except for Note 15, as to which the
date is May 24, 2005, and Note 11, as to which the
date is June 17, 2005)
F-2
Table of Contents
REPORT OF THE INDEPENDENT AUDITORS
To the Shareholders of Net 1 Applied Technology Holdings
Limited
We have audited the accompanying consolidated balance sheets of
Net 1 Applied Technology Holdings Limited and subsidiaries
as of June 30, 2003 and 2002, and the related consolidated
statements of income, cash flows and shareholders’ equity
for each of the two years in the period ended June 30,
2003. These financial statements are the responsibility of the
Corporation’s directors. Our responsibility is to express
an opinion on these financial statements based on our audits.
Except as discussed in the following paragraph, we conducted our
audit in accordance with auditing standards generally accepted
in South Africa and 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 audit provides a reasonable basis for our opinion.
For purposes of reporting on the 2004 fiscal year the
composition of reportable segments was changed which has
resulted in the corresponding information for earlier periods
being restated. Similarly, the number of issued and authorised
shares during 2003 and 2002 has been restated as a result of the
transaction described in Note 1 and the one-for-six share
split described in Note 11. As of November 30, 2003, we
were not able to verify the adjustments made in connection with
the restatement of segment information, the capital structure of
the Corporation and basic and diluted earnings per share. Hence
we do not express an opinion on the aforementioned items
included in these financial statements.
In our opinion, except for the effects of such adjustments to
the segment report, the capital structure and basic and diluted
earnings per share, if any, as might have been determined to be
necessary had we been able to satisfy ourselves as to the
correctness of the restatements, such consolidated financial
statements present fairly, in all material respects, the
financial position of Net 1 Applied Technology Holdings Limited
and subsidiaries as of June 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the
two years in the period ended June 30, 2003, in conformity
with accounting principles generally accepted in the United
States of America.
| /s/ PKF (JHB) Inc. | |
|
|
|
| PKF (JHB) INC | |
| Chartered Accountants (SA) | |
| Registered Accountants and Auditors |
November 30, 2003
F-3
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| June 30, | June 30, | |||||||||
| 2004 | 2003 | |||||||||
| (In thousands except | ||||||||||
| share data) | ||||||||||
| ASSETS | ||||||||||
|
CURRENT ASSETS
|
||||||||||
|
Cash and cash equivalents
|
$ | 80,282 | $ | 54,313 | ||||||
|
Trade and other receivables (net of allowances of —
2004: $8,387; 2003: $6,797)
|
33,527 | 20,614 | ||||||||
|
Inventory
|
1,054 | 845 | ||||||||
|
Deferred income taxes
|
2,549 | 2,933 | ||||||||
|
Total current assets
|
117,412 | 78,705 | ||||||||
|
LONG TERM RECEIVABLE
|
1,106 | — | ||||||||
|
PROPERTY, PLANT, & EQUIPMENT, net
|
7,638 | 8,017 | ||||||||
|
EQUITY ACCOUNTED INVESTMENT
|
878 | — | ||||||||
|
GOODWILL
|
15,212 | 8,046 | ||||||||
|
INTANGIBLE ASSETS
|
10,386 | 3,591 | ||||||||
|
TOTAL ASSETS
|
152,632 | 98,359 | ||||||||
| LIABILITIES | ||||||||||
|
CURRENT LIABILITIES
|
||||||||||
|
Bank overdraft
|
19 | — | ||||||||
|
Trade and other payables
|
23,693 | 16,459 | ||||||||
|
Income taxes payable
|
24,119 | 3,402 | ||||||||
|
Total current liabilities
|
47,831 | 19,861 | ||||||||
|
DEFERRED INCOME TAXES
|
8,961 | 7,994 | ||||||||
|
LONG TERM LIABILITIES
|
252 | — | ||||||||
| 57,044 | 27,855 | |||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||
|
COMMON STOCK
Authorized: 83,333,333 with $0.001 par value; Issued and outstanding shares — 2004: 22,539,204; 2003: 32,161,190 |
23 | 6 | ||||||||
|
SPECIAL CONVERTIBLE PREFERRED STOCK
Authorized: 50,000,000 with $0.001 par value; Issued and outstanding shares: 32,161,190 |
32 | — | ||||||||
|
B CLASS PREFERRED STOCK
Authorized: 330,000,000 with $0.001 par value; Issued and outstanding shares: 236,977,187 |
38 | — | ||||||||
|
ADDITIONAL PAID-IN-CAPITAL
|
71,954 | 40,571 | ||||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
15,039 | (962 | ) | |||||||
|
RETAINED EARNINGS
|
8,502 | 30,889 | ||||||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
95,588 | 70,504 | ||||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 152,632 | $ | 98,359 | ||||||
The consolidated notes are an integral part of these
consolidated financial statements.
F-4
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| June 30, | June 30, | June 30, | |||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| (In thousands, except share data) | |||||||||||||
|
REVENUE
|
$ | 131,098 | $ | 74,924 | $ | 51,793 | |||||||
|
EXPENSES
|
|||||||||||||
|
COST OF GOODS SOLD, IT PROCESSING, SERVICING AND SUPPORT
|
39,134 | 25,935 | 14,170 | ||||||||||
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
39,677 | 26,399 | 21,637 | ||||||||||
|
DEPRECIATION AND AMORTIZATION
|
5,676 | 3,323 | 3,128 | ||||||||||
|
REORGANIZATION COSTS
|
11,133 | — | — | ||||||||||
|
OPERATING INCOME
|
35,478 | 19,267 | 12,858 | ||||||||||
|
INTEREST INCOME, NET
|
3,640 | 2,600 | 1,381 | ||||||||||
|
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
|
39,118 | 21,867 | 14,239 | ||||||||||
|
INCOME TAX EXPENSE
|
25,927 | 9,473 | 5,554 | ||||||||||
|
MINORITY INTEREST
|
— | 452 | 167 | ||||||||||
|
NET INCOME FROM CONTINUING OPERATIONS BEFORE EARNINGS FROM
EQUITY ACCOUNTED INVESTMENT, EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE
|
13,191 | 11,942 | 8,518 | ||||||||||
|
EARNINGS FROM EQUITY ACCOUNTED INVESTMENT
|
87 | — | — | ||||||||||
|
INCOME FROM CONTINUING OPERATIONS
|
13,278 | 11,942 | 8,518 | ||||||||||
|
EXTRAORDINARY ITEM
|
— | 857 | — | ||||||||||
|
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
|
— | 318 | — | ||||||||||
|
NET INCOME FOR THE YEAR
|
$ | 13,278 | $ | 13,117 | $ | 8,518 | |||||||
|
Income from continuing operations per share
|
|||||||||||||
|
Basic earnings, in cents
|
|||||||||||||
|
Common stock
|
39.6 | 37.2 | 27.0 | ||||||||||
|
Linked units
|
39.6 | — | — | ||||||||||
|
Diluted earnings, in cents
|
|||||||||||||
|
Common stock
|
38.4 | — | 27.0 | ||||||||||
|
Linked units
|
38.4 | — | — | ||||||||||
|
Net income per share
|
|||||||||||||
|
Basic earnings, in cents
|
|||||||||||||
|
Common stock
|
39.6 | 40.8 | 27.0 | ||||||||||
|
Linked units
|
39.6 | ||||||||||||
|
Diluted earnings, in cents
|
|||||||||||||
|
Common stock
|
38.4 | — | 27.0 | ||||||||||
|
Linked units
|
38.4 | ||||||||||||
The consolidated notes are an integral part of these
consolidated financial statements.
F-5
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF MOVEMENTS IN SHAREHOLDERS’
EQUITY
For the Years Ended June 30, 2004, 2003 and 2002
| Special Convertible | B Class | |||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Preferred Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||
| Number | Additional | Number | Number | Comprehensive | Comprehensive | |||||||||||||||||||||||||||||||||||||||
| of | Paid-In | of | of | Retained | Income | Income | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Amount | Shares | Amount | Earnings | (Loss) | Total | (Loss) | ||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | ||||||||||||||||||||||||||||||||||||||||||||
|
Balance — July 1, 2001 (as previously reported)
|
187,134,139 | $ | 37 | $ | 38,445 | — | — | — | — | $ | 15,710 | $ | (9,159 | ) | $ | 45,033 | ||||||||||||||||||||||||||||
|
Effect of one-for- six reverse stock split
|
(155,945,116 | ) | (31 | ) | 31 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
|
Balance — July 1, 2001 (as restated)
|
31,189,023 | 6 | 38,476 | — | — | — | — | 15,710 | (9,159 | ) | 45,033 | |||||||||||||||||||||||||||||||||
|
Net Income
|
8,518 | 8,518 | $ | 8,518 | ||||||||||||||||||||||||||||||||||||||||
|
Dividends declared
|
(2,531 | ) | (2,531 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Stock issued during the year
|
495,356 | — | 528 | 528 | ||||||||||||||||||||||||||||||||||||||||
|
Stock compensation expense
|
384 | 384 | ||||||||||||||||||||||||||||||||||||||||||
|
Movement in Foreign Currency Translation Reserve
|
(10,208 | ) | (10,208 | ) | (10,208 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance — June 30, 2002
|
31,684,379 | 6 | 39,388 | — | — | — | — | 21,697 | (19,367 | ) | 41,724 | (1,690 | ) | |||||||||||||||||||||||||||||||
|
Net Income
|
13,117 | 13,117 | 13,117 | |||||||||||||||||||||||||||||||||||||||||
|
Dividends declared
|
(3,925 | ) | (3,925 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Stock issued during the year
|
476,811 | — | 570 | 570 | ||||||||||||||||||||||||||||||||||||||||
|
Stock compensation expense
|
613 | 613 | ||||||||||||||||||||||||||||||||||||||||||
|
Movement in Foreign Currency Translation Reserve
|
18,405 | 18,405 | 18,405 | |||||||||||||||||||||||||||||||||||||||||
|
Balance — June 30, 2003
|
32,161,190 | 6 | 40,571 | — | — | — | — | 30,889 | (962 | ) | 70,504 | 31,522 | ||||||||||||||||||||||||||||||||
|
Net income
|
13,278 | 13,278 | 13,278 | |||||||||||||||||||||||||||||||||||||||||
|
Items related to the reorganization transaction
|
||||||||||||||||||||||||||||||||||||||||||||
|
Dividends paid
|
(35,665 | ) | (35,665 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Cash distribution to Aplitec shareholders
|
(37,002 | ) | (37,002 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Reorganization of share capital
|
(31,910,238 | ) | (6 | ) | (64 | ) | 31,910,238 | $ | 32 | 235,128,068 | $ | 38 | — | |||||||||||||||||||||||||||||||
|
Issue of linked units to Brait in accordance with underwriting
agreement
|
(250,952 | ) | 847 | 250,952 | 1,849,119 | 847 | ||||||||||||||||||||||||||||||||||||||
|
Reverse acquisition of Net 1 by Aplitec
|
2,642,143 | 3 | 7,931 | 7,934 | ||||||||||||||||||||||||||||||||||||||||
|
Issue of common stock
|
17,610,238 | 18 | 52,813 | 52,831 | ||||||||||||||||||||||||||||||||||||||||
|
Stock issued in accordance with 2004 Stock Incentive Plan
|
1,453,490 | 1 | 4,359 | 4,360 | ||||||||||||||||||||||||||||||||||||||||
|
Issue of stock for transaction fees
|
833,333 | 1 | 2,499 | 2,500 | ||||||||||||||||||||||||||||||||||||||||
|
Movement in Foreign Currency Translation Reserve
|
16,001 | 16,001 | 16,001 | |||||||||||||||||||||||||||||||||||||||||
|
Balance — June 30, 2004
|
22,539,204 | $ | 23 | $ | 71,954 | 32,161,190 | $ | 32 | 236,977,187 | $ | 38 | $ | 8,502 | $ | 15,039 | $ | 95,588 | $ | 29,279 | |||||||||||||||||||||||||
The consolidated notes are an integral part of these
consolidated financial statements.
F-6
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| June 30, | June 30, | June 30, | |||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| (In thousands, except share data) | |||||||||||||
|
Cash flows from operating activities
|
|||||||||||||
|
Cash received from customers
|
$ | 123,177 | $ | 70,768 | $ | 72,059 | |||||||
|
Cash paid to suppliers and employees
|
(72,825 | ) | (49,487 | ) | (57,501 | ) | |||||||
|
Interest received
|
15,362 | 8,065 | 3,260 | ||||||||||
|
Finance costs paid
|
(11,698 | ) | (5,465 | ) | (1,879 | ) | |||||||
|
Income taxes paid
|
(12,121 | ) | (6,237 | ) | (4,186 | ) | |||||||
|
Net cash provided by operating activities
|
41,895 | 17,644 | 11,753 | ||||||||||
|
Cash flows from investing activities
|
|||||||||||||
|
Capital expenditures
|
(2,802 | ) | (6,712 | ) | (1,919 | ) | |||||||
|
Proceeds from disposal of property, plant and equipment
|
62 | 314 | 624 | ||||||||||
|
Long term receivable granted
|
(937 | ) | — | — | |||||||||
|
Acquisition of minority interests/subsidiaries/equity accounted
investments
|
(2,052 | ) | (995 | ) | 415 | ||||||||
|
Cash received on acquisition of Net 1 UEPS Technologies,
Inc.
|
8 | — | — | ||||||||||
|
Net cash used in investing activities
|
(5,721 | ) | (7,393 | ) | (880 | ) | |||||||
|
Cash flows from financing activities
|
|||||||||||||
|
Proceeds from issue of share capital
|
52,831 | 570 | 528 | ||||||||||
|
Proceeds from issue of preference share capital
|
847 | — | — | ||||||||||
|
Proceeds from bank overdrafts
|
17 | — | — | ||||||||||
|
Cash distribution to shareholders
|
(37,002 | ) | — | — | |||||||||
|
Dividends paid
|
(40,753 | ) | (2,836 | ) | — | ||||||||
|
Net cash used in financing activities
|
(24,060 | ) | (2,266 | ) | 528 | ||||||||
|
Effect of exchange rate changes on cash
|
13,855 | 14,178 | (6,284 | ) | |||||||||
|
Net increase in cash and cash equivalents
|
25,969 | 22,163 | 5,117 | ||||||||||
|
Cash and cash equivalents — beginning of period
|
54,313 | 32,150 | 27,033 | ||||||||||
|
Cash and cash equivalents at end of year
|
$ | 80,282 | $ | 54,313 | $ | 32,150 | |||||||
The consolidated notes are an integral part of these
consolidated financial statements.
F-7
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended June 30, 2004, 2003 and 2002
(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. (“Net 1” or
the “Company”) was incorporated in the State of
Florida on May 8, 1997 and is engaged in the business of
commercializing the smart card technology based Universal
Electronic Payment System (“UEPS”) and Funds Transfer
System (“FTS”) through the development of strategic
alliances with national and international bank and card service
organizations.
Net 1 Applied Technology Holdings Limited
(“Aplitec”) was a holding company established and
existing under the laws of Republic of South Africa.
Aplitec’s subsidiaries employed specialized smart card
technologies to add efficiency to commercial activities
requiring money transfers, payment systems, and other electronic
data applications. Through its subsidiaries, Aplitec was
involved in the administration, management and payment of social
welfare grants and handles the payment of pensions on behalf of
the government in five of the nine provinces of South Africa.
Aplitec also operated microlending businesses with more than
100 branches throughout South Africa and developed,
marketed and licensed administrative and payment solutions for
the microlending industry. In addition, Aplitec provided
financial services to its customers through its proprietary
smart card platform and provided technical, operational,
business solutions and outsourcing services to companies.
As a result of the transaction described below, the former
shareholders of Aplitec obtained a majority voting interest in
the Company on June 7, 2004. Generally accepted accounting
principles require that the company whose shareholders retain a
majority interest in a combined business be treated as the
acquiror for accounting purposes. Consequently, this transaction
has been accounted for as a reverse acquisition. Accordingly,
all the financial information included in this prospectus unless
indicated otherwise for the periods up to June 7, 2004
represent the results of Aplitec prior to the date it acquired
Net 1. For the period from June 7, 2004 the financial
information presented herein represents the consolidated results
of Aplitec and Net 1 with Net 1 as the acquired entity.
In addition, on June 2, 2005, the Company’s board of
directors approved a one-for-six reverse stock split. Under
Florida corporate law the reverse stock split was not required
to be approved by the Company’s shareholders.
The following have been retroactively restated as a result of
the reverse stock split mentioned above:
| • | number of common and special convertible stock authorized, issued and outstanding; | |
| • | stock issued under any of the Company’s stock compensation plans, including stock issued pursuant to the Company’s 2004 Stock Incentive Plan; | |
| • | all per share measures, including but not limited to basic and diluted earnings per share; | |
| • | certain price per share information related to the transaction mentioned above and described more fully below; and | |
| • | reallocation of amounts from common stock to additional paid in capital as the par value did not change. |
Although Aplitec is deemed to be the acquiring company for
financial and reporting purposes, the legal status of the
Company as the surviving corporation has not changed.
F-8
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
The transaction referred to above had the following elements:
| • | On June 7, 2004, Net 1 Applied Technologies South Africa Limited (“New Aplitec”), a holding company established and existing under the laws of South Africa, completed a transaction whereby it acquired substantially all of the assets and liabilities of Aplitec for $127.53 million (or ZAR825,641,638) (the “net purchase price”). The net purchase price together with the cash retained in Aplitec was distributed as an advance distribution to Aplitec shareholders. | |
| • | The New Aplitec Participation Trust (“South African Trust”) is a South African bewind trust established and existing under the laws of South Africa. | |
| • | The Aplitec Holdings Participation Trust (the “Cayman Trust”) is a purpose trust created under Part VIII of the Trust Law (2001 Revision) of the Cayman Islands. | |
| • | The Aplitec shareholders had the option of either electing to receive 190 South African cents per share and an investment in New Aplitec in the form of a nil paid renounceable letter of allocation representing an interest in a New Aplitec B class preference share (“B class preferred stock”) and B class loans held by the South African Trust (collectively the “reinvestment option”) or cash of 500 South African cents per share. Shareholders who elected to receive the reinvestment option are described as “reinvesting shareholders”. In addition to the liquidation dividend, reinvesting shareholders were granted, units in the South African Trust with the right to receive, for no additional consideration, special convertible preferred stock of the Company, which are held by the Cayman Trust. These shares may be converted, upon the occurrence of a trigger event, to Company common stock on a one-for-one basis. A trigger event can occur when a unit holder gives notice to the South African Trust in writing of its intention to convert some or all of its B class preferred stock and B class loans. A trigger event also includes the abolition or relaxation of Exchange Controls by the South African Reserve Bank to permit reinvesting shareholders to hold Company common stock directly or the winding up or placing under judicial management of New Aplitec or the Company. | |
| • | Upon receipt of notice of a trigger event, the trustee of the South African Trust will request delivery from the Cayman Trust of the number of shares of the Company’s special convertible preferred stock attributable to the units being converted. Upon delivery by the Cayman Trust, the South African Trust will transfer these shares of special convertible preferred stock, along with a proportionate number of B class preferred stock and loan accounts to the Company in exchange for shares of the Company’s common stock. | |
| • | On June 25, 2004, shareholders holding 1,849,119 of Aplitec’s issued shares elected the cash option. The remaining shareholders holding 235,128,068 shares elected the reinvestment option. Aplitec entered into an underwriting agreement with South African Private Equity Trust III (“SAPET”) and South African Private Equity Fund III L.P. (“SAPEF” and, together with SAPET, the “Underwriters”). In terms of this arrangement the Underwriters agreed to take up all of the rights in the South African Trust of the reinvestment option not taken up by Aplitec’s shareholders, up to the maximum of $70 million (or ZAR437 million), which was equivalent to 64.7% of the reinvestment option, at a price of $0.45 (or ZAR2.85) per Aplitec share not involved in the reinvestment. The Underwriters paid $0.84 million (or ZAR5,269,989) for 1,849,119 units in the South African Trust in terms of the underwriting agreement. | |
| • | On May 27, 2004, the Company issued the equivalent of 32,161,190 of its special convertible preferred stock to the Cayman Trust, to be held for the benefit of Aplitec’s shareholders that elected the reinvestment option and the Underwriters. |
F-9
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| • | The combination of instruments issued to the reinvesting shareholders (B Class preferred stock and B Class loans in New Aplitec as well as rights to receive special convertible preference shares in the Company) are referred to as “linked units” and the reinvesting shareholders that hold these instruments are referred to as “linked unit holders”. Both the Net 1 common stock and the linked units have been reflected as equity of the Company. Refer to Note 10 — Capital Structure for a detailed explanation of this treatment. |
In this document we refer to the continuing combined entity of
Net 1 and Aplitec, i.e. the registrant as it exists now, as
“the Company” or “Net 1”. We refer to
the historic Aplitec business before the transaction as
“Aplitec”, and the subsidiary that legally acquired
the business of Old Aplitec as “New Aplitec”. Finally
we refer to the historic business of Net 1 UEPS
Technologies, Inc. prior to the transaction as “NUEP”.
| 2. | Significant Accounting Policies |
| Basis of Presentation |
The accompanying consolidated financial statements of the
Company include all majority owned subsidiaries over which the
Company exercises control and have been prepared in accordance
with accounting principles generally accepted in the United
States of America (“GAAP”).
| Principles of Consolidation |
The financial statements of entities which are controlled by the
Company, referred to as subsidiaries, are consolidated.
Inter-company accounts and transactions are eliminated upon
consolidation.
| 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.
| 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 years | |||
|
Office equipment
|
3 years | |||
|
Vehicles
|
4 to 5 years | |||
|
Furniture and fittings
|
5 to 10 years |
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognized in income.
| Leasehold Improvement Costs |
Costs incurred in the adaptation of leased properties to serve
the requirements of the Company are capitalized and amortized
over the shorter of the term of the lease and the contract for
which the lease
F-10
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
has been entered into. Where the Company is required to restore
a property to its original condition upon termination of a
lease, the related costs 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 tax rate in South
Africa varies depending on whether income is distributed. The
income tax rate is currently 30%, but upon distribution an
additional tax (Secondary Tax on Companies, or “STC”)
of 12.5% is due based on the amount of dividends declared net of
dividends received during a dividend cycle. The Company
therefore measures its income taxes and deferred income taxes
using a combined rate of 37.78%. These rates have not changed
over the past three years.
In establishing the appropriate income tax valuation allowances,
the Company assesses the realizability of its net deferred tax
assets, and based on all available evidence, both positive and
negative, determines whether it is more likely than not that the
net deferred tax assets or a portion thereof will be realized.
| 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. Effective July 1,
2002, 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 net income. Measurement of the fair value of a
reporting unit is based on one or more of the following fair
value measures including: amounts at which the unit as a whole
could be bought or sold in a current transaction between willing
parties; using present value techniques of estimated future cash
flows; or using 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 and are amortized over their useful lives, which
vary between five and ten 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 an impairment
exists.
| Equity Method Investments |
The Company uses the equity method to account for investments in
companies when it has a significant influence but not control
over the operations of the company. Under the equity method, the
Company initially records the investment at cost and then
adjusts the carrying value of the investment to
F-11
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
recognize the proportional share of the equity accounted
company’s net income (loss). In addition, dividends
received from the equity accounted company reduce the carrying
value of our investment.
| Inventory |
Inventory is valued at the lower of cost and market. Cost is
determined on a first-in, first-out basis and includes transport
and handling costs.
| Translation of Foreign Currencies |
The functional currency of the Company is the South African Rand
and its reporting currency is the United States Dollar. The
current rate method is used to translate the financial
statements of the Company to United States Dollars. Under the
current rate method, 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 shareholders’ 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 income for the
period.
| Revenue Recognition |
| Fees and Commissions |
The Company provides a State pension and welfare benefit
distribution service to provincial governments in South Africa.
Fees are computed based on the number of beneficiaries included
in the Government payfile. Fee income received for these
services is recognized in the income statement when
distributions have been made.
The Company provides an automated payment collection service to
third parties, for which it charges monthly fees. These fees are
recognized in the income statement as the underlying services
are performed.
| Interest Income |
Interest income earned from microlending activities is
recognized in the income statement as it falls due, using the
effective interest rate method by reference to the constant
interest rate stated in each loan agreement.
Capital and interest that is in arrears and determined to be
doubtful is provided for in full if the capital outstanding has
not been insured. The Company insures against losses of capital
related to certain loans. For these loans, provision is made for
the amount of interest previously recognized in the income
statement if it is determined that the interest outstanding will
not be collected.
| Systems Implementation Projects |
The Company undertakes smart card system implementation
projects. The hardware and software installed in these projects
are in the form of customized systems, which ordinarily involve
modification to meet the customer’s specifications.
Software delivered under such arrangements is available to the
customer permanently, subject to the payment of annual license
fees. Revenue for such arrangements is recognized under the
completed contract method, no income and profit being recognized
until the contract is completed, 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-12
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| Other Income |
Revenue from service and maintenance activities is charged to
customers on a time-and-materials basis and is recognized in the
income statement as services are delivered to customers.
| Research and Development Expenditure |
Research and development costs are charged to net income in the
periods in which they are incurred.
| Loan Provisions |
A specific provision is established for all loans where it is
considered likely that some of the capital and interest will not
be repaid by the borrower. Where the loan capital is insured,
the amount due to be recovered from the insurer is recorded as a
receivable. Default is taken to be likely after a specified
period of repayment default, which is generally not more than
150 days. The provision is assessed based on a review by
the management of the ageing of outstanding amounts, the payment
history in relation to those specific accounts and the overall
default history.
| Stock-Based Compensation |
The Company accounts for stock-based compensation under the
expense recognition provisions of APB 25 and provides
disclosures of pro-forma stock compensation expense in
accordance with SFAS 123. Included in net income for the
Company’s share option plan and stock awards under
APB 25 was a charge of $4.36 million (2003:
$0.6 million; 2002: $0.4 million). Had compensation
expense for share options granted under the stock option plan
been determined based on fair value at the grant dates
consistent with the method required in accordance with
SFAS 123, the Company’s net income and earnings per
share in accordance with US GAAP for 2002, 2003 and 2004 would
have been as presented in the pro-forma disclosures below:
| 2004 | 2003 | 2002 | ||||||||||
|
Net income
|
$ | 13,278 | $ | 13,117 | $ | 8,518 | ||||||
|
Add back: stock-based compensation expense included in reported
net income, net of related tax effects
|
4,360 | 613 | 384 | |||||||||
|
Deduct: total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
(6,257 | ) | (100 | ) | (209 | ) | ||||||
|
Pro-forma net income
|
$ | 11,381 | $ | 13,630 | $ | 8,693 | ||||||
|
Earnings per share, basic and diluted (in cents):
|
||||||||||||
|
Basic, as reported
|
39.6 | 40.8 | 27.0 | |||||||||
|
Basic, pro forma
|
32.4 | 40.8 | 27.0 | |||||||||
|
Weighted average assumptions(1):
|
||||||||||||
|
Risk-free interest rate
|
3.50 | % | 14.00 | % | 13.00 | % | ||||||
|
Dividend yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Stock volatility
|
72.00 | % | 67.82 | % | 67.82 | % | ||||||
|
Average expected life (years)
|
7.00 | 2.15 | 2.15 | |||||||||
| (1) | The 2004 assumptions are based on stock issued under the 2004 Stock Incentive Plan and the 2003 and 2002 assumptions are based on the stock compensation plan for the equity listed on the Johannesburg Securities Exchange. |
F-13
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 3. | Property, Plant and Equipment |
| 2004 | 2003 | ||||||||
|
Cost:
|
|||||||||
|
Computer equipment
|
$ | 16,626 | $ | 11,444 | |||||
|
Furniture and office equipment
|
4,097 | 2,407 | |||||||
|
Motor vehicles
|
10,140 | 7,979 | |||||||
| 30,863 | 21,830 | ||||||||
|
Accumulated depreciation:
|
|||||||||
|
Computer equipment
|
14,558 | 8,247 | |||||||
|
Furniture and office equipment
|
2,280 | 1,329 | |||||||
|
Motor vehicles
|
6,387 | 4,237 | |||||||
| 23,225 | 13,813 | ||||||||
|
Carrying amount:
|
|||||||||
|
Computer equipment
|
2,068 | 3,197 | |||||||
|
Furniture and office equipment
|
1,817 | 1,078 | |||||||
|
Motor vehicles
|
3,753 | 3,742 | |||||||
| $ | 7,638 | $ | 8,017 | ||||||
| 4. | Goodwill and Intangible Assets |
On July 1, 2002 the Company adopted SFAS 142 for US
GAAP purposes, which required that goodwill and certain
intangible assets with indefinite useful lives, including those
recorded in past business combinations, no longer be amortized,
but instead be tested for impairment at least annually. The
standard also required the completion of a transitional
impairment test with any resulting impairment identified treated
as a cumulative effect of a change in accounting principle.
Prior to SFAS 142, the Company assessed goodwill for
impairment based on the guidance in Accounting Principles Board
Opinion No. 17, Intangible Assets and
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and had to evaluate the periods of amortization continually
to determine whether later events and circumstances warranted
revised estimates of useful lives; impairment had to be
recognized when the carrying amount exceeded the fair market
value of the asset.
In connection with the adoption of SFAS 142, the Company
completed a transitional impairment test of its goodwill. Fair
value was determined based on discounted cash flows using
reasonable and appropriate assumptions that are consistent with
internal forecasts. As a result, the Company determined that
goodwill was not impaired and that no adjustment was required.
F-14
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Summarized below is the carrying value and accumulated
amortization of the intangible assets that will continue to be
amortized under SFAS 142, as well as the carrying amount of
goodwill, which will no longer be amortized.
| 2004 | 2003 | ||||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
| Value | Amortization | Value | Value | Amortization | Value | ||||||||||||||||||||
|
Goodwill
|
$ | 19,302 | $ | (4,090 | ) | $ | 15,212 | $ | 12,085 | $ | (4,039 | ) | $ | 8,046 | |||||||||||
|
Finite-lived intangible assets:
|
|||||||||||||||||||||||||
|
Contract rights
|
2,673 | (520 | ) | 2,153 | — | — | — | ||||||||||||||||||
|
Customer contracts
|
114 | (2 | ) | 112 | — | — | — | ||||||||||||||||||
|
Exclusive licences
|
4,506 | (54 | ) | 4,452 | — | — | — | ||||||||||||||||||
|
FTS patent
|
6,106 | (2,443 | ) | 3,663 | 5,129 | (1,539 | ) | 3,591 | |||||||||||||||||
|
Other patents
|
6 | — | 6 | — | — | — | |||||||||||||||||||
|
Total finite-lived intangible assets
|
$ | 13,405 | $ | (3,019 | ) | $ | 10,386 | $ | 5,129 | $ | (1,539 | ) | $ | 3,591 | |||||||||||
The Company obtained its patent for the Funds Transfer System
(FTS) on its acquisition of Net 1 Investment Holdings
(Proprietary) Limited (“Net 1 Holdings”) on
July 12, 2000. 100% of Net 1 Holdings’ issued share
capital was acquired for a historical cost of approximately
$3.2 million (or $4.1 million at the year end exchange
rate of $1:ZAR6.275), which was satisfied through the issuance
of approximately 1.3 million of the Company’s common
shares. In addition, a deferred taxation adjustment was required
to increase the historical carrying value to $4.8 million
(or $2 million at the year end exchange rate of
$1:ZAR6.275). Net 1 Holdings was a holding company that did
not generate significant revenues or expenses and did not have
significant assets or liabilities other than the FTS patent
rights for South Africa and surrounding territories, on which
the Company’s smart card applications are based.
Aggregate amortization expense on the FTS patent for the year
ended June 30, 2004 was approximately $0.6 million
(2003: $0.5 million, 2002: $0.4 million). Actual
amortization expense to be reported in future periods could
differ from these estimates as a result of new intangible asset
acquisitions, changes in useful lives and other relevant factors.
In December 2003 the Company entered into an agreement with
various black economic empowerment partners (the
“partners”) whereby the partners would provide certain
services, for example, debt collection and dispute resolution,
related to the Cash Paymaster Services Northern contract. The
Company total amount to be paid to the partners is approximately
$2.3 million (or $2.7 million at the year end exchange
rate of $1:ZAR6.275), of which $1.3 million was paid during
the year. The amount paid will be amortized over the contract
period of 3 years. Amortization for the nine months to June
2003 is approximately $0.5 million.
As a result of the reverse acquisition described in note 1
the assets and liabilities of the Company were valued in
accordance with the requirements of SFAS 141, Business
Combinations. The customer contracts and exclusive licenses
were valued by an independent third party and these assets were
valued at approximately $0.1 million and $4.5 million,
respectively, with estimated useful lives of 5 and 7 years
respectively. Amortization expense for the customer contracts
and exclusive licenses for the year ended June 30, 2004 is
$0.002 million and $.05 million, respectively.
F-15
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
As required by SFAS 141 goodwill has been allocated to the
Company’s reportable UEPS Transaction-based activities,
UEPS-based Financial Services and Hardware, Software and related
Technology Sales business segments as follows:
| June 30, 2004 | ||||||||||||
| Net | ||||||||||||
| Accumulated | Carrying | |||||||||||
| Cost | Amortization | Value | ||||||||||
|
Transaction-based activities
|
$ | 3,841 | $ | (1,133 | ) | $ | 2,708 | |||||
|
Financial services
|
7,857 | (2,203 | ) | 5,654 | ||||||||
|
Hardware, software and related technology sales
|
7,604 | (754 | ) | 6,850 | ||||||||
|
Total
|
$ | 19,302 | $ | (4,090 | ) | $ | 15,212 | |||||
| June 30, 2003 | ||||||||||||
| Net | ||||||||||||
| Accumulated | Carrying | |||||||||||
| Cost | Amortization | Value | ||||||||||
|
Transaction-based activities
|
$ | 3,962 | $ | (1,554 | ) | $ | 2,408 | |||||
|
Financial services
|
6,602 | (1,851 | ) | 4,751 | ||||||||
|
Hardware, software and related technology sales
|
1,521 | (634 | ) | 887 | ||||||||
|
Total
|
$ | 12,085 | $ | (4,039 | ) | $ | 8,046 | |||||
As required by SFAS 142, the standard has not been
retroactively applied to the results for the period prior to
adoption. Net profit on a pro forma basis, as if SFAS 142
had been adopted as of July 1, 2000, is presented below:
| 2004 | 2003 | 2002 | ||||||||||
|
Reported net profit
|
$ | 13,278 | $ | 13,117 | $ | 8,518 | ||||||
|
Add back: goodwill amortization
|
— | — | 865 | |||||||||
|
Recognition of negative goodwill
|
— | — | — | |||||||||
|
Adjusted net profit
|
$ | 13,278 | $ | 13,117 | $ | 9,383 | ||||||
The effect of adopting FAS 142 on July 1, 2002 was as
follows:
| 2004 | 2003 | |||||||
|
Extraordinary gain — negative goodwill that arose
after July 1, 2002
|
— | $ | 857 | |||||
|
Cumulative effect of an accounting change: write-off of negative
goodwill that arose prior to July 1, 2002
|
— | 318 | ||||||
| — | $ | 1,175 | ||||||
F-16
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 5. | Income Taxes |
The following is a reconciliation of income taxes, calculated at
the statutory South African income tax rate, to the income tax
provision included in the accompanying statements of operations
for each of the years ended June 30:
| 2004 | 2003 | 2002 | |||||||||||
|
Income tax provision
|
|||||||||||||
|
Current provision
|
$ | 21,298 | $ | 10,635 | $ | 5,757 | |||||||
|
Capital gains tax
|
4,012 | — | — | ||||||||||
|
Deferred taxation charge (benefit)
|
617 | (1,162 | ) | (203 | ) | ||||||||
|
Income tax provision
|
$ | 25,927 | $ | 9,473 | $ | 5,554 | |||||||
|
Income tax rate reconciliation
|
|||||||||||||
|
Income taxes at statutory South African tax rates
|
37.78 | % | 37.78 | % | 37.78 | % | |||||||
|
Permanent items
|
9.95 | % | 5.54 | % | 1.23 | % | |||||||
|
NUEP losses not provided for
|
8.29 | % | — | — | |||||||||
|
Capital gains tax
|
10.26 | % | — | — | |||||||||
|
Income tax provision
|
66.29 | % | 43.32 | % | 39.01 | % | |||||||
|
Current
|
54.45 | % | 48.63 | % | 40.43 | % | |||||||
|
Capital gains tax
|
10.26 | % | — | — | |||||||||
|
Deferred
|
1.58 | % | (5.31 | )% | (1.42 | )% | |||||||
The following table shows the significant components included in
deferred income taxes as at June 30:
| 2004 | 2003 | |||||||
|
Assets:
|
||||||||
|
Assessed losses
|
$ | 6,667 | $ | 1,431 | ||||
|
Valuation allowance related to assessed losses
|
(3,245 | ) | — | |||||
|
Prepaid expenses
|
(2,395 | ) | (1,365 | ) | ||||
|
Provisions and accruals
|
1,191 | 2,833 | ||||||
|
Other
|
331 | 34 | ||||||
| 2,549 | 2,933 | |||||||
|
Liabilities:
|
||||||||
|
FTS patent
|
1,384 | 1,356 | ||||||
|
Intangible assets
|
1,633 | (167 | ) | |||||
|
Property, plant and equipment
|
— | (98 | ) | |||||
|
STC Liability
|
6,025 | 6,756 | ||||||
|
Other
|
(81 | ) | 147 | |||||
| 8,961 | 7,994 | |||||||
|
Net deferred income tax liabilities
|
$ | 6,412 | $ | 5,061 | ||||
F-17
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 6. | Stock-Based Compensation |
| 2004 Stock Incentive Plan |
The shareholders of the Company approved the 2004 Stock
Incentive Plan (the “Plan”) on May 27, 2004. The
2004 Stock Incentive Plan permits the Company to grant to its
employees, directors and consultants incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock, performance-based awards and other awards
based on its common stock. The remuneration committee of the
Company’s board of directors (“the committee”)
administers the Plan.
| Term |
No awards may be granted under the Plan after the tenth
anniversary of the effective date of the Plan, but awards
granted before such tenth anniversary may extend beyond that
date.
| Shares Reserved for Awards and Limits on Awards |
The total number of shares of Company common stock available
under the Plan initially will be 2,906,980, of which
1,453,490 shares may be used with respect to stock options,
and 1,453,490 shares may be used in respect of other
stock-based awards, which may include grants of restricted
shares. The maximum number of shares for which stock options and
stock appreciation rights, or for which other stock-based awards
may be granted during a calendar year to any participant is
436,047, which is approximately 30% of the total number of
shares that may be used with respect to stock options or
stock-based awards under the Plan.
| Stock Options |
The committee will establish the duration of each option at the
time it is granted. The maximum duration of an incentive stock
option is ten years after the date of grant. The committee will
establish the exercise price of each option at the time it is
granted. Initial grants of non-qualified stock options may be
made at an exercise price of $3.00 per share, which is
based on the price per share of Company common stock issued to
the Brait Consortium. The exercise price of an incentive stock
option may not be less than the fair market value of the
underlying common stock on the date of grant. The committee may
establish vesting and performance requirements that must be met
prior to the exercise of options. Unless otherwise determined by
the committee, stock options become exercisable ratably, on an
annual basis, over a period of five years, commencing with the
first anniversary of the grant date. On June 7, 2004, the
Company granted 1,453,490 options to directors, management and
employees of Aplitec at an exercise price of $3.00. The options
become exercisable ratably, on an annual basis, over a period of
five years, commencing with the first anniversary of the grant
date. No compensation expense was recorded as the grants were
made at market value, which was considered to be the price that
the Brait Group paid for its shares in the Company.
| Stock Appreciation Rights |
The 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 our common
stock (as determined by the committee) equal in value to the
excess of the fair market value of the shares covered by the
right over the grant price.
| Other Stock-Based Awards |
The 2004 Stock Incentive Plan permits the committee to grant
awards that are valued by reference to, or otherwise based on
the fair market value of, our common stock. These awards will be
in such form
F-18
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
and subject to such conditions, as the committee may determine,
including the satisfaction of performance goals, the completion
of periods of service or the occurrence of events.
As a condition precedent to the transaction, the committee
granted 1,453,490 stock awards to management and employees of
Aplitec on June 7, 2004. These grants were valued at
$3.00 per stock award, and become exercisable ratably, on
an annual basis, over a period of five years, commencing with
the grant date. Market value for the shares was determined to be
the price that the Brait Consortium paid for its shares in the
Company. The total cost related to these grants recognized in
income for the year ended June 30, 2004 is approximately
$4.3 million.
The movement in stock options outstanding during the three years
ended June 30, 2004 is summarized in the following table:
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| No. of | Weighted | No. of | Weighted | No. of | Weighted | |||||||||||||||||||
| Shares | Average | Shares | Average | Shares | Average | |||||||||||||||||||
| Under | Exercise | Under | Exercise | Under | Exercise | |||||||||||||||||||
| Option(2) | Price | Option(1) | Price | Option(1) | Price | |||||||||||||||||||
|
Outstanding at beginning of year
|
— | — | 481,787 | $ | 0.96 | 983,929 | $ | 0.90 | ||||||||||||||||
|
Granted
|
1,453,490 | — | — | — | — | — | ||||||||||||||||||
|
Exercised
|
— | $ | 3.00 | 476,811 | 0.96 | 495,356 | 0.90 | |||||||||||||||||
|
Lapsed or otherwise forfeited
|
— | — | 4,976 | — | 6,786 | — | ||||||||||||||||||
|
Outstanding at end of year
|
1,453,490 | — | — | $ | 0.96 | 481,787 | $ | 0.90 | ||||||||||||||||
|
Exercisable at end of year
|
— | — | — | — | — | — | ||||||||||||||||||
| (1) | The number of stock based awards outstanding during 2003 and 2002 has been adjusted using the reinvestment ratio mentioned in Note 1 above, and reflects the one-for-six stock split described in Note 11 below. |
| (2) | The number of stock-based awards outstanding during 2004 has been adjusted to reflect the one-for-six reverse stock split described in Note 11 below. |
| 7. | Trade and Other Receivables |
| 2004 | 2003 | |||||||
|
Trade and other receivables, gross
|
$ | 41,914 | $ | 27,411 | ||||
|
Allowance for doubtful accounts, beginning of year restated at
year end rates
|
8,091 | 5,682 | ||||||
|
Provisions charged to the income statement
|
723 | 1,122 | ||||||
|
Amounts utilized
|
(427 | ) | (7 | ) | ||||
|
Allowance for doubtful accounts, end of year
|
8,387 | 6,797 | ||||||
|
Trade and other receivables, net
|
$ | 33,527 | $ | 20,614 | ||||
F-19
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 8. | Trade and Other Payables |
| 2004 | 2003 | |||||||
|
Trade payables
|
$ | 7,431 | $ | 6,189 | ||||
|
Accruals
|
9,091 | 4,404 | ||||||
|
Value-added tax payable
|
1,049 | 661 | ||||||
|
Other payables
|
2,984 | 2,629 | ||||||
|
Provisions
|
3,138 | 2,576 | ||||||
| $ | 23,693 | $ | 16,459 | |||||
| 9. | Revenue |
| 2004 | 2003 | 2002 | ||||||||||
|
Sale of goods
|
$ | 3,321 | $ | 7,979 | $ | 6,216 | ||||||
|
Services rendered and loan based interest received
|
127,777 | 66,945 | 45,577 | |||||||||
| $ | 131,098 | $ | 74,924 | $ | 51,793 | |||||||
| 10. | Capital Structure and Creditor Rights Attached to the B Class Loans |
The balance sheet reflects two classes of equity, namely common
stock and linked units. The rights of the holders of common
stock and linked units have not been affected by the reverse
stock split described in Note 11 below.
The linked units comprise the following instruments which are
linked and cannot be traded separately:
| • | Special convertible preferred stock, | |
| • | B Class preferred stock in New Aplitec and | |
| • | B Class loans issued by New Aplitec |
Although the linked units include certain instruments (the B
Class preferred stock and the B Class loans) that are legally
equity of a subsidiary of the Company, they have been treated as
equity of the Company and recorded as part of shareholders’
equity in these consolidated financial statements, in
recognition of their substance, which is economically equivalent
to that of common stock.
The B Class loans referred to above are not considered to be a
liability in accordance with SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Equity and Liability, as New Aplitec does not have an
obligation to transfer assets to its shareholders in respect of
the loans. In addition, any distributions relating to the loans
are solely at the discretion of New Aplitec.
Voting rights — The holder of a convertible
preference share has the same voting rights as a common
shareholder. Therefore, a linked unit-holder is able to vote on
the same matters as a common shareholder of the Company,
including the selection of directors, corporate decisions
submitted to shareholder vote, and decisions regarding
distribution of earnings. In addition, the convertible
preference shares do not provide any additional rights with
respect to control of the Company above or beyond the common
shareholder.
Dividend rights — The corporate by-laws of the
Company are such that the Company’s common shareholders and
linked unit holders have similar rights to the distribution of
the Company’s earnings.
F-20
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Liquidation rights — The corporate by-laws
allow for the automatic conversion of the linked units into
common stock of the Company thereby allowing linked unit holder
to have identical liquidation rights to a common shareholder in
the event liquidation.
Sale rights — A linked unit holder can only
dispose of its interest in the Company by 1) converting the
linked units into common stock and 2) selling the common
stock on the open market. Therefore, a holder of the linked
units receives the same risk and rewards in market price
fluctuation as a common shareholder of the Company. In addition,
both groups of shareholders have similar means as to which it is
able to liquidate its interest in the Company.
| Common Stock |
Holders of shares of the Company’s common stock are
entitled to receive dividends and other distributions when
declared by the Company’s board of directors out of funds
available. Payment of dividends and distributions is subject to
certain restrictions of the state of Florida law, including the
requirement that after making any distribution the Company 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 the Company, 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 Company common stock
are not subject to redemption.
| Special Convertible Preferred Stock |
The special convertible preferred stock ranks, on parity,
without preference and priority, with the Company’s common
stock with respect to dividend rights (except as described
below) or rights upon liquidation, dissolution or winding up of
the Company. The stock is junior in preference and priority to
each other class or series of preferred stock or other equity
security of the Company under terms which may be determined by
the board of directors to expressly provide that such other
security rank senior in preference or priority to the special
convertible preferred stock with respect to dividend rights or
rights upon liquidation, dissolution or winding up of the
Company.
Provided that shares of special convertible preferred stock are
outstanding, the Company’s board will determine immediately
prior to the declaration of any dividend or distribution
(i) the portion, if any, of the Company’s assets
available for such dividend of distribution that is attributable
to funds or assets from New Aplitec, regardless of the manner
received (“the South African Amount”), and
(ii) the portion of such funds or assets that is not from
New Aplitec (the “Non South African Amount”). The
South African Amount will not include amounts received from New
Aplitec due to its liquidation, distribution or dividend after
an insolvency or winding up.
Provided that shares of special convertible preferred stock are
outstanding, (i) any dividends or distributions by the
Company’s board of Non-South African Amounts must be paid
pro rata to all holders of common stock and special
convertible preferred stock, and (ii) and dividends or
distributions by the Company’s board of South African
Amounts can be paid only to holders of common stock. The
F-21
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Company’s board has complete discretion to declare a
dividend or distribution with respect to South African Amounts
or Non-South African Amounts.
In the event of the voluntary or involuntary liquidation,
dissolution, distribution of assets or winding-up of the
Company, all outstanding shares of special convertible preferred
stock will automatically convert and holders of such stock will
be entitled to receive pari passu with holders of common
stock, any assets of the Company distributed for the benefit of
its shareholders.
Holders of special convertible preferred stock have the right to
receive notice of, attend, speak and vote at general meetings of
Net 1, and are entitled to vote on all matters on which
holders of common stock are entitled to vote. Each holder of
special convertible preferred stock present in person, or the
person representing such holder, is entitled to a number of
votes equal to the number of shares of common stock that would
be issued upon conversion of the special convertible preferred
stock held by such holder on the record date.
| B Class Preferred Stock |
The Company owns 100% of the A class common stock and A class
loans in issue of New Aplitec. The B class preferred stock rank
pari passu with the New Aplitec A class stock in respect
of participation in dividends and return of capital prior to
winding-up of New Aplitec. The B class preferred stock shall
not, however, participate in dividends or a return of capital on
a winding-up of New Aplitec for any reason. However, the unit
holders will participate, as the B class preference stock will
automatically convert into Company common stock on a winding-up
of New Aplitec. The B class preferred stock cannot be sold or
transferred other than to the Company pursuant to the occurrence
of a trigger event. Therefore, the B class preferred stock, the
B class loans and the rights to receive Company special
convertible preferred stock are linked together and cannot be
traded separately.
The holders of B class preferred stock will only be entitled to
vote on matters which directly affect the rights attaching to
the B class preferred stock. At every general meeting of New
Aplitec at which more than one class of shareholders are present
and entitled to vote, unit holders of the South African Trust
which in turn holds the B class preferred stock, shall be
entitled, upon a poll, to that proportion of the total votes in
New Aplitec which the aggregate number of B class preferred
stock held bears to the aggregate number of all shares entitled
to be voted at such meeting (provided that no resolution for the
declaration of a dividend or for the disposal of any
intellectual property of New Aplitec shall be passed unless unit
holders representing 50.1% of the B class preferred stock
present at the meeting in person or represented by proxy vote in
favor of such resolution).
| B Class Loans |
The B class loans are unsecured and repayable as and when
directed by the board of directors of New Aplitec provided that
no capital may be repaid until at least 30 days have lapsed
from the date of drawdown of the loans, and subject to South
African Exchange Control approval. The loans will bear interest
at such rates as may be determined by the board of directors of
New Aplitec at the beginning of each year, but shall not be more
than the prime rate as quoted by Standard Bank of South Africa
Limited from time to time. Interest, if so declared by the board
of directors of New Aplitec, will be payable by New Aplitec
semi-annually in arrears.
F-22
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| Conversion of Special Convertible Preferred Stock to Common Stock |
Special convertible preferred stock is convertible into shares
of common stock on a one-for-one basis upon the occurrence of
trigger event. With each converted share of special convertible
preferred stock that is converted, the Company will receive:
| • | 7.368421056 B class preference shares; and | |
| • | such holder’s interest in the New Aplitec B loan accounts. |
Upon conversion, all rights with respect to shares for special
convertible preferred stock will cease. Converted shares will be
cancelled and have the status of authorized but unissued
preferred stock, without designation as to series until such
shares are once more designated as part of a particular series
by the board of directors.
| 11. | Earnings Per Share |
The entire consolidated net income of the Company is
attributable to the shareholders of the Company comprising both
the holders of Net 1 common stock and the holders of the
linked units. As described in Note 10, the linked units
have the same rights and entitlements as those attached to
common shares.
On June 2, 2005, the Company’s board of directors
approved a one-for-six reverse stock split which became
effective on June 13, 2005. Under Florida corporate law the
reverse stock split was not required to be approved by the
Company’s shareholders. The effect of this reverse stock
split was to decrease the number of issued and outstanding
shares by a factor of six and correspondingly increase the
earnings per share by a factor of six. Each holder of common
stock received one share for every six shares previously held.
Each holder of linked units had an adjustment to the conversion
ration of each linked unit from 1.228070176 to 7.368421056
(six-fold conversion ratio change).
As a result of the Aplitec transaction described in Note 1
above and the one-for-six reverse stock split, the weighted
average number of shares used to calculate earnings per share
for 2003 and 2002 have been retroactively restated to reflect
the capital structure after the Aplitec transaction and the
one-for-six reverse stock split. For the purpose of these
restatements, the Aplitec share capital has been presented as
common stock in prior periods.
As the linked units owned by holders are exchangeable for
special convertible preferred stock at the ratio of 7.37:1
(prior to reverse stock split: 1.23:1), which is then converted
to common stock at the ratio of 1:1, the basic earnings per
share for the common stock and linked units are the same and is
calculated by dividing the net income by combined number
(54.7 million) of common stock (22.5 million) and
special convertible preferred stock (32.2 million) in
issue. Diluted earnings per share has been calculated to give
effect to the number of additional common shares/linked units
that would have been outstanding if
F-23
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
the potential dilutive instruments had been issued in each
period, and includes the effects, if any, of the one-for-six
reverse stock split. This is demonstrated in the following table:
| 2004 | 2003 | 2002 | ||||||||||
| In U.S. cents | ||||||||||||
|
Earnings per share, as previously reported
|
6.6 | 6.8 | 4.5 | |||||||||
|
Effects of one-for-six reverse stock split
|
33.0 | 30.4 | 22.5 | |||||||||
|
Earnings per share, as restated
|
39.6 | 37.2 | 27.0 | |||||||||
| ’000 shares | ||||||||||||
|
Weighted average number of common stock and linked units, as
previously reported
|
201,489 | 192,967 | 187,287 | |||||||||
|
Effects of one-for-six reverse stock split
|
(167,908 | ) | (160,806 | ) | (156,072 | ) | ||||||
|
Weighted average number of common stock and linked units, as
restated, included in tables below
|
33,581 | 32,161 | 31,215 | |||||||||
| 2004 | 2003 | 2002 | ||||||||||
| In U.S. cents | ||||||||||||
|
Diluted earnings per share, as previously reported
|
6.4 | 6.8 | 4.5 | |||||||||
|
Effects of one-for-six reverse stock split
|
32.0 | 30.4 | 22.5 | |||||||||
|
Diluted earnings per share, as restated
|
38.4 | 37.2 | 27.0 | |||||||||
| ’000 shares | ||||||||||||
|
Weighted average number of common stock and linked units, as
previously reported - diluted
|
207,939 | 192,967 | 187,287 | |||||||||
|
Effects of one-for-six reverse stock split
|
(173,282 | ) | (160,806 | ) | (156,072 | ) | ||||||
|
Weighted average number of common stock and linked units, as
restated, included in tables below - diluted
|
34,657 | 32,161 | 31,215 | |||||||||
Earnings per common share does not give effect to any future
taxes to be paid by Net 1 upon receipt of New Aplitec dividends,
which could otherwise reduce the earnings available for
distribution to the holders of Net 1 common stock.
The weighted average number of shares for 2004 presented below
includes the common shares as well as the special convertible
preferred shares as the shareholders that hold these shares have
the same rights and entitlements as those attached to the common
shares.
The following tables detail the weighted average number of
shares used for the calculation of earnings per share for the
years ended June 30.
| 2004 | 2003 | 2002 | |||||||||||
|
Weighted average number of common shares — basic
|
1,420 | 32,161 | 31,215 | ||||||||||
|
Weighted average effect of dilutive securities:
|
|||||||||||||
|
Employee stock options
|
46 | — | 171 | ||||||||||
|
Weighted average number of shares — diluted
|
1,466 | 32,161 | 31,386 | ||||||||||
F-24
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 2004 | 2003 | 2002 | |||||||||||
|
Weighted average number of linked units — basic
|
32,161 | — | — | ||||||||||
|
Weighted average effect of dilutive securities:
|
|||||||||||||
|
Employee stock options
|
1,030 | — | — | ||||||||||
|
Weighted average number of linked units — diluted
|
33,191 | — | — | ||||||||||
| 2004 | 2003 | 2002 | ||||||||||
|
Basic Earnings per common share, in cents
|
||||||||||||
|
Income before extraordinary item and cumulative effect of an
accounting change
|
39.60 | 37.20 | 27.00 | |||||||||
|
Extraordinary item
|
— | 2.40 | — | |||||||||
|
Cumulative effect of an accounting change
|
— | 1.20 | — | |||||||||
|
Net income
|
39.60 | 40.80 | 27.00 | |||||||||
| 12. | Commitments and Contingencies |
| Operating Lease Commitments |
The Company leases certain premises and equipment under
operating leases. At June 30, 2004, the future minimum
payments under operating leases consist of:
|
Due within a year
|
$ | 2,072 | ||
|
Due within 2 years
|
1,398 | |||
|
Due within 3 years
|
840 | |||
|
Due within 4 years
|
$ | 250 |
Operating lease payments related to the premises and equipment
were $3 million, $2.2 million and $1.9 million,
respectively for the years ended June 2004, 2003 and 2002,
respectively.
| Capital Commitments |
The Group had no outstanding capital commitments as at
June 30, 2004 which had been approved by the directors
(2003: nil; 2002: $1.2 million).
| Purchase Obligations |
As of June 30, 2004 New Aplitec has purchase obligations
totaling $6.6 million.
| Guarantees |
In 2001, Aplitec issued a guarantee of $3.2 million
(R 20 million) to Nedbank Limited
(“Nedbank”), regarding the guarantee provided by
Nedbank to the Eastern Cape provincial government. The guarantee
was required by the provincial government that Cash Paymaster
Services (Proprietary) Limited, a wholly owned subsidiary of
Aplitec, would perform under the contract for the provision of
welfare grants to beneficiaries in the province. The maximum
potential amount that Aplitec could pay is $3.2 million
(R 20 million).
| Contingencies |
The Company is also subject to a variety of insignificant claims
and suits that arise from time to time in the ordinary course of
our business.
F-25
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Management of the Company currently believes that resolving all
of these matters, individually or in aggregate, will not have a
material adverse impact on our financial position or our results
of operations.
| 13. | Related Party Transactions |
Pursuant to a Directors’ Resolution of January 29,
2002, approximately $0.4 million (2003: approximately
$0.2 million) of consulting fees paid to the ex-CEO, Claude
Guerard, of the Company have been postponed until the Company
has sufficient funds. The amount outstanding as of June 30,
2004 was settled in full in July 2004.
During the 2004 period Net 1 Holdings S.a.r.l. made
payments on the Company’s behalf. A total of approximately
$0.3 million remains outstanding without interest and is
due on demand.
For services provided related to the transaction mentioned in
Note 1 above, Brait received a capital raising fee of
$3.7 million and a further corporate finance fee of
$0.2 million, at a price of $3.00 a share, in the
Company’s common stock as part payment for the services
rendered. The remaining amount is to be paid in cash and is
included in accounts payable as of June 30, 2004.
Nedcor Limited’s (“Nedcor”) subsidiary Nedbank
has the right to approximately 7.7 million special
convertible preferred stock of the Company as of June 30,
2004. Aplitec provides Nedcor with point of sale terminals and
other pay processing hardware. In addition, Aplitec has a
software development and maintenance contract with Nedcor and
provides other sundry services. During the year Aplitec earned
$1.6 million under the software development and maintenance
contract, $0.9 million in hardware sales and
$0.05 million from other sundry services. Included in
accounts receivable is $1 million due from Nedcor.
Light & Livingstone Financial Services CC, in which
Mr. J C Livingstone (a non-executive director of
Aplitec) is a member, performs the Company Secretarial function
for Aplitec.
| 14. | Reconciliation of Net Income for the Year to Net Cash Provided by Operating Activities |
| 2004 | 2003 | 2002 | |||||||||||
|
Net Income for the year
|
$ | 13,278 | $ | 13,117 | $ | 8,518 | |||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|||||||||||||
|
Depreciation and amortizations
|
5,676 | 3,323 | 3,128 | ||||||||||
|
Minority interest in net income
|
— | 452 | 167 | ||||||||||
|
Earnings from equity accounted investment
|
(87 | ) | — | — | |||||||||
|
(Profit) loss on disposal of property, plant and equipment
|
14 | (22 | ) | (67 | ) | ||||||||
|
Profit on disposal of business
|
— | (300 | ) | (267 | ) | ||||||||
|
Fair value adjustment related to financial liabilities
|
33 | — | — | ||||||||||
|
Fair value of foreign currency exchange contracts
|
483 | — | — | ||||||||||
|
Interest received from equity accounted investment
|
(68 | ) | — | — | |||||||||
|
Stock compensation charge related to awards of stock/options
|
4,360 | 613 | 385 | ||||||||||
|
Stock issued related to transaction costs
|
2,500 | — | — | ||||||||||
|
Extraordinary item
|
— | (857 | ) | — | |||||||||
|
Change in accounting policy
|
— | (318 | ) | — | |||||||||
F-26
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| 2004 | 2003 | 2002 | |||||||||||||
|
Changes in assets and liabilities:
|
|||||||||||||||
|
(Increase) decrease in accounts receivable
|
(7,954 | ) | (4,156 | ) | (1,184 | ) | |||||||||
|
(Increase) decrease in inventory
|
(44 | ) | 1,003 | 106 | |||||||||||
|
Increase (decrease) in accounts payable
|
6,770 | 4,838 | (402 | ) | |||||||||||
|
Increase (decrease) in taxes payable
|
18,166 | (647 | ) | 406 | |||||||||||
|
Increase (decrease) in deferred taxes
|
(1,232 | ) | 598 | 963 | |||||||||||
|
Total adjustments
|
28,617 | 4,527 | 3,235 | ||||||||||||
|
Net cash provided by operating activities
|
$ | 41,895 | $ | 17,644 | $ | 11,753 | |||||||||
| 15. | Operating Segments |
The Company discloses segment information in accordance with
SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (SFAS 131), which
requires companies to determine and review their segments as
reflected in the management information systems reports that
their managers use in making decisions and to report certain
entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds
assets and reports revenues. The Company’s management
prepares consolidated statutory financial statements for
management purposes under South African GAAP (“SA
GAAP”), the company’s chief operating decision-maker
evaluates the segment performance using SA GAAP measures.
Revenues and operating income are measured on a segmental basis
in accordance with SA GAAP (defined as “operating
(loss)/income of continuing operations before central costs,
goodwill amortization, SA GAAP operating exceptional items and
share option costs”). In the tables below, this measure is
referred to as segment operating (loss)/income.
The Company currently has four reportable segments which each
operate mainly within South Africa: transaction-based
activities; smart card accounts (previously included within the
financial services segment, but now reviewed separately by
management); financial services and hardware; software and
related technology sales. The Company also has a
corporate/eliminations segment. The Company’s reportable
segments offer different products and services and require
different resources and marketing strategies and share the
Company’s assets.
The Transaction-based activities segment currently consists
mainly of a state pension and welfare benefit distribution
service to provincial governments in South Africa. Fee income is
earned based on the number of beneficiaries included in the
government pay-file. This segment has individually significant
customers that each provides more than 10 percent of the
total revenue of the Company. For the year ended June 30,
2004, there were three such customers, providing 38, 22 and
11 percent of total revenue (2003: two customers providing
35, and 20 percent of total revenue; 2002: three customers
providing 30, 18 and 13 percent of total revenue).
The smart card accounts segment derives revenue from the
provision of smart card accounts, as a fixed monthly fee per
card is charged for the maintenance of these accounts. This
segment’s activities were previously included in the
financial services segment. Prior year segment information has
been restated in order to show comparative information.
The financial services segment derives revenue from the
provision of short-term personal lending activities and life
insurance products. Interest income is recognized in the income
statement as it falls due, using the interest method by
reference to the constant interest rate stated in each loan
agreement.
The hardware, software and related technology sales segment
markets, sells and implements the Universal Electronic Payment
System (“UEPS”). The segment undertakes smart card
system implementation projects, delivering hardware, software
and business solutions in the form of customized systems.
F-27
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Corporate/ Eliminations include the Company’s head office
cost centers in addition to the elimination of inter-segment
transactions.
The Company evaluates segment performance based on operating
income. The following tables summarize segment information which
is prepared in accordance with SA GAAP:
| June 30, | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
Revenues
|
||||||||||||||
|
Transaction-based activities
|
$ | 83,275 | $ | 44,058 | $ | 28,291 | ||||||||
|
Smart card accounts
|
26,584 | 13,750 | 8,318 | |||||||||||
|
Financial services
|
16,633 | 13,407 | 10,465 | |||||||||||
|
Hardware, software and related technology sales
|
4,606 | 5,135 | 4,719 | |||||||||||
|
Total
|
131,098 | 76,350 | 51,793 | |||||||||||
|
Operating income
|
||||||||||||||
|
Transaction-based activities
|
24,913 | 10,196 | 7,376 | |||||||||||
|
Smart card accounts
|
12,055 | 5,500 | 2,772 | |||||||||||
|
Financial services
|
6,778 | 4,705 | 900 | |||||||||||
|
Hardware, software and related technology sales
|
1,232 | 680 | 1,611 | |||||||||||
|
Corporate/Eliminations
|
(5,735 | ) | (1,663 | ) | 642 | |||||||||
|
Total
|
39,243 | 19,418 | 13,301 | |||||||||||
|
Interest earned
|
||||||||||||||
|
Transaction-based activities
|
— | — | — | |||||||||||
|
Smart card accounts
|
— | — | — | |||||||||||
|
Financial services
|
— | — | — | |||||||||||
|
Hardware, software and related technology sales
|
— | — | — | |||||||||||
|
Corporate/Eliminations
|
15,418 | 8,070 | 3,261 | |||||||||||
|
Total
|
15,418 | 8,070 | 3,261 | |||||||||||
|
Interest expense
|
||||||||||||||
|
Transaction-based activities
|
11,175 | 4,887 | 1,617 | |||||||||||
|
Smart card accounts
|
— | — | — | |||||||||||
|
Financial services
|
29 | 51 | 15 | |||||||||||
|
Hardware, software and related technology sales
|
155 | 338 | 247 | |||||||||||
|
Corporate/Eliminations
|
419 | 194 | — | |||||||||||
|
Total
|
11,778 | 5,470 | 1,879 | |||||||||||
F-28
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| June 30, | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
|
Depreciation and amortization
|
||||||||||||||
|
Transaction-based activities
|
4,017 | 3,287 | 2,004 | |||||||||||
|
Smart card accounts
|
— | — | — | |||||||||||
|
Financial services
|
572 | 488 | 408 | |||||||||||
|
Hardware, software and related technology sales
|
4 | 14 | 50 | |||||||||||
|
Corporate/Eliminations
|
299 | 179 | 173 | |||||||||||
|
Total
|
4,892 | 3,968 | 2,635 | |||||||||||
|
Income taxation expense
|
||||||||||||||
|
Transaction-based activities
|
4,121 | 1,593 | 1,728 | |||||||||||
|
Smart card accounts
|
3,617 | 1,650 | 832 | |||||||||||
|
Financial services
|
2,024 | 1,396 | 265 | |||||||||||
|
Hardware, software and related technology sales
|
323 | 103 | 409 | |||||||||||
|
Corporate/Eliminations
|
18,791 | 2,892 | 1,031 | |||||||||||
|
Total
|
28,876 | 7,634 | 4,265 | |||||||||||
|
Net income after taxation
|
||||||||||||||
|
Transaction-based activities
|
9,616 | 3,716 | 4,031 | |||||||||||
|
Smart card accounts
|
8,438 | 3,850 | 1,940 | |||||||||||
|
Financial services
|
4,725 | 3,258 | 619 | |||||||||||
|
Hardware, software and related technology sales
|
754 | 240 | 955 | |||||||||||
|
Corporate/Eliminations
|
(9,614 | ) | 3,321 | 2,873 | ||||||||||
|
Total
|
13,919 | 14,385 | 10,418 | |||||||||||
|
Segment assets
|
||||||||||||||
|
Total
|
142,309 | 87,252 | 49,250 | |||||||||||
|
Expenditures for long-lived assets
|
||||||||||||||
|
Transaction-based activities
|
2,371 | 6,043 | 943 | |||||||||||
|
Smart card accounts
|
— | — | — | |||||||||||
|
Financial services
|
185 | 106 | 817 | |||||||||||
|
Hardware, software and related technology sales
|
34 | 15 | 5 | |||||||||||
|
Corporate/Eliminations
|
218 | 548 | 153 | |||||||||||
|
Total
|
$ | 2,808 | $ | 6,712 | $ | 1,918 | ||||||||
As part of the reissuance of these financial statements for
incorporation in the S-1 Registration Statement, the Company has
restated its segmental information for 2004, 2003 and 2002 in
order to reflect the segments as reported in its Quarterly
Report on Form 10-Q for the quarter ended March 31,
2005. The segmental information has been restated to reflect the
new “smart card accounts segment,” which derives
revenue from the provision of smart card accounts, as a fixed
monthly fee per card is charged for the maintenance of these
accounts. This segment’s activities were previously
included in the financial services segment. All periods
presented have been restated in order to be comparable with the
new segment format.
F-29
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
In addition, the new 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.
The following tables present the Company’s net income after
tax and segment assets from the Company’s reportable
segments presented in accordance with SA GAAP and then
reconciled to US GAAP financial information consolidated
totals:
| 2004 | 2003 | 2002 | ||||||||||||
|
Net income after tax in accordance with SA GAAP
|
$ | 14,007 | $ | 14,385 | $ | 10,418 | ||||||||
|
Intangible amortization adjustment
|
(a) | (300 | ) | (229 | ) | (205 | ) | |||||||
|
Internally developed intangibles adjustment
|
(b) | — | 180 | 54 | ||||||||||
|
Development expenses adjustment
|
(c) | — | 252 | 366 | ||||||||||
|
Revenue adjustment due to inclusion of the business from the
beginning of the year instead of acquisition date
|
(d) | — | (1,427 | ) | — | |||||||||
|
Self insurance adjustment
|
(e) | (2,894 | ) | 873 | 468 | |||||||||
|
Goodwill amortization adjustment
|
(f) | (484 | ) | 813 | (742 | ) | ||||||||
|
Stock compensation charge
|
(k) | — | (613 | ) | (385 | ) | ||||||||
|
Secondary Taxation on Companies adjustment
|
(h) | 1,612 | (1,533 | ) | (1,120 | ) | ||||||||
|
Taxation adjustments due to difference between SA and US GAAP
|
(i) | 1,337 | (307 | ) | (169 | ) | ||||||||
|
Reclassification of earnings from equity accounted investment
|
(j) | (87 | ) | — | — | |||||||||
|
Net income after tax in accordance with US GAAP
|
$ | 13,191 | $ | 12,394 | $ | 8,685 | ||||||||
|
Segment assets in accordance with SA GAAP
|
$ | 142,309 | $ | 87,252 | $ | 49,250 | ||||||||
|
Recognition of goodwill, net of amortization
|
(f) | 6,573 | 5,740 | 3,473 | ||||||||||
|
Recognition of intangible assets, net of amortization
|
(a) | 3,669 | 3,591 | 2,579 | ||||||||||
|
Recognition of derivative instruments
|
(g) | (20 | ) | (17 | ) | (12 | ) | |||||||
|
Consolidation of the Self Insurance Captive
|
(e) | (358 | ) | 1,394 | 1,117 | |||||||||
|
Deferred tax adjustments
|
(h) | 459 | 399 | 89 | ||||||||||
|
Segment assets in accordance with US GAAP
|
$ | 152,632 | $ | 98,359 | $ | 56,496 | ||||||||
(a) Aplitec obtained the patent for the Funds Transfer
System (FTS) on its acquisition of Net 1 Investment
Holdings (Pty) Ltd (“Holdings”) on July 12, 2000.
100% of Holdings issued share capital was acquired for
approximately $3.2 million, which was satisfied through the
issuance of approximately 1.3 million of Aplitec common
shares. For SA GAAP purposes, this was treated as the
acquisition of a business as it was a corporate entity and the
excess of the purchase price over the identifiable assets
acquired was treated as goodwill and amortized over
10 years. For US GAAP purposes, EITF 98-3, Determining
Whether a Non-monetary Transaction Involves Receipt of
Productive Assets or of a Business, defines a business and the
acquisition of Holdings was in substance the acquisition of an
asset. As such, the treatment of the premium on acquisition over
the net asset value is regarded as being attributable to the
patent rights acquired and not treated as goodwill. The patent
rights carrying value should be amortized over 10 years,
which is the same period that would be used to amortize goodwill.
(b) In 2000, the Aplitec incurred costs of approximately
$0.4 million to develop and promote a trademark. Under SA
GAAP, these costs were capitalized as an intangible asset. Under
US GAAP, only
F-30
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
the costs of intangible assets acquired from other enterprises
or individuals that provide a future discernible benefit are
capitalized, whilst other costs of developing, maintaining, or
restoring intangible assets which are no specifically
identifiable, have indeterminate lives, or are inherent in a
continuing business and related to an enterprise as a whole are
deducted from income when incurred. The trademark developed by
the Company would not be considered to have a determinate life
under US GAAP, and would consequently be expensed as incurred.
This adjustment therefore treats the costs of developing the
trademark as an expense in 2000 for US GAAP purposes and
reverses the intangible asset amortization under SA GAAP from
2000.
(c) Aplitec capitalized $2.5 million in development
costs in 1998 and 1999 and has then amortized these over the
four years ended June 30, 2003. Subsequent to 1999,
development costs have been expensed as incurred. Under
SA GAAP, expenditure on development is charged to income in
the year in which it is incurred except where a clearly defined
project is undertaken and it is reasonably anticipated that
development costs will be recovered through future commercial
activity. Such development costs are capitalized as an
intangible asset and amortized on a straight-line basis over the
life of the project from the date when the developed asset is
put into use. Under US GAAP, costs incurred to develop
computer software to be used externally are expensed as incurred
until the developed software has been proven to be
technologically feasible, in accordance with SFAS 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. Under SFAS 86,
technological feasibility of a computer software produce is
established when all planning, designing, coding, and testing
activities that are necessary to establish that the produce can
be produced to meet its design specifications including
functions, features and technical performance requirements.
Costs to develop software for internal use by Aplitec are
generally expensed as incurred, except in certain situations, as
outlined in Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use, issued by the AICPA. Under SOP 98-1, only certain
costs to develop internal-use computer software during the
applications development stage or costs to develop or obtain
software that allows for access or conversion of old data by new
systems are eligible for capitalization. All other costs,
including those incurred in the project development and
post-implementation stages are expensed as incurred. Aplitec did
not meet the relevant criteria for capitalization of software
development costs under US GAAP and consequently the amounts
capitalized under SA GAAP would not have been capitalized
under US GAAP.
(d) For Aplitec’s purposes, the date of acquisition of
a minority interest in the year ended June 30, 2003 has
been treated as being the beginning of the financial year and
the results of the acquired business have been included in the
consolidated income statement from that date. Likewise, goodwill
has been computed as the difference between the purchase price
and the fair value of the identifiable assets and liabilities as
of the same date. For US GAAP purposes, the results of
acquired businesses should be reflected in the income statement
only as from the date of acquisition and the fair value of the
identifiable assets and liabilities determined as of that date.
This adjustment therefore deducts from the income for the period
the results of the acquired business from the beginning of the
year until the date of acquisition and treats that amount as
goodwill to be accounted for in accordance with SFAS 142,
the relevant provisions of US GAAP at the time.
(e) Aplitec has established a provision in respect of
self-insured losses (mainly attributable to cash in transit
theft) based on actuarially determined amount of such losses
expected to arise in the next 12 months. The amount
provided is approximately $1 million in the year ended
June 30, 2002 and a further approximate $1 million in
the year ended June 30, 2003. For SA GAAP purposes the
provision for self-insured losses was reversed in 2004 and the
provision for self-insured losses provided approximates the
amounts required under US GAAP. In addition, the Company
has an insurance captive with a current balance of around
$1.6 million. This was acquired as part of the acquisition
of Cash Paymaster Services (Pty) Ltd in 1999. This asset was not
recognized on acquisition and the amount at acquisition was
$2.3 million. For the purposes of US GAAP,
self-insurance does not represent the transfer of risk and as
F-31
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
such it is not possible to recognize a liability for future
losses that will arise from events subsequent to the balance
sheet date. In addition the captive insurance company should be
consolidated for US GAAP purposes. This adjustment
therefore reverses that part of the charge in the income
statement in respect of such losses that does not represent the
losses of the period and consolidates the assets of the captive
insurance company.
(f) Under SA GAAP Goodwill arising on business
combinations was written off against shareholder’s equity.
With effect from July 1, 2000, SA GAAP required that
goodwill be capitalized and amortized over its useful life.
Under US GAAP, until July 1, 2002, goodwill should be
capitalized and amortized over its useful life, which could not
exceed 40 years. The adjustment therefore gives effect to
the amount of goodwill that would have been required to be
recognized in a US GAAP balance sheet and the amount of
amortization that would have arisen thereon, which has been
calculated on the basis of a useful life of 10 years. Due
to the adoption of SFAS 141 and SFAS 142, goodwill is
no longer required to be amortized, instead an impairment review
is required at least annually. In addition certain goodwill
amounts were not recognized at the correct amount due to Aplitec
using a fixed price as opposed to a fair market price for shares
issued in exchange for assets.
(g) Aplitec has historically entered into foreign exchange
forward contracts to hedge its exposure to fluctuations in
foreign currency exchange rates on specific transactions. Under
SA GAAP, prior to the adoption of AC 133, Financial
Instruments: Recognition and Measurement on July 1, 2002,
gains and losses on forward contracts designated as hedges of
identifiable foreign currency firm commitments were recognized
in the measurement of the related foreign currency transactions.
Under SA GAAP, upon adoption of AC 133, the difference
between previous carrying amounts and the fair value of
derivatives, which prior to the adoption of AC 133 had been
designated as either fair value or cash flow hedges but do not
qualify as hedges under AC 133, is recognized as an
adjustment of the opening balance of retained earnings at the
beginning of the financial year AC 133 is initially
applied. Changes in the fair value of derivatives not designed
as hedges after July 1, 2002 are recorded in the income
statement.
(h) SA GAAP requires that deferred tax be provided for
at the undistributed rate of 30%. For the purpose of
US GAAP, under FAS 109, Accounting for Income
Tax, temporary differences have been tax effected using the
tax rate that will apply when income is distributed, i.e. an
effective rate of 37.78% including Secondary Tax on Companies.
Aplitec has computed the effect this change in tax rate would
have on the current deferred taxation assets.
(i) The tax effects of the US GAAP adjustments have
been calculated based on the enacted tax rate of 37.78% (2003:
37.78%; 2002: 37.78%).
(j) Under SA GAAP the earnings from the equity
accounted investment is included before the income tax expense.
Under US GAAP the earnings from the equity accounted
investment is shown after the income tax expense and net income
after tax. An adjustment is required to reclassify the earnings
from the equity accounted investment from above the income tax
expense to below net income after tax.
(k) Under SA GAAP there is currently no literature
that regulates the accounting treatment of employee stock
compensation. Accordingly, for SA GAAP purposes, the
Company does not account for the stock options at the time of
grant. Upon exercise, the issuance of the shares is accounted
for at the exercise price of the stock option, with no effect on
earnings. Options granted to directors are disclosed in the
Company’s financial statements. Under US GAAP,
companies may elect to follow the accounting prescribed by
either Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees (“APB 25”), or
SFAS No 123, Accounting for Stock-Based Compensation. Under
US GAAP, compensation is recorded for the cost of providing
warrants and options to the employee over the relevant service
period. The costs can be determined based on either the
intrinsic value method (APB 25) or the fair value method
(FAS 123). The Company has elected to apply the intrinsic
value method in respect of
F-32
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
grants to employees make in May 2000. While these grants of
options were made at an exercise price that was equivalent to
the market value at date of grant, the employees were permitted
to exercise using a loan provided by the Company. These loans
are non-recourse and bear interest at a variable rate.
Consequently, under EITF 96-16, Accounting for Stock
Compensation Arrangements with Employer Loan Features under
APB Opinion No 25 and FIN 44, Accounting for Certain
Transactions involving Stock Compensation, these awards are
accounted for as variable awards under US GAAP with the
final measurement of the compensation expense only being
determined when the loans are repaid or when the options are
exercised without a loan.
| 16. | Comprehensive Income (Loss) |
The Company’s comprehensive income consists of net income
and foreign currency translation gains and losses which, under
GAAP, are excluded from net income. Total comprehensive income
for each of the three years ended June 30, 2004 was:
| 2004 | 2003 | 2002 | ||||||||||
|
Net income
|
$ | 13,278 | $ | 13,117 | $ | 8,518 | ||||||
|
Foreign currency translation adjustments
|
16,001 | 18,405 | (10,208 | ) | ||||||||
| $ | 29,279 | $ | 31,522 | $ | (1,690 | ) | ||||||
| 17. | Fair Value of Financial Instruments |
| Initial Recognition and Measurement |
Financial instruments are recognized when the Company becomes a
party to the transaction. Initial measurements are at cost,
which includes transaction costs subsequent to initial
recognition. These instruments are measured as set out below:
| Trade and Other Receivables |
Trade and other receivables originated by the Company are stated
at cost less provision for doubtful debts. The fair value of
trade and other receivables approximate their carrying value due
to their short-term nature.
| Trade and Other Payables |
The fair values of trade and other payables approximates their
carrying amounts, due to their short-term nature.
| Risk Management |
The company uses derivative financial instruments including
currency forward contracts to hedge its exposure to foreign
currency fluctuations. It is the policy of the group not to
trade in derivative financial instruments. The company is also
exposed to credit risk.
F-33
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
| Foreign Exchange Risk |
The company has used forward contracts in order to limit its
exposure to the ZAR/USD and ZAR/EUR exchange rate fluctuations
from foreign currency transactions. As of June 30, 2004,
2003 and 2002, the outstanding foreign exchange contracts are as
follows:
| Forward Purchase Contracts |
June 2004
| Notional Amount | Strike Price | Maturity | ||||
|
EUR 16,250
|
ZAR 7.8475 | July 12, 2004 | ||||
|
EUR 202,000
|
ZAR 8.1822 | August 2, 2004 | ||||
|
EUR 16,250
|
ZAR 7.8878 | August 10, 2004 | ||||
|
EUR 16,250
|
ZAR 7.9299 | September 10, 2004 | ||||
|
EUR 16,250
|
ZAR 7.9749 | October 12, 2004 | ||||
|
EUR 263,200
|
ZAR 8.2129 | October 29, 2004 | ||||
|
EUR 4,243,000
|
ZAR 8.5225 | January 7, 2005 | ||||
|
USD 167,900
|
ZAR 6.2950 | September 22, 2004 | ||||
June 2003
None
June 2002
| Notional Amount | Strike Price | Maturity | ||||
|
USD 16,250
|
ZAR 12.643 | January 8, 2003 | ||||
| Interest Rate Risk |
As a result of its normal borrowing activities, the
Company’s operating results are exposed to fluctuations in
interest rates, which the Company manages primarily through its
regular financing activities. The Company generally maintains
investment in cash equivalents.
| Credit Risk |
Credit risk relates to the risk of loss that the Company would
incur as a result of non-performance by counterparties. The
Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies
include an evaluation of a potential counterparty’s
financial condition, credit rating, and other credit criteria
and risk mitigation tools as deemed appropriate.
In regards to credit risk on financial instruments, the Company
maintains the policy to enter into such transactions only with
highly rated financial institutions.
| 18. | Equity Accounted Investment and Long Term Receivable |
On April 1, 2004, Aplitec purchased 43% of the issued share
capital of the Permit Group (Proprietary) Limited
(“Permit”) for $10. A loan of approximately
$0.8 million, bearing interest at the current South African
prime rate, currently 11.5%, and with no fixed repayment terms,
was made to Permit in April 2004 and the proceeds of this loan
was used to purchase 43% of a 95% interest in New
F-34
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
Era Life Insurance Company Limited (“New Era”), a
provider of various insurance products to the South African
market.
Imvume Resources (Pty) Limited, (“Imvume”), the
Company’s national black economic empowerment partner,
holds a 57% equity interest in Permit, and controls Permit
through its majority voting rights. On April 1, 2004,
Aplitec granted a loan of approximately $1 million to
Imvume, for the purpose of enabling Imvume to make a loan to
Permit. This loan to Imvume, bears interest at the current South
African prime rate, currently 11.5%. As of year end
June 30, 2004 fixed repayment terms had not been agreed,
however the loan is not expected to be repaid before
December 31, 2005. The loan to Imvume is with recourse to
the assets of Imvume, and as of the balance sheet date,
management of Net 1 considers the loan to be recoverable.
In December 2003, the FASB issued FIN 46R, Consolidation of
Variable Interest Entities, an Interpretation of ARB 51,
Revised December 2003 (“FIN 46R”), which
clarifies the application of ARB No. 51, “Consolidated
Financial Statements,” to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support. FIN 46R requires the
consolidation of these entities, known as Variable Interest
Entities (“VIEs”), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that will
absorb a majority of the entity’s expected losses, receive
a majority of the entity’s expected residual returns, or
both.
On adoption of FIN 46R, the Company determined that Permit
was a VIE, as the loan to Permit represents a variable interest.
However, the Company is not the primary beneficiary of Permit.
Therefore, the Company has not consolidated Permit, and has
accounted for this investment as an equity method investee.
Aplitec’s equity earnings from this investment totaled
$0.08 million for the year ended June 30, 2004. The
interest earned on the loan to Permit has been eliminated. The
company’s total outstanding loan balances exposed to loss
as a result of its involvement with Permit was
$0.8 million. The maximum exposure to loss refers to the
maximum loss that the Company would be required to record in its
income statement as a result of its involvement with a VIE. It
does not consider the probability of such losses actually being
incurred.
| 19. | Acquisitions |
| Reverse Acquisition of NUEP |
On June 7, 2004, as part of the transaction described in
Note 1, the Company (i.e. Aplitec) from an accounting
perspective was deemed to have acquired 100 percent of the
outstanding common shares of NUEP. The results of NUEP’s
operations have been included in the consolidated financial
statements since that date.
From an accounting perspective, the aggregate purchase price was
deemed to be approximately $7.9 million. This amount was
determined based on the best estimate of fair market value of
NUEP shares at the measurement date of the acquisition,
multiplied by the number of shares of NUEP that were outstanding
immediately prior to the acquisition (approximately
15.9 million). The fair value, before any adjustments to
the price as a result of the reverse stock split, of the NUEP
common stock used in determining the purchase price was $0.50,
which is the price per share, before any adjustments to the
price as a result of the reverse stock split, paid by the Brait
Consortium under the Common Stock Purchase Agreement.
F-35
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE FINANCIAL STATEMENTS — (Continued)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the acquisition date.
|
Cash
|
$ | 8 | |||
|
Investments
|
217 | ||||
|
Intangible assets
|
4,620 | ||||
|
Goodwill
|
5,794 | ||||
|
Total assets acquired
|
10,639 | ||||
|
Current liabilities
|
960 | ||||
|
Deferred tax
|
1,745 | ||||
|
Total liabilities acquired
|
2,705 | ||||
|
Net assets acquired
|
$ | 7,934 | |||
Of the $4,620 of acquired intangible assets, approximately
$0.1 million was assigned to customer contracts and
approximately $4.5 million was assigned to the exclusive
licenses. The customer contracts have an expected useful life of
5 years, and the exclusive license has an expected useful
life of 7 years. The tax bases of the intangible assets
acquired is nil and consequently a deferred tax liability of
$1.8 million has been recognized.
The goodwill of approximately $5.8 million is included in
the Hardware, Software and Related Technologies Sales segment.
The goodwill is not deductible for tax purposes.
No pro-forma financial effect has been presented as the impact
on earnings is immaterial.
| Acquisition of NUEP Holdings S.a.r.l. |
In June 2004, the Company acquired 100% of the issued share
capital of NUEP Holdings S.a.r.l (“Holdings”) for
$0.03 million. Holdings owns the US patent for the FTS and
the rights to the UEPS technology.
| 20. | Reorganization Charge |
As a result of the transaction mentioned in Note 1 above
the Company incurred the following charges during the period
ended June 30, 2004:
|
Accounting fees
|
$ | 1,256 | ||
|
Regulatory, filing and printing charges
|
520 | |||
|
Legal fees
|
529 | |||
|
Secretarial services
|
16 | |||
|
Other professional fees
|
4,429 | |||
|
Other
|
4,383 | |||
| $ | 11,133 | |||
The Other professional fees include the transaction costs
mentioned above payable to Brait. Included in the Other category
is the charge for stock awards of approximately
$4.3 million issued to directors and other employees as a
condition precedent to the transaction.
F-36
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | June 30, | |||||||||
| 2005 | 2004 | |||||||||
| (Unaudited) | (Audited) | |||||||||
| (In thousands, | ||||||||||
| except share data) | ||||||||||
| ASSETS | ||||||||||
|
CURRENT ASSETS
|
||||||||||
|
Cash and cash equivalents
|
$ | 92,712 | $ | 80,282 | ||||||
|
Accounts receivable
|
31,769 | 18,196 | ||||||||
|
Finance loans receivable, net of allowances of —
March: $7,059;
June: $8,387 |
8,830 | 9,300 | ||||||||
|
Deferred expenditure on smart cards
|
3,514 | 6,031 | ||||||||
|
Inventory
|
1,662 | 1,054 | ||||||||
|
Deferred income taxes
|
3,473 | 2,549 | ||||||||
|
Total current assets
|
141,960 | 117,412 | ||||||||
|
LONG TERM RECEIVABLE
|
1,027 | 1,106 | ||||||||
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
OF — March: $19,818; June: $23,225
|
7,327 | 7,638 | ||||||||
|
EQUITY ACCOUNTED INVESTMENT
|
1,346 | 878 | ||||||||
|
GOODWILL
|
14,933 | 15,212 | ||||||||
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF — March: $4,625; June: $3,019
|
8,725 | 10,386 | ||||||||
|
TOTAL ASSETS
|
175,318 | 152,632 | ||||||||
| LIABILITIES | ||||||||||
|
CURRENT LIABILITIES
|
||||||||||
|
Bank overdraft
|
— | 19 | ||||||||
|
Accounts payable
|
17,990 | 23,693 | ||||||||
|
Income taxes payable
|
14,660 | 24,119 | ||||||||
|
Total current liabilities
|
32,650 | 47,831 | ||||||||
|
DEFERRED INCOME TAXES
|
13,988 | 8,961 | ||||||||
|
LONG TERM LIABILITIES
|
— | 252 | ||||||||
|
TOTAL LIABILITIES
|
46,638 | 57,044 | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||||
|
COMMON STOCK
|
||||||||||
|
Authorized: 83,333,333 with $0.001 par value;
|
||||||||||
|
Issued and outstanding shares —
March: 27,175,135; June: 22,539,204
|
27 | 23 | ||||||||
|
SPECIAL CONVERTIBLE PREFERRED STOCK
|
||||||||||
|
Authorized: 50,000,000 with $0.001 par value;
|
||||||||||
|
Issued and outstanding shares —
March: 27,525,259; June: 32,161,190
|
28 | 32 | ||||||||
|
B CLASS PREFERENCE SHARES
|
||||||||||
|
Authorized: 330,000,000 with $0.001 par value;
|
||||||||||
|
Issued and outstanding shares (net of shares held by the
Company) — March: 209,890,130; June: 236,977,187
|
33 | 38 | ||||||||
|
ADDITIONAL PAID-IN-CAPITAL
|
71,959 | 71,954 | ||||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
13,711 | 15,039 | ||||||||
|
RETAINED EARNINGS
|
42,922 | 8,502 | ||||||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
128,680 | 95,588 | ||||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 175,318 | $ | 152,632 | ||||||
See notes to unaudited condensed consolidated financial
statements.
F-37
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Nine Months Ended | |||||||||
| March 31, | March 31, | ||||||||
| 2005 | 2004 | ||||||||
| (In thousands, except | |||||||||
| share data) | |||||||||
|
REVENUE
|
$ | 134,885 | $ | 91,463 | |||||
|
EXPENSE
|
|||||||||
|
COST OF GOODS SOLD, IT PROCESSING, SERVICING AND SUPPORT
|
41,207 | 28,206 | |||||||
|
GENERAL AND ADMINISTRATIVE
|
33,804 | 25,625 | |||||||
|
DEPRECIATION AND AMORTIZATION
|
4,897 | 4,110 | |||||||
|
REORGANIZATION CHARGES
|
— | 3,537 | |||||||
|
OPERATING INCOME
|
54,977 | 29,985 | |||||||
|
INTEREST INCOME, net
|
1,497 | 2,464 | |||||||
|
INCOME BEFORE INCOME TAXES
|
56,474 | 32,449 | |||||||
|
INCOME TAX EXPENSE
|
22,534 | 13,896 | |||||||
|
NET INCOME BEFORE EARNINGS FROM EQUITY ACCOUNTED INVESTMENT
|
33,940 | 18,553 | |||||||
|
EARNINGS FROM EQUITY ACCOUNTED INVESTMENT
|
480 | — | |||||||
|
NET INCOME
|
$ | 34,420 | $ | 18,553 | |||||
|
Basic earnings per share (in cents), common stock and linked
units
|
62.94 | 57.66 | |||||||
|
Diluted earnings per share (in cents), common stock and
linked units
|
61.80 | 57.66 | |||||||
See notes to unaudited condensed consolidated financial
statements.
F-38
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
MOVEMENTS IN SHAREHOLDERS’ EQUITY
| Nine Months Ended | ||||||||||
| March 31, | March 31, | |||||||||
| 2005 | 2004 | |||||||||
| (In thousands) | ||||||||||
|
COMMON STOCK
|
||||||||||
|
Balance, beginning of period
|
$ | 23 | $ | 6 | ||||||
|
Conversion to common stock from special convertible preferred
stock
|
4 | — | ||||||||
|
Balance, end of period
|
27 | 6 | ||||||||
|
SPECIAL CONVERTIBLE PREFERRED STOCK
|
||||||||||
|
Balance, beginning of period
|
32 | — | ||||||||
|
Conversion from special convertible preferred stock to common
stock
|
(4 | ) | — | |||||||
|
Balance, end of period
|
28 | — | ||||||||
|
B CLASS PREFERENCE SHARES
|
||||||||||
|
Balance, beginning of period
|
38 | — | ||||||||
|
Cessation of B class preference shares to Net 1 as a result
of trigger events
|
(5 | ) | — | |||||||
|
Balance, end of period
|
33 | — | ||||||||
|
ADDITIONAL PAID IN CAPITAL
|
||||||||||
|
Balance, beginning of period
|
71,954 | 40,571 | ||||||||
|
Conversion to common stock from special convertible preferred
stock
|
15,539 | — | ||||||||
|
Cessation of B class preference shares and B class loans to
Net 1 as a result of trigger events
|
(15,534 | ) | — | |||||||
|
Balance, end of period
|
71,959 | 40,571 | ||||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
||||||||||
|
Balance, beginning of period
|
15,039 | (962 | ) | |||||||
|
Movement in foreign currency translation reserve
|
(1,328 | ) | 14,215 | |||||||
|
Balance, end of period
|
13,711 | 13,253 | ||||||||
|
RETAINED EARNINGS
|
||||||||||
|
Balance, beginning of period
|
8,502 | 30,889 | ||||||||
|
Net income for the period
|
34,420 | 18,553 | ||||||||
|
Balance, end of period
|
42,922 | 49,442 | ||||||||
|
Total shareholders’ equity
|
$ | 128,680 | $ | 103,272 | ||||||
See notes to unaudited condensed consolidated financial
statements.
F-39
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended | |||||||||
| March 31, | March 31, | ||||||||
| 2005 | 2004 | ||||||||
| (In thousands) | |||||||||
|
Cash flows from operating activities
|
|||||||||
|
Cash received from customers
|
$ | 127,910 | $ | 92,969 | |||||
|
Cash paid to suppliers and employees
|
(81,864 | ) | (49,580 | ) | |||||
|
Interest received
|
11,645 | 10,755 | |||||||
|
Finance costs paid
|
(10,131 | ) | (8,161 | ) | |||||
|
Income taxes paid
|
(31,984 | ) | (10,626 | ) | |||||
|
Net cash (used in) provided by operating activities
|
15,576 | 35,357 | |||||||
|
Cash flows from investing activities
|
|||||||||
|
Capital expenditures
|
(2,982 | ) | (2,392 | ) | |||||
|
Proceeds from disposal of property, plant and equipment
|
29 | 33 | |||||||
|
Acquisition of contract rights
|
— | (1,329 | ) | ||||||
|
Net cash used in investing activities
|
(2,953 | ) | (3,688 | ) | |||||
|
Cash flows from financing activities
|
|||||||||
|
Repayment of bank overdrafts
|
(19 | ) | — | ||||||
|
Dividends paid
|
— | (5,088 | ) | ||||||
|
Net cash used in financing activities
|
(19 | ) | (5,088 | ) | |||||
|
Effect of exchange rate changes on cash
|
(174 | ) | 12,170 | ||||||
|
Net increase in cash and cash equivalents
|
12,430 | 38,751 | |||||||
|
Cash and cash equivalents — beginning of period
|
80,282 | 54,313 | |||||||
|
Cash and cash equivalents at end of period
|
$ | 92,712 | $ | 93,064 | |||||
See notes to unaudited condensed consolidated financial
statements.
F-40
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2005 and 2004
(All amounts stated in thousands of United States Dollars,
unless otherwise stated)
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
| Unaudited Interim Financial Information |
On June 7, 2004, the Company completed a transaction, which
is more fully described in the Company’s Annual Report on
Form 10-K for the year ended June 30, 2004, in which
the former shareholders of Net 1 Applied Technology
Holdings Limited, or Aplitec, acquired a majority voting
interest in the Company. In accordance with generally accepted
accounting principles, the Company accounted for the Aplitec
transaction as a reverse acquisition, which requires that the
company whose shareholders retain a majority voting interest in
a combined business be treated as the acquiror for accounting
purposes. Therefore, for the nine months ended March 31,
2005, the Company’s condensed consolidated financial
statements reflect the operations of Net 1 and its
consolidated subsidiaries and for the three and nine months
ended March 31, 2004, reflect the operations of Aplitec and
its consolidated subsidiaries, but not Net 1. References to
the “Company” refer to Net 1 and its consolidated
subsidiaries, including Aplitec, unless the context otherwise
requires. References to Net 1 are references solely to
Net 1 UEPS Technologies, Inc.
In addition, these condensed consolidated financial statements
include the effects of a one-for-six reverse stock split that
was approved by the Company’s board of directors on
June 2, 2005. Under Florida corporate law the reverse stock
split was not required to be approved by the Company’s
shareholders.
The following have been retroactively restated as a result of
the reverse stock split mentioned above:
| • | number of common and special convertible stock authorized, issued and outstanding; | |
| • | stock issued pursuant to the Company’s 2004 Stock Incentive Plan; | |
| • | all per share measures, including but not limited to basic and diluted earnings per share; and | |
| • | reallocation of amounts from common stock to additional paid in capital as the par value did not change. |
The accompanying unaudited condensed consolidated financial
statements include all majority owned subsidiaries over which
the Company exercises control and have been prepared in
accordance with the rules and regulations of the Securities and
Exchange Commission for Form 10-Q and include all of the
information and disclosures required by generally accepted
accounting principles (“GAAP”) for interim financial
reporting. The results of operations for the nine months ended
March 31, 2005 and 2004 are not necessarily indicative of
the results for the full year. The Company believes that the
disclosures are adequate to make the information presented not
misleading.
These financial statements should be read in conjunction with
the financial statements, accounting policies and financial
notes thereto included in the Company’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2004, as
filed with the Securities and Exchange Commission on
October 12, 2004. In the opinion of management, the
accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting only of normal
recurring adjustments), which are necessary for a fair
representation of financial results for the interim periods
presented.
| Stock-Based Compensation |
The Company accounts for stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(“APB 25”), and related interpretations.
Accordingly, compensation expense is not required to be recorded
when stock options/
F-41
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
awards under fixed plans are granted to employees as long as the
exercise price is not less than the fair market value of the
stock when the option/ award is granted. In October 1995, the
Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard 123, Accounting
for Stock-Based Compensation (“SFAS 123”).
SFAS 123 allows the Company to continue to follow the
present APB 25 guidelines, but requires pro-forma
disclosures of net income and earnings per share as if the
Company had adopted the provisions of the Statement. The Company
has continued to account for stock-based compensation under the
provisions of APB 25 using the intrinsic value method.
FASB Statement 123 (Revision 2004), Share-Based
Payment, was issued in December 2004 and is effective for
fiscal years beginning after June 15, 2005. The new
statement requires all share-based payments to employees to be
recognized in the financial statements based on their fair
values. The Company currently accounts for its share-based
payments to employees under the intrinsic value method of
accounting set forth in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
Additionally, the Company complies with the stock-based employer
compensation disclosure requirements of SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure, an amendment of FASB Statement
No. 123.” The Company plans to adopt the new statement
in the first quarter of its next fiscal year, beginning
July 1, 2005.
There was no stock compensation charge under APB 25 for
either of the nine months ended March 31, 2005 and 2004.
Had compensation expense for share options granted under the
stock option plan been determined based on fair value at the
grant dates consistent with the method required in accordance
with SFAS 123, the Company’s net income and earnings
per share in accordance with US GAAP for the nine months ended
March 31, 2005 and 2004 would have been as presented in the
pro-forma disclosures below:
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
|
Net income
|
$ | 34,420 | $ | 18,553 | ||||
|
Add back: stock-based compensation expense included in reported
net income, net of related tax effects
|
— | — | ||||||
|
Deduct: total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
(650 | ) | — | |||||
|
Pro-forma net income
|
$ | 33,770 | $ | 18,553 | ||||
|
Earnings per share, basic and diluted (U.S. cents):
|
||||||||
|
Basic, as reported
|
62.94 | 57.66 | ||||||
|
Basic, pro forma
|
60.60 | 57.66 | ||||||
|
Weighted average assumptions:
|
||||||||
|
Risk-free interest rate
|
3.50 | % | — | |||||
|
Dividend yield
|
— | — | ||||||
|
Stock volatility
|
72.00 | % | — | |||||
|
Average expected life (years)
|
7.00 | — | ||||||
| Translation of Foreign Currencies |
The functional currency of the Company is the South African rand
and its reporting currency is the U.S. dollar. The current
rate method is used to translate the financial statements of the
Company to U.S. dollars. Under the current rate method,
assets and liabilities are translated at the exchange rates in
F-42
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 shareholders’ 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 income for the
period.
| Recent Accounting Pronouncements |
On March 3, 2005, the FASB issued FASB Staff Position
(“FSP”) FIN 46(R)-5, Implicit Variable Interests
under FASB Interpretation No. 46(R), Consolidation of
Variable Interest Entities. The FSP requires a reporting
enterprise to consider whether it holds an implicit variable
interest in the variable interest entity (“VIE”) or
potential VIE. The determination of whether an implicit variable
interest exists involves determining whether an enterprise may
be indirectly absorbing or receiving the variability of the
entity. The FSP is effective in the first reporting period
beginning after March 3, 2005. The adoption of the FSP by
the Company has not had an impact on its overall results of
operations or financial position.
FASB Statement No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions, was issued in December 2004 and is
effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of
the statement shall be applied prospectively. The amendments
made by the statement are based on the principle that exchanges
of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance.
Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or
an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar
productive assets.
The Company does not believe that adoption of the statement will
have an impact on its overall results of operations or financial
position.
| 2. | Goodwill and Intangible Assets |
On July 1, 2002, the Company adopted SFAS 142 for
U.S. GAAP purposes, which required that goodwill and
certain intangible assets with indefinite useful lives,
including those recorded in past business combinations, no
longer be amortized, but instead be tested for impairment at
least annually. The standard also required the completion of a
transitional impairment test with any resulting impairment
identified treated as a cumulative effect of a change in
accounting principle.
Prior to SFAS 142, the Company assessed goodwill for
impairment based on the guidance in Accounting Principles Board
Opinion No. 17, Intangible Assets and
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and had to evaluate the periods of amortization continually
to determine whether later events and circumstances warranted
revised estimates of useful lives; impairment had to be
recognized when the carrying amount exceeded the fair market
value of the asset.
F-43
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized below is the carrying value and accumulated
amortization of the intangible assets that will continue to be
amortized under SFAS 142, as well as the carrying amount of
goodwill, which will no longer be amortized.
| As at March 31, 2005 | As at June 30, 2004 | ||||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
| Value | Amortization | Value | Value | Amortization | Value | ||||||||||||||||||||
|
Goodwill
|
$ | 18,886 | $ | (3,953 | ) | $ | 14,933 | $ | 19,302 | $ | (4,090 | ) | $ | 15,212 | |||||||||||
|
Finite-lived intangible assets:
|
|||||||||||||||||||||||||
|
Contract rights
|
2,658 | (1,181 | ) | 1,477 | 2,673 | (520 | ) | 2,153 | |||||||||||||||||
|
Customer contracts
|
114 | (20 | ) | 94 | 114 | (2 | ) | 112 | |||||||||||||||||
|
Exclusive licences
|
4,506 | (539 | ) | 3,967 | 4,506 | (54 | ) | 4,452 | |||||||||||||||||
|
FTS patent
|
6,072 | (2,885 | ) | 3,187 | 6,106 | (2,443 | ) | 3,663 | |||||||||||||||||
|
Other patents
|
— | — | — | 6 | — | 6 | |||||||||||||||||||
|
Total finite-lived intangible assets
|
$ | 13,350 | $ | (4,625 | ) | $ | 8,725 | $ | 13,405 | $ | (3,019 | ) | $ | 10,386 | |||||||||||
| FTS Patent |
The Company obtained its patent for the Funds Transfer System
(the “FTS Patent”) on its acquisition of Net 1
Investment Holdings (Proprietary) Limited (“Net 1
Holdings”) on July 12, 2000. 100% of Net 1
Holdings’ issued share capital was acquired for a
historical cost of approximately $3.2 million (or
$4.1 million at the March 31, 2005 exchange rate of
$1: ZAR6.3099), which was satisfied through the issuance of
approximately 1.3 million shares of the Company’s
common stock. In addition, a deferred taxation adjustment was
required to increase the historical carrying value to
$1.6 million (or $2 million at the quarter end
exchange rate of $1: ZAR6.3099). Net 1 Holdings was a
holding company that did not generate significant revenues or
expenses and did not have significant assets or liabilities
other than the FTS Patent rights for South Africa and
surrounding territories, on which the Company’s smart card
applications are based.
Aggregate amortization expense on the FTS Patent for the nine
months ended March 31, 2005 was approximately
$0.16 million and $0.46 million, respectively (nine
months to March 31, 2004: $0.14 million and
$0.41 million, respectively). Estimated amortization
expense to be reported in future periods is estimated at
$0.62 million per annum, however this amount could differ
from the actual amortization as a result of new intangible asset
acquisitions, changes in useful lives and other relevant factors.
| Contract Rights |
In December 2003, the Company entered into an agreement with
various black economic empowerment partners (the
“partners”) whereby the partners would provide certain
services, for example, debt collection and dispute resolution,
related to the Cash Paymaster Services Northern contract. The
total amount paid to the partners was approximately
$2.3 million (or $2.7 million at the March 31,
2005 exchange rate of $1: ZAR6.3099). The amount paid will
be amortized over the contract period of 3 years.
Amortization for the nine months ended March 31, 2005 is
approximately $0.23 million and $0.68 million,
respectively (nine months to March 31, 2004:
$0.28 million and $0.28 million, respectively).
Estimated amortization expense to be reported in future periods
is estimated at $0.91 million per annum, however this
amount could differ from the actual amortization as a result of
changes in the contract period and other relevant factors.
F-44
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Customer Contracts and Exclusive Licenses |
The customer contracts and exclusive licenses were valued by an
independent third party and these assets were valued at
approximately $0.1 million and $4.5 million,
respectively, with estimated useful lives of 5 and 7 years,
respectively. Amortization expense for the customer contracts
and exclusive licenses for the nine months ended March 31,
2005 is $0.01 million and $0.16 million, respectively,
and $0.02 million and $0.49 million, respectively.
Estimated amortization expense for the customer contracts and
exclusive license to be reported in future periods is estimated
at $0.02 million and $0.64 million per annum,
respectively. These amounts could differ from the actual
amortization as a result of changes in the useful lives and
other relevant factors.
As required by SFAS 141 goodwill has been allocated to the
Company’s reportable transaction-based activities,
financial services and hardware, software and related technology
sales business segments as follows:
| As at March 31, 2005 | |||||||||||||
| Accumulated | Net Carrying | ||||||||||||
| Cost | Amortization | Value | |||||||||||
|
Transaction-based activities
|
$ | 3,478 | $ | (1,011 | ) | $ | 2,467 | ||||||
|
Smart card accounts
|
— | — | — | ||||||||||
|
Financial services
|
7,813 | (2,191 | ) | 5,622 | |||||||||
|
Hardware, software and related technology sales
|
7,595 | (751 | ) | 6,844 | |||||||||
|
Total
|
$ | 18,886 | $ | (3,953 | ) | $ | 14,933 | ||||||
| As at June 30, 2004 | |||||||||||||
| Accumulated | Net Carrying | ||||||||||||
| Cost | Amortization | Value | |||||||||||
|
Transaction-based activities
|
$ | 3,841 | $ | (1,133 | ) | $ | 2,708 | ||||||
|
Smart card accounts
|
— | — | — | ||||||||||
|
Financial services
|
7,857 | (2,203 | ) | 5,654 | |||||||||
|
Hardware, software and related technology sales
|
7,604 | (754 | ) | 6,850 | |||||||||
|
Total
|
$ | 19,302 | $ | (4,090 | ) | $ | 15,212 | ||||||
As required by SFAS 142, the standard has not been
retroactively applied to the results for the periods prior to
adoption.
| 3. | Capital Structure and Creditor Rights Attached to the B Class Loans |
The Company’s balance sheet reflects two classes of
equity — common stock and linked units. The rights of
the holders of common stock and linked units have not been
affected by the reverse stock split described in Note 4
below.
The linked units comprise the following instruments which are
linked and cannot be traded separately:
| • | a right to special convertible preferred stock, | |
| • | B Class preference shares in Net 1 Applied Technologies South Africa Limited (“New Aplitec”) and | |
| • | B Class loans issued by New Aplitec. |
F-45
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Although the linked units include certain instruments (the B
Class preference shares and the B Class loans) that are legally
equity of a subsidiary of the Company, they have been treated as
equity of the Company and recorded as part of shareholders’
equity in these condensed consolidated financial statements, in
recognition of their substance, which is economically equivalent
to that of common stock.
The B Class loans referred to above are not considered to be a
liability in accordance with SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Equity and Liability, as New Aplitec does not have an
obligation to transfer assets to its shareholders in respect of
the loans. In addition, any distributions relating to the loans
are solely at the discretion of New Aplitec.
Voting rights — Holders of shares of special
convertible preferred stock have the same voting rights as
holders of common stock. Therefore, a linked unit-holder is able
to vote on the same matters as a holder of common stock,
including the selection of directors, corporate decisions
submitted to shareholder vote, and decisions regarding
distribution of earnings. In addition, the special convertible
preferred stock does not provide any additional rights with
respect to control of the Company not shared by holders of
common stock.
Dividend rights — Holders of common stock and
linked units have similar rights to the distribution of the
Company’s earnings.
Liquidation rights — In the event of a
liquidation of the Company or New Aplitec, the linked units are
automatically convertible into common stock of the Company,
thereby allowing a linked unit holder to have identical
liquidation rights to a holder of common stock in the event of
liquidation.
Sale rights — A linked unit holder can only
dispose of its interest in the Company by 1) converting the
linked units into common stock and 2) selling the common
stock on the open market. Therefore, a holder of the linked
units receives the same risk and rewards in market price
fluctuation as a common shareholder of the Company.
| Common Stock |
Holders of shares of the Company’s common stock are
entitled to receive dividends and other distributions when
declared by the Company’s board of directors out of funds
available. Payment of dividends and distributions is subject to
certain restrictions under the Florida Business Corporation Act,
including the requirement that after making any distribution the
Company 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 the Company, 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 Company common stock
are not subject to redemption.
F-46
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Special Convertible Preferred Stock |
The special convertible preferred stock ranks, on parity,
without preference and priority, with the Company’s common
stock with respect to dividend rights (except as described
below) or rights upon liquidation, dissolution or winding-up of
the Company. The stock is junior in preference and priority to
each other class or series of preferred stock or other equity
security of the Company under terms which may be determined by
the board of directors to expressly provide that such other
security rank senior in preference or priority to the special
convertible preferred stock with respect to dividend rights or
rights upon liquidation, dissolution or winding-up of the
Company.
So long as any shares of special convertible preferred stock are
outstanding, the Company’s board will determine immediately
prior to the declaration of any dividend or distribution
(i) the portion, if any, of the Company’s assets
available for such dividend of distribution that is attributable
to funds or assets from New Aplitec, regardless of the manner
received (the “South African Amount”) and
(ii) the portion of such funds or assets that is not from
New Aplitec (the “Non-South African Amount”). The
South African Amount will not include amounts received from New
Aplitec due to its liquidation, distribution or dividend after
insolvency or winding up.
So long as any shares of special convertible preferred stock are
outstanding, (i) any dividends or distributions by the
Company’s board of Non-South African Amounts must be paid
pro rata to all holders of common stock and special
convertible preferred stock, and (ii) and dividends or
distributions by the Company’s board of South African
Amounts can be paid only to holders of common stock. The
Company’s board has complete discretion to declare a
dividend or distribution with respect to South African Amounts
or Non-South African Amounts.
In the event of the voluntary or involuntary liquidation,
dissolution, distribution of assets or winding-up of the
Company, all outstanding shares of special convertible preferred
stock will automatically convert and holders of such stock will
be entitled to receive pari passu with holders of common
stock, any assets of the Company distributed for the benefit of
its shareholders.
Holders of special convertible preferred stock have the right to
receive notice of, attend, speak and vote at general meetings of
the Company, and are entitled to vote on all matters on which
holders of common stock are entitled to vote. Each holder of
special convertible preferred stock present in person, or the
person representing such holder, is entitled to a number of
votes equal to the number of shares of common stock that would
be issued upon conversion of the special convertible preferred
stock held by such holder on the record date.
| B Class Preference Shares |
Net 1 owns 100% of the A class common stock and
A class loans in issue of New Aplitec. The B class
preference shares rank pari passu with the New Aplitec
A class stock in respect of participation in dividends and
return of capital prior to winding-up of New Aplitec. The
B class preference shares shall not, however, participate
in dividends or a return of capital on a winding-up of New
Aplitec for any reason. However, the unit holders will
participate, as the B class preference stock will
automatically convert into Company common stock on a winding-up
of New Aplitec. The B class preference shares cannot be
sold or transferred other than to the Company pursuant to the
occurrence of a trigger event. Therefore, the B class
preference shares, the B class loans and the rights to
receive Company special convertible preferred stock are linked
together and cannot be traded separately.
The holders of B class preference shares will only be
entitled to vote on matters which directly affect the rights
attaching to the B class preference shares. At every
general meeting of New Aplitec at which more than one class of
shareholders are present and entitled to vote, unit holders of
the South African
F-47
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Trust which in turn holds the B class preference shares,
shall be entitled, upon a poll, to that proportion of the total
votes in New Aplitec which the aggregate number of B class
preference shares held bears to the aggregate number of all
shares entitled to be voted at such meeting (provided that no
resolution for the declaration of a dividend or for the disposal
of any intellectual property of New Aplitec shall be passed
unless unit holders representing 50.1% of the B class
preference shares present at the meeting in person or
represented by proxy vote in favor of such resolution).
| B Class Loans |
The B class loans are unsecured and repayable as and when
directed by the board of directors of New Aplitec provided that
no capital may be repaid until at least 30 days have lapsed
from the date of drawdown of the loans, and subject to South
African Exchange Control approval. The loans will bear interest
at such rates as may be determined by the board of directors of
New Aplitec at the beginning of each year, but shall not be more
than the prime rate as quoted by Standard Bank of South Africa
Limited from time to time. Interest, if so declared by the board
of directors of New Aplitec, will be payable by New Aplitec
semi-annually in arrears.
| Conversion of Special Convertible Preferred Stock to Common Stock |
Special convertible preferred stock is convertible into shares
of common stock on a one-for-one basis upon the occurrence of
trigger event. With each converted share of special convertible
preferred stock that is converted, the Company will receive:
| • | 7.368421056 B class preference shares; and | |
| • | such holder’s interest in the New Aplitec B loan accounts. |
Upon conversion, all rights with respect to shares for special
convertible preferred stock will cease. Converted shares will be
cancelled and have the status of authorized but unissued
preferred stock, without designation as to series until such
shares are once more designated as part of a particular series
by the board of directors.
During the nine months ended March 31, 2005,
4,635,931 shares of special convertible preferred stock
were converted to common stock. The trigger events that gave
rise to these conversions were requests by linked unit-holders
to sell and/or convert 34,159,493 linked units during the
nine months ended March 31, 2005. The net result of these
conversions was that 34,159,493 B class preference
shares and B class loans were ceded to Net 1 during
the nine months ended March 31, 2005, which converted
4,635,931 shares of special convertible preferred stock to
4,635,931 common stock in return for the ownership of the
34,159,493 B class preferred shares and B class
loans. As a result of the conversion, the number of outstanding
shares of common stock has increased by 4,635,931 and the number
of outstanding shares of special convertible preferred stock has
decreased by 4,635,931. In addition, as a consequence of the
conversion, the Company now owns 34,159,493 B class
preferred shares and B class loans. The reduction in the
B class preference shares from $0.038 million to
$0.033 million is due to the cession to the Company of the
B class preference shares as a result of the trigger
events. The value of the B class preference shares held by
the Company is eliminated on consolidation.
| 4. | Earnings Per Share |
The entire consolidated net income of the Company is
attributable to the shareholders of the Company comprising both
the holders of Net 1 common stock and the holders of linked
units. As described in Note 3, the linked units have the
same rights and entitlements as those attached to common shares.
F-48
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On June 2, 2005, the Company’s board of directors
approved a one-for-six reverse stock split which became
effective on June 13, 2005. Under Florida corporate law the
reverse stock split was not required to be approved by the
Company’s shareholders. The effect of this reverse stock
split was to decrease the number of issued and outstanding
shares by a factor of six and correspondingly increase the
earnings per share by a factor of six. Each holder of common
stock received one share for every six shares previously held.
Each holder of linked units had an adjustment to the conversion
ratio of each linked unit from 1.228070176 to 7.368421056
(six-fold conversion ratio change).
As a result of the Aplitec transaction, the weighted average
number of shares used to calculate earnings per share for the
nine months ended March 31, 2004, has been prepared to
reflect the capital structure after the transaction and the
one-for-six reverse stock split. The earnings per share
calculation for the nine months ended March 31, 2005,
include the effects of the one-for-six reverse stock split. For
the purposes of these restatements, the Aplitec share capital
has been presented as common stock as of March 31, 2004.
As the linked units owned by holders, other than the Company,
are exchangeable for special convertible preferred stock at the
ratio of 7.37:1, (prior to the reverse stock split: 1.23:1),
which is then converted to common stock at the ratio of 1:1, the
basic earnings per share for the common stock and linked units
are the same and is calculated by dividing the net income by the
combined number (54.7 million) of common stock
(27.2 million) and special convertible preferred stock
(27.5 million) in issue. Diluted earnings per share has
been calculated to give effect to the number of additional
shares of common stock/linked units that would have been
outstanding if the potential dilutive instruments had been
issued in each period, and includes the effects, if any, of the
one-for-six reverse stock split. This is demonstrated in the
following table:
| Nine Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| In U.S. cents | ||||||||
|
Earnings per share, as previously reported
|
10.5 | 9.6 | ||||||
|
Effects of one-for-six reverse stock split
|
52.4 | 48.1 | ||||||
|
Earnings per share, as restated
|
62.9 | 57.7 | ||||||
| ’000 shares | ||||||||
|
Weighted average number of common stock and linked units, as
previously reported
|
328,202 | 192,967 | ||||||
|
Effects of one-for-six reverse stock split
|
(273,502 | ) | (160,806 | ) | ||||
|
Weighted average number of common stock and linked units, as
restated, included in tables below
|
54,700 | 32,161 | ||||||
| Nine Months | ||||||||
| Ended | ||||||||
| March 31 | ||||||||
| 2005 | 2004 | |||||||
| In U.S. cents | ||||||||
|
Diluted earnings per share, as previously reported
|
10.3 | 9.6 | ||||||
|
Effects of one-for-six reverse stock split
|
51.5 | 48.1 | ||||||
|
Diluted earnings per share, as restated
|
61.8 | 57.7 | ||||||
| ’000 shares | ||||||||
|
Weighted average number of common stock and linked units, as
previously reported — diluted
|
334,243 | 192,967 | ||||||
|
Effects of one-for-six reverse stock split
|
(278,536 | ) | (160,806 | ) | ||||
|
Weighted average number of common stock and linked units, as
restated, included in tables below — diluted
|
55,707 | 32,161 | ||||||
F-49
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average number of outstanding shares for the nine
months ended March 31, 2005 presented below includes the
common stock as well as the special convertible preferred stock,
as the holders of special convertible preferred stock have the
same rights and entitlements as those attached to the common
stock.
The following tables detail the weighted average number of
outstanding shares used for the calculation of earnings per
share as of March 31, 2005 and 2004.
| Nine Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| ‘000 | ‘000 | |||||||
|
Weighted average number of outstanding shares of common
stock — basic
|
27,175 | 32,161 | ||||||
|
Weighted average effect of dilutive securities: employee stock
options
|
500 | — | ||||||
|
Weighted average number of outstanding shares of common
stock — diluted
|
27,675 | 32,161 | ||||||
| Nine Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| ‘000 | ‘000 | |||||||
|
Weighted average number of outstanding linked units —
basic
|
27,525 | — | ||||||
|
Weighted average effect of dilutive securities: employee stock
options
|
507 | — | ||||||
|
Weighted average number of outstanding linked units —
diluted
|
28,032 | — | ||||||
| Nine Months | ||||||||
| Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
| ‘000 | ‘000 | |||||||
|
Total weighted average number of outstanding shares used to
calculated earnings per share — basic
|
54,700 | 32,161 | ||||||
|
Total weighted average number of outstanding shares used to
calculated earnings per share — diluted
|
55,707 | 32,161 | ||||||
| 5. | Comprehensive Income |
The Company’s comprehensive income consists of net income
and foreign currency translation gains and losses which, under
GAAP, are excluded from net income. Total comprehensive income
for each of the nine months ended March 31, 2005 and 2004
was:
| Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
|
Net income
|
$ | 34,420 | $ | 18,553 | ||||
|
Foreign currency translation adjustments
|
(1,328 | ) | 14,215 | |||||
| $ | 33,092 | $ | 32,768 | |||||
F-50
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 6. | Operating Segments |
The Company discloses segment information in accordance with
SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (SFAS 131), which
requires companies to determine and review their segments as
reflected in the management information systems reports that
their managers use in making decisions and to report certain
entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds
assets and reports revenues. The Company’s management
prepares consolidated statutory financial statements for
management purposes under South African GAAP
(“SA GAAP”), the company’s chief operating
decision-maker evaluates the segment performance using
SA GAAP measures.
Revenues and operating income are measured on a segmental basis
in accordance with SA GAAP (defined as “operating
(loss)/income of continuing operations before central costs,
goodwill amortization, SA GAAP operating exceptional items
and share option costs”). In the tables below, this measure
is referred to as segment operating (loss)/income.
The Company currently has four reportable segments which each
operate mainly within South Africa: transaction-based
activities; smart card accounts; financial services and
hardware, software and related technology sales. The Company
also has a corporate/eliminations segment. The Company’s
reportable segments offer different products and services and
require different resources and marketing strategies and share
the Company’s assets.
The transaction-based activities segment currently consists
mainly of a state pension and welfare benefit distribution
service to provincial governments in South Africa. Fee income is
earned based on the number of beneficiaries included in the
government pay-file. This segment has individually significant
customers that each provides more than 10 percent of the
total revenue of the Company. For the nine months ended
March 31, 2005, there were three such customers,
providing 12, 36 and 20 percent, respectively, of
total revenue. For the nine months ended March 31, 2004
there were three such customers providing 11, 37 and
22 percent, respectively, of total revenue.
The smart card accounts segment derives revenue from the
provision of smart card accounts, as a fixed monthly fee per
card is charged for the maintenance of these accounts. This
segment’s activities were previously included in the
financial services segment. In the third quarter of fiscal 2005
management started analyzing the results of this segment
separately and consequently a new segment has been presented.
Prior year segment information has been restated in order to
show comparative information.
The financial services segment derives revenue from the
provision of short-term personal lending activities and life
insurance products. Interest income is recognized in the income
statement as it falls due, using the interest method by
reference to the constant interest rate stated in each loan
agreement.
The hardware, software and related technology sales segment
markets, sells and implements the Universal Electronic Payment
System (“UEPS”). The segment undertakes smart card
system implementation projects, delivering hardware, software
and business solutions in the form of customized systems.
Corporate/Eliminations include the Company’s head office
cost centers in addition to the elimination of inter-segment
transactions.
The accounting policies of the segments are consistent with
those described at June 30, 2004, and any inter-segment
sales or transfers are eliminated.
F-51
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company evaluates segment performance based on operating
income. The following tables summarize segment information which
is prepared in accordance with SA GAAP, with the exception
of income tax expense and net income after taxation, where the
recent reduction in the South African tax rate from 30% to 29%
has not been effected:
| Nine Months Ended | ||||||||||
| March 31, | ||||||||||
| 2005 | 2004 | |||||||||
|
Revenues
|
||||||||||
|
Transaction-based activities
|
$ | 77,538 | $ | 59,875 | ||||||
|
Smart card accounts
|
26,362 | 15,762 | ||||||||
|
Financial services
|
15,642 | 12,384 | ||||||||
|
Hardware, software and related technology sales
|
15,343 | 3,312 | ||||||||
|
Total
|
134,885 | 91,333 | ||||||||
|
Operating income
|
||||||||||
|
Transaction-based activities
|
31,629 | 18,626 | ||||||||
|
Smart card accounts
|
11,983 | 7,165 | ||||||||
|
Financial services
|
7,579 | 5,150 | ||||||||
|
Hardware, software and related technology sales
|
6,036 | (236 | ) | |||||||
|
Corporate/Eliminations
|
(174 | ) | (3,442 | ) | ||||||
|
Total
|
57,053 | 27,263 | ||||||||
|
Interest earned
|
||||||||||
|
Transaction-based activities
|
— | — | ||||||||
|
Smart card accounts
|
— | — | ||||||||
|
Financial services
|
— | — | ||||||||
|
Hardware, software and related technology sales
|
— | — | ||||||||
|
Corporate/Eliminations
|
11,505 | 10,962 | ||||||||
|
Total
|
11,505 | 10,962 | ||||||||
|
Interest expense
|
||||||||||
|
Transaction-based activities
|
9,689 | 8,020 | ||||||||
|
Smart card accounts
|
— | — | ||||||||
|
Financial services
|
21 | 20 | ||||||||
|
Hardware, software and related technology sales
|
298 | 109 | ||||||||
|
Corporate/Eliminations
|
— | 349 | ||||||||
|
Total
|
$ | 10,008 | $ | 8,498 | ||||||
F-52
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Nine Months Ended | ||||||||||
| March 31, | ||||||||||
| 2005 | 2004 | |||||||||
|
Depreciation and amortization
|
||||||||||
|
Transaction-based activities
|
$ | 3,910 | $ | 3,432 | ||||||
|
Smart card accounts
|
— | — | ||||||||
|
Financial services
|
377 | 435 | ||||||||
|
Hardware, software and related technology sales
|
— | 2 | ||||||||
|
Corporate/Eliminations
|
716 | 189 | ||||||||
|
Total
|
5,003 | 4,058 | ||||||||
|
Income taxation expense
|
||||||||||
|
Transaction-based activities
|
6,559 | 3,359 | ||||||||
|
Smart card accounts
|
3,595 | 2,150 | ||||||||
|
Financial services
|
2,268 | 1,539 | ||||||||
|
Hardware, software and related technology sales
|
1,720 | (103 | ) | |||||||
|
Corporate/Eliminations
|
3,850 | 4,205 | ||||||||
|
Total
|
17,992 | 11,150 | ||||||||
|
Net income after taxation
|
||||||||||
|
Transaction-based activities
|
15,379 | 7,248 | ||||||||
|
Smart card accounts
|
8,386 | 5,015 | ||||||||
|
Financial services
|
5,292 | 3,590 | ||||||||
|
Hardware, software and related technology sales
|
4,014 | (242 | ) | |||||||
|
Corporate/Eliminations
|
7,487 | 2,966 | ||||||||
|
Total
|
40,558 | 18,577 | ||||||||
|
Segment assets
|
||||||||||
|
Total
|
164,670 | 131,243 | ||||||||
|
Expenditures for long-lived assets
|
||||||||||
|
Transaction-based activities
|
2,313 | 2,077 | ||||||||
|
Smart card accounts
|
— | — | ||||||||
|
Financial services
|
669 | 111 | ||||||||
|
Hardware, software and related technology sales
|
— | 15 | ||||||||
|
Corporate/Eliminations
|
— | 189 | ||||||||
|
Total
|
$ | 2,982 | $ | 2,392 | ||||||
Due to the developments in the business, all of the significant
assets are used in the operations of all the segments. The
company does not have dedicated assets assigned to a particular
operating segment. Accordingly, it is not meaningful to attempt
an arbitrary allocation and segment asset allocation is
therefore not presented.
F-53
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present the Company’s net income after
tax and segment assets from the Company’s reportable
segments presented in accordance with SA GAAP and then
reconciled to United States generally accepted accounting
principles (“US GAAP”) financial information
consolidated totals:
| Nine Months Ended | ||||||||||
| March 31, | March 31, | |||||||||
| 2005 | 2004 | |||||||||
|
Net income after tax in accordance with SA GAAP
|
$ | 40,558 | $ | 18,577 | ||||||
|
Intangible amortization adjustment
|
(a) | (251 | ) | (223 | ) | |||||
|
Self insurance adjustment
|
(b) | (1,465 | ) | 2,515 | ||||||
|
Goodwill amortization adjustment
|
(c) | 120 | 430 | |||||||
|
Secondary Taxation on Companies adjustment
|
(d) | (4,740 | ) | (1,977 | ) | |||||
|
Taxation adjustments due to difference between SA and
US GAAP
|
(e) | 198 | (769 | ) | ||||||
|
Reclassification of earnings from equity accounted investment
|
(f) | (480 | ) | — | ||||||
|
Net income after tax in accordance with US GAAP
|
$ | 33,940 | $ | 18,553 | ||||||
| March 31, | ||||||
| 2005 | ||||||
|
Segment assets in accordance with SA GAAP
|
$ | 164,670 | ||||
|
Recognition of goodwill, net of amortization
|
(c) | 6,882 | ||||
|
Recognition of intangible assets, net of amortization
|
(a) | 3,187 | ||||
|
Deferred tax adjustments
|
(d) | 579 | ||||
|
Segment assets in accordance with US GAAP
|
$ | 175,318 | ||||
(a) Aplitec obtained the FTS Patent on its acquisition
of Net 1 Holdings on July 12, 2000. 100% of Net 1
Holdings issued share capital was acquired for approximately
$3.2 million, which was satisfied through the issuance of
approximately 1.3 million of Aplitec common shares. For
SA GAAP purposes, this was treated as the acquisition of a
business as it was a corporate entity and the excess of the
purchase price over the identifiable assets acquired was treated
as goodwill and amortized over 10 years. For US GAAP
purposes, EITF 98-3, Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets or of a
Business, defines a business and the acquisition of Net 1
Holdings was in substance the acquisition of an asset. As such,
the treatment of the premium on acquisition over the net asset
value is regarded as being attributable to the patent rights
acquired and not treated as goodwill. The patent rights carrying
value should be amortized over 10 years, which is the same
period that would be used to amortize goodwill.
(b) Aplitec had in the past established a provision in
respect of self-insured losses (mainly attributable to cash in
transit theft) based on actuarially determined amount of such
losses expected to arise in the next 12 months. For
SA GAAP purposes, the provision for self-insured losses was
reversed towards the end of fiscal year June 30, 2004 and
the provision for self-insured losses provided approximates the
amounts required under US GAAP. The Company acquired an
insurance captive as part of the acquisition of Cash Paymaster
Services (Pty) Ltd in 1999. This asset was not recognized
on acquisition and the cash in the captive at acquisition was
$2.3 million. The captive was cancelled in the first
quarter of 2005 and the cash included in the captive at the date
of closure was included in the cash and cash equivalents as of
September 30, 2004.
For the purposes of US GAAP, self-insurance does not
represent the transfer of risk and as such it is not possible to
recognize a liability for future losses that will arise from
events subsequent to the balance sheet date. In addition, the
captive insurance company, for periods prior to its cancellation
(i.e. for all
F-54
Table of Contents
NET 1 UEPS TECHNOLOGIES, INC.
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
periods before and including June 30, 2004), should be
consolidated for US GAAP purposes. However as the captive
was cancelled, a consolidation adjustment is no longer required
for periods beginning September 30, 2004.
An adjustment is required to reverse that part of the charge in
the income statement in respect of such losses that do not
represent the losses of the period (nine months ended March
2005: $0, nine months ended March 2004: $0.6 million and
$2.5 million, respectively) and consolidate the assets of
the captive insurance company for all periods ended prior to and
including June 30, 2004. In addition, an adjustment is
required for the nine months ended March 31, 2005 to
reverse the gain of $1.5 million recognized under
SA GAAP due to the cancellation of the captive.
(c) Under SA GAAP, goodwill arising on business
combinations was written off against shareholders’ equity.
With effect from July 1, 2000, SA GAAP required that
goodwill be capitalized and amortized over its useful life.
Under US GAAP, until July 1, 2002, goodwill should be
capitalized and amortized over its useful life, which could not
exceed 40 years. The adjustment therefore gives effect to
the amount of goodwill that would have been required to be
recognized in a US GAAP balance sheet and the amount of
amortization that would have arisen thereon, which has been
calculated on the basis of a useful life of 10 years. Due
to the adoption of SFAS 141 and SFAS 142, goodwill is
no longer required to be amortized, instead an impairment review
is required at least annually. In addition, certain goodwill
amounts were not recognized at the correct amount due to Aplitec
using a fixed price as opposed to a fair market price for shares
issued in exchange for assets.
(d) SA GAAP requires that deferred tax be provided for
at the undistributed rate of 30%. For the purpose of
US GAAP, under FAS 109, Accounting for Income Tax,
temporary differences have been tax effected using the tax rate
that will apply when income is distributed, i.e. an
effective rate of 37.78% including Secondary Tax on Companies.
Aplitec has computed the effect this change in tax rate would
have on the current deferred taxation assets.
(e) The tax effects of the US GAAP adjustments have
been calculated based on the enacted tax rate for the nine
months ended March 31, 2005 of 37.78% (nine months ended
March 31, 2004: 37.78%).
(f) Under SA GAAP, the tax effected earnings from the
equity accounted investment is included before the income tax
expense. Under US GAAP, the earnings from the equity
accounted investment is shown after the income tax expense and
net income after tax. An adjustment is required to reclassify
the earnings from the equity accounted investment from above the
income tax expense to below net income after tax.
| 7. | Deferred Expenditure on Smart Cards |
The deferred expenditure on smart cards represents amounts paid
for smart cards used in the administration and distribution of
grants to beneficiaries. These expenditures are deferred and
written off over the period of the contract with the provincial
government.
F-55
Table of Contents
9,850,000 Shares
Common Stock
Prospectus
| Morgan Stanley | JPMorgan |
|
Robert W. Baird & Co.
|
Jefferies & Company, Inc. | Thomas Weisel Partners LLC |
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable by us in
connection with the sale of shares of common stock in this
offering. All amounts are estimates except the SEC registration
fee and the NASD fee.
| Amount to be Paid | |||||
|
SEC registration fee
|
$ | 30,602.00 | |||
|
NASD filing fee
|
26,500.00 | ||||
|
Nasdaq National Market listing fee
|
100,000.00 | ||||
|
Printing expenses
|
255,000.00 | * | |||
|
Legal fees and expenses
|
1,600,000.00 | * | |||
|
Accounting fees and expenses
|
40,000.00 | * | |||
|
Transfer agent fee
|
10,000.00 | ||||
|
Miscellaneous
|
37,898.00 | ||||
|
Total
|
$ | 2,100,000.00 | |||
* Estimated
| Item 14. | Indemnification of Directors and Officers |
Section 607.0850(1) of the Florida Business Corporation
Act, or FBCA, permits a Florida corporation to indemnify any
person who may be a party to any third party proceeding by
reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, against liability
incurred in connection with such proceeding (including any
appeal thereof) if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
Section 607.0850(2) of the FBCA permits a Florida
corporation to indemnify any person who may be a party to a
derivative action if such person acted in any of the capacities
set forth in the preceding paragraph, against expenses and
amounts paid in settlement not exceeding, in the judgment of the
board of directors, the estimated expenses of litigating the
proceeding to conclusion, actually and reasonably incurred in
connection with the defense or settlement of such proceeding
(including appeals), provided that the person acted under the
standards set forth in the preceding paragraph. However, no
indemnification shall be made for any claim, issue or matter for
which such person is found to be liable unless, and only to the
extent that, the court determines that, despite the adjudication
of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnification
for such expenses which the court deems proper.
Section 607.0850(4) of the FBCA provides that any
indemnification made under the above provisions, unless pursuant
to a court determination, may be made only after a determination
that the person to be indemnified has met the standard of
conduct described above. This determination is to be made by a
majority vote of a quorum consisting of the disinterested
directors of the board of directors, by duly selected
independent legal counsel, or by a majority vote of the
disinterested shareholders. The board of directors also may
designate a special committee of disinterested directors to make
this determination.
Section 607.0850(3), however, provides that a Florida
corporation must indemnify any director, or officer, employee or
agent of a corporation who has been successful in the defense of
any proceeding referred to in Sections 607.0850(1) or (2),
or in the defense of any claim, issue or matter therein, against
expenses actually and reasonably incurred by him in connection
therewith.
II-1
Table of Contents
Under the FBCA, expenses incurred by a director or officer in
defending a civil or criminal proceeding may be paid by the
corporation in advance of the final disposition thereof upon
receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it is ultimately determined that
such director or officer is not entitled to indemnification
under Section 607.0850. Expenses incurred by other
employees or agents in such a proceeding may be paid in advance
of final disposition thereof upon such terms or conditions that
the board of directors deems appropriate.
The FBCA further provides that the indemnification and
advancement of payment provisions contained therein are not
exclusive and it specifically empowers a corporation to make any
other further indemnification or advancement of expenses under
any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both for actions taken in an official
capacity and for actions taken in other capacities while holding
an office. However, a corporation cannot indemnify or advance
expenses if a judgment or other final adjudication establishes
that the actions of the director or officer were material to the
adjudicated cause of action and the director or officer
(a) violated criminal law, unless the director or officer
had reasonable cause to believe his conduct was lawful or had no
reasonable cause to believe his conduct was unlawful,
(b) derived an improper personal benefit from a
transaction, (c) was or is a director in a circumstance
where the liability under Section 607.0834 (relating to
unlawful distributions) applies, or (d) engages in willful
misconduct or conscious disregard for the best interests of the
corporation in a proceeding by or in right of the corporation to
procure a judgment in its favor or in a proceeding by or in
right of a shareholder.
Our articles of incorporation provide that we have the power to,
and we intend to adopt provisions in our by-laws providing that
we will, indemnify any current or former director, officer,
employee or agent against any liability arising from any action
or suit to the fullest extent permitted by law. Advances against
expenses may be made under our by-laws and any other
indemnification agreement into which we may enter and the
indemnity coverage provided thereunder may include liabilities
under the federal securities laws as well as in other contexts.
Our by-laws also permit us to purchase and maintain insurance on
behalf of any current or former director, officer, employee or
agent for any liability incurred by any of them in connection
with, or arising out of, their actions in their capacity as our
director, officer, employee or agent, whether or not our
articles of incorporation or by-laws permit such
indemnification. We have not obtained such insurance, but we
intend to do so.
Pursuant to that certain common stock purchase agreement between
us and SAPEF III International G.P. Limited, dated
January 30, 2004, we agreed to indemnify and provide
directors and officers liability insurance for each nominee of
SAPEF, or its nominee, that serves as our director, to the
maximum extent permitted by law. Additionally, we agreed to
purchase additional insurance as necessary to provide continuous
directors and officers liability coverage, including coverage
for claims asserted up to six years after the termination of any
such insurance for matters occurring prior to such termination,
as reasonably requested by SAPEF. We have not obtained such
additional insurance, but we intend to do so.
Reference is made to Article V of our by-laws filed as
Exhibit 3.4 hereto.
| Item 15. | Recent Sales of Unregistered Securities |
Set forth below is information regarding unregistered offerings
and shares of common stock and options granted by us within the
past three years. Also included is the consideration, if any,
received by us for such shares and options and information
relating to the section of the Securities Act or rule of the
SEC, under which exemption from registration was claimed.
On June 7, 2004, 17,610,238 shares of common stock
were issued to a group of private equity funds at an aggregate
price of $52.8 million, or $3.00 per share. These
shares were issued and exempt from registration under the
Securities Act of 1933, pursuant to Section 4(2) of that
Act.
In addition, on June 7, 2004, Brait International Limited
exercised its option to receive 833,333 shares of common
stock at a price of $3.00 per share as partial
consideration of its transaction fees in connection
II-2
Table of Contents
with the Aplitec transaction. These shares were issued and
exempt from registration under the Securities Act of 1933,
pursuant to Section 4(2) of that Act.
During June 2004, we issued other stock-based awards with
respect to 1,453,493 shares of common stock to our
employees for no cash consideration, and issued options to
purchase 1,453,493 shares of common stock to our
employees at an exercise price of $3.00 per share.
| Item 16. | Exhibits and Financial Statement Schedules |
| (a) | Exhibits |
A list of exhibits filed herewith is contained in the exhibit
index that immediately precedes such exhibits and is
incorporated herein by reference.
| Item 17. | Undertakings |
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Johannesburg, South Africa on the 19th day
of July, 2005.
| Net 1 UEPS Technologies, Inc. |
| By: | /s/ Serge C.P. Belamant |
|
|
|
| Name: Serge C.P. Belamant |
| Title: | Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
whose signature appears below hereby appoints Serge C.P.
Belamant and Herman Gideon Kotze, and each of them acting
singly, as his true and lawful attorney-in-fact to sign on his
behalf and individually and in the capacity stated below and to
file all amendments (including post-effective amendments) and
make such changes and additions to this Registration Statement,
including any subsequent registration statement for the same
offering that may be filed under Rule 462(b), and to file the
same, with all exhibits thereof, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or either of them, their
substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities indicated, on the 19th day of July, 2005.
| Signature | Title | Date | ||||
|
/s/ Serge C.P. Belamant |
Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer) | July 19, 2005 | ||||
|
* |
Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial and Accounting Officer) | July 19, 2005 | ||||
|
* |
Director | July 19, 2005 | ||||
|
* |
Director | July 19, 2005 | ||||
|
* |
Director | July 19, 2005 | ||||
II-4
Table of Contents
| Signature | Title | Date | ||||
|
* |
Director | July 19, 2005 | ||||
|
/s/ Paul Edwards |
Director | July 19, 2005 | ||||
| *By: |
/s/ Serge C.P. Belamant Attorney-in-Fact |
|||||
II-5
Table of Contents
EXHIBIT INDEX
| 1.1** | Form of Underwriting Agreement. | |||
| 2.1 | Sale Agreement, dated October 31, 2003, between Net 1 Applied Technology Holdings Limited, Net 1 Investment Holdings (Proprietary) Limited, Net 1 Support Services (Proprietary) Limited and Newshelf 713 (Proprietary) Limited (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.2 | Subscription Agreement, dated October 31, 2003, between Net 1 UEPS Technologies, Inc. and Newshelf 713 (Proprietary) Limited (incorporated by reference to Exhibit 2.2 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.3 | Asset Purchase Agreement, dated as of January 30, 2004, between Net 1 Holdings S.a.r.l. and Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 2.3 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.4 | Common Stock Purchase Agreement, dated as of January 30, 2004, between Net 1 UEPS Technologies, Inc. and SAPEF III International G.P. Limited (or its nominees) (incorporated by reference to Exhibit 2.4 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.5 | Subscription Agreement, dated November 10, 2003, between the Trustees for the time being of the New Aplitec Participation Trust and Newshelf 713 (Proprietary) Limited (incorporated by reference to Exhibit 2.5 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.6 | Trust Deed of the New Aplitec Participation Trust, dated October 31, 2003, entered into between Newshelf 713 (Proprietary) Limited and Brait Capital Partners Trustees (Proprietary) Limited (incorporated by reference to Exhibit 2.6 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.7 | Trust Deed for the Aplitec Holdings Participation Trust, dated January 30, 2004, between Walkers SPV, SAPEF III International G.P. Limited (in its capacity as original enforcer), Brait Capital Partners Trustees (Proprietary) Limited (in its capacity as trustee of the New Aplitec Participation Trust) and Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 2.7 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.8 | Umbrella Agreement, dated November 10, 2003, between SAPEF III International G.P. Limited, The Trustees of the South African Private Equity Trust III, Net 1 UEPS Technologies, Inc., The Trustees of the New Aplitec Participation Trust and Newshelf 713 (Proprietary) Limited (incorporated by reference to Exhibit 2.8 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 2.9 | Underwriting Agreement, dated November 5, 2003, South African Private Equity Trust III and South African Private Equity Fund III L.P. and Newshelf 713 (Proprietary) Limited (incorporated by reference to Exhibit 2.9 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 3.1 | Articles of Incorporation of Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 1 to our Registration Statement on Form 10-SB filed on August 1, 2000 (file no. 000-31203)). | |||
| 3.2 | Articles of Amendment to Articles of Incorporation of Net 1 UEPS Technologies, Inc. (included as Annex A to the proxy statement/ prospectus included in our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463) and incorporated by reference herein). | |||
| 3.3 | Articles of Amendment to Articles of Incorporation of Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 3.3 to our Form 8-K, filed on June 14, 2005). | |||
| 3.4 | Amended and Restated By-Laws of Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 3.5 to our Form 8-K, filed on June 7, 2005). | |||
| 4.1* | Form of common stock certificate. |
Table of Contents
| 5.1** | Opinion of DLA Piper Rudnick Gray Cary US LLP as to the legality of the securities being registered. | |||
| 10.1 | Distribution Agreement, dated July 1, 2002, between Net 1 UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty) Limited (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 10.2 | Patent and Technology Agreement, dated June 19, 2000, by and between Net 1 Holdings S.a.r.l. and Net 1 UEPS Technologies, Inc. (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 10.3 | Service Level Agreement between The Limpopo Provincial Government in its Department of Health and Welfare and Cash Paymaster Services (Northern) (Pty) Limited (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 10.4 | Service Level Agreement between the Department of Social Welfare and Population Development, KwaZulu-Natal and Cash Paymaster Services KwaZulu-Natal (Pty) Ltd. (incorporated by reference to our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463)). | |||
| 10.5 | 2004 Stock Incentive Plan (included as Annex B to the proxy statement/ prospectus included in our Registration Statement on Form S-4, filed on February 3, 2004 (file no. 333-112463) and incorporated by reference herein). | |||
| 10.6 | Product License Agreement between Net 1 Holdings S.a.r.l. and Banque De Gestion Et De Financement Burundi (incorporated by reference to Exhibit 10.6 to Amendment No. 2 to our Registration Statement on Form S-4/ A, filed on April 21, 2004 (file no. 333-112463)). | |||
| 10.7 | Product Licence Agreement between Net 1 Holdings S.a.r.l. and Banque De Commerce, De Development Et D’Industrie B.C.D.I. S.A. Rwanda (incorporated by reference to Exhibit 10.7 to Amendment No. 2 to our Registration Statement on Form S-4/ A, filed by Net 1 UEPS Technologies, Inc. on April 21, 2004 (file no. 333-112463)). | |||
| 10.8 | Product Licence Agreement between Net 1 Holdings S.a.r.l. and Net 1 Operations S.a.r.l. (incorporated by reference to Exhibit 10.8 to Amendment No. 2 to our Registration Statement on Form S-4/ A, filed on April 21, 2004 (file no. 333-112463)). | |||
| 10.9 | Procurement and Commissioning Agreement between Net 1 Investment Holdings (Proprietary) Limited and Reserve Bank of Malawi (incorporated by reference to Exhibit 10.9 to Amendment No. 2 to our Registration Statement on Form S-4/ A, filed on April 21, 2004 (file no. 333-112463)). | |||
| 10.10 | Non Exclusive UEPS Licence Agreement between Net 1 Investment Holdings (Proprietary) Limited and SIA Netcards (incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-4/ A, filed on April 21, 2004 (file no. 333-112463)). | |||
| 10.11* | Technology License Agreement between Net 1 Investment Holdings (Proprietary) Limited and Visa International Service Association. | |||
| 10.12* | Service Level Agreement between the Province of the Eastern Cape Department of Social Development and CPS Eastern Cape (Proprietary) Limited. | |||
| 10.13* | Banking Facility between Nedbank Limited and Net 1 Applied Technology Holdings Limited. | |||
| 10.14* | Facility between Cash Paymaster Services Eastern Cape and Nedbank Limited. | |||
| 10.15* | Addendum to Facility Letter—Approval of Increase Bridging Loan Facilities between Nedbank Limited and Net 1 Applied Technology Holding Limited. | |||
| 10.16** | Agreement between Nedcor Bank Limited and Net 1 Products (Proprietary) Limited. | |||
| 10.17* | Assignment of Copyright and License of Patents and Trade Marks between MetroLink (Proprietary) Limited and Net 1 Products (Proprietary) Limited. | |||
| 10.18* | Patent and Technology Agreement by and between Net 1 Investment Holdings (Proprietary) Limited and Nedcor Bank Limited. |
Table of Contents
| 10.19** | Patent and Technology Agreement by and between Net 1 Holdings S.a.r.l. and Net 1 Applied Technology Holdings Limited and Nedcor Bank Limited. | |||
| 10.20** | Agreement between Nedbank Limited and Net 1 UEPS Technologies, Inc. and Net 1 Applied Technologies South Africa Limited. | |||
| 10.21** | Stock Purchase Agreement dated July 18, 2005, by and among CI Law Trustees Limited for the San Roque Trust, Dr. Serge C.P. Belamant, South African Private Equity Fund III, L.P., South African Private Equity Trust III, Brenthurst Private Equity II Limited, Brenthurst Private Equity South Africa I Limited, General Atlantic Partners 80, L.P., GapStar LLC, GAP Coinvestments III, LLC, GAP Coinvestments IV, LLC, GAPCO GmbH & Co. KG and Net 1 UEPS Technologies, Inc. | |||
| 10.22** | Placement Agent Agreement, dated July 18, 2005, among Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc., as Placement Agents, the sellers party thereto, and Net 1 UEPS Technologies, Inc. | |||
| 21.1** | Subsidiaries of Net 1 UEPS Technologies, Inc. | |||
| 23.1** | Consent of Deloitte & Touche, Chartered Accountants. | |||
| 23.2** | Consent of PKF (Jhb) Inc. | |||
| 23.3** | Consent of DLA Piper Rudnick Gray Cary US LLP (incorporated by reference to Exhibit 5.1 to this Registration Statement on Form S-1). | |||
| 23.4** | Consent of Cliffe Dekker Inc | |||
| 24.1** | Power of Attorney (included on signature page to the initial filing of this Registration Statement on Form S-1 and this Amendment No. 3 to this Registration Statement on Form S-1). | |||
| 99.1** | Consent of Florian P. Wendelstadt |
| * | Filed previously. |
| ** | Filed herewith. |