Net 1 UEPS Technologies, Inc. Chairman’s Letter for 2011 Annual Report
Dear Fellow Shareholders:
2011 was one of the most challenging years for our company since its founding over twenty years ago, but also one in which we
made measurable progress towards the diversification and globalization of our revenue and earnings as well as the addition of a
number of complementary products in line with our ultimate vision.
Our financial performance in fiscal 2011 was hindered primarily by the lower economics at our largest customer, the South
African Social Security Agency (“SASSA”). SASSA has issued a national tender for the distribution of social grants across all
nine of South Africa’s provinces. I believe Net1 has submitted a most comprehensive and value-creating proposal for the South
African government, the people of South Africa, the company and ultimately our shareholders.
We completed our acquisition of KSNET, one of the leading payment processors in the Republic of Korea, on October 29, 2010,
began the commercialization of Mobile Virtual Card (“MVC”) and laid significant groundwork to capitalize on the transformation
of the U.S. healthcare industry via our XeoHealth subsidiary. Meanwhile, the opportunities for further organic geographic
expansion in developing countries through our UEPS products are as strong as ever.
With the potential conclusion of SASSA’s tender process in the near future, I believe Net1 will re-emerge as a growth company
with a much lower risk profile.
Our mission has always been, and will continue to remain, to provide efficient, secure and affordable electronic transaction
platforms, including the FTS/UEPS, and financial services for the world’s unbanked and under-banked populations. That said, we
also see opportunities in select developed and developing countries for both our mobile payment and healthcare claims processing
activities that will facilitate interoperability across the developed and developing nations of the world.
I believe our key accomplishments in fiscal 2011 were the acquisition of KSNET; the strengthening of our capabilities in
healthcare claims adjudication and payroll processing; the commercializing of MVC in the U.S. and imminently in Mexico;
growing our transaction revenues in Iraq and solidifying EasyPay’s market-leading position by expanding its customer base,
broadening its value-added services product portfolio, and enhancing its point-of-sale, web, mobile and Kiosk distribution
channels. Despite this progress, our financial results were adversely impacted by the concessions we provided to SASSA and the
writedown of Net1 UTA intangibles due to uncertainty about its near-term profitability.
Financial Overview and Key Metrics. Our financial and operating performance in fiscal 2011 were in line with the expectations
we laid out at the beginning of the year and reflect the adverse impact of the concessions to SASSA and the Net1 UTA
writedown. Our US dollar-based results were favorably impacted by a 8% year-over-year appreciation in the South African rand,
while in constant currency revenue grew 13% and Fundamental EPS (GAAP earnings excluding amortization of intangibles,
stock compensation and one-time items) declined 30%, predominantly due to the lower profitability of our contract with SASSA.
Consolidated operating margin excluding those same items, was 30% in fiscal 2011 compared to 43% a year ago, and reflects our
SASSA contract and lower margin profiles of the acquisitions we made over the past year.
Our operating performance continues to be fueled by growth in our non-SASSA related transaction-based activities. In fiscal
2011, we also introduced our new international transaction-based activities segment, which incorporates KSNET, transaction
revenue from Iraq and MVC. During fiscal 2011, this segment generated $70 million of revenue and a 15% operating margin,
excluding amortization of intangibles and other one-time items but including start up expenses for MVC. Our business remains
cash generative, providing $66 million in operating cash flow during the year, and we ended fiscal 2011 with $95 million in cash
and $126 million in debt.
Corporate Development Activities. In fiscal 2011, we acquired 98.7% of KSNET for approximately $240 million and financed
the transaction with $124 million in cash and $116 million in debt. We intend to use our cash going forward to fund investments
in key areas rather than to pursue any other large acquisitions.
During the year, we implemented the previously negotiated contract with SASSA at lower economics. The contract currently runs
through March 31, 2012. We spent significant time and resources over the past year to create a proactive, comprehensive and
cost-effective solution in response to the new national tender issued by SASSA in April 2011. For KSNET, we substantially
completed the integration of the acquisition, introduced a special promotion to accelerate growth in its small and medium-sized
merchant base, and actively evaluated multiple revenue synergy opportunities, which we expect to implement over the course of
fiscal 2012. Additionally, we continue to enhance our EasyPay network, including the introduction of self-service Kiosks, deliver
on our existing international projects, maintain active negotiations on our future international pipeline, and invest in MVC and
XeoHealth as we prepare to build scale in the U.S and other markets.
New Products. Innovation is in Net1’s DNA. MVC, our mobile phone-based technology that eliminates fraud in card-not-present
transactions, was officially launched in the U.S. last year. We expect that the system will become operational in early calendar
2012 through Banamex, Mexico’s leading financial institution and a unit of Citigroup, and we expect to introduce MVC in several
other countries around the world. We have also partnered with the two leading global card networks, namely MasterCard and
Visa, on a country-by-country basis to accelerate the roll-out of MVC while making accessibility universal.
Management and Governance. We remain committed to expanding our management team and last year added several seasoned
industry veterans both organically and via acquisitions. A large part of our investments in fiscal 2012 will be related to the further
expansion of our management and sales and marketing teams across Net1’s key growth areas. Our Board of Directors continues
to provide invaluable support to the success of the Company.
Looking Ahead. The public and private sectors around the world continue to seek increased penetration of formal financial
services and electronic payments to the vast unbanked population across multiple distribution channels, and Net1 is better
positioned to benefit from these trends than at any time before. Demand for our offline traditional UEPS payment systems, as well
as healthcare, payroll and mobile payment technologies, provides the Company with strong momentum, and in turn should fuel
sustained revenue and earnings growth over the next several years. Concurrently, our focus on better leveraging our existing
infrastructure, integrating our acquisitions and continued migration to an electronic payment model should drive further
efficiencies and margin improvements.
To our stakeholders, we recognize the pressure on our share price over the past two years which is a result of the perceived
uncertainty surrounding the long-term sustainability of our contract with SASSA and more recently, SASSA’s outstanding tender.
Rest assured that management is fully committed to providing the most comprehensive, cost-effective and socially responsible
solution to the South African government, which we are able to do given our best-in-class technology, track record and cost
structure. Additionally, I believe Net1 now has in place most of the major building blocks to drive long-term sustained growth.
I would like to conclude by thanking all of our employees for their dedication and tireless pursuit of excellence in serving our new
and existing customers, our communities, and for striving to push Net1 to a position of leadership within our industries.
Sincerely,
Dr. Serge Belamant
Chairman and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-31203
NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction
of incorporation or organization)
98-0171860
(I.R.S. Employer
Identification No.)
President Place, 4th Floor, Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices)
Registrant’s telephone number, including area code: 27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
Common Stock,
par value $0.001 per share
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filings requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
Yes [X] No [ ]
the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
[ ] Large accelerated filer
[ X] Accelerated filer
[ ] Non-accelerated filer
[ ]
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of
December 31, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter),
based upon the closing price of the common stock as reported by The Nasdaq Global Select Market on such
date, was $408,272,810. This calculation does not reflect a determination that persons are affiliates for any
other purposes.
As of August 23, 2011, 45,152,805 shares of the registrant’s common stock, par value $0.001 per share
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 2011 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2011
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Reserved
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
Signatures
Financial Statements
Page
2
16
29
30
30
30
31
33
35
62
63
63
64
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67
67
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70
F-1
1
FORWARD LOOKING STATEMENTS
PART I
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties that could cause our actual results to differ materially from those projected, anticipated or implied in the
forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those
discussed in Item 1A—“Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as
“may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of such terms and other comparable terminology. You should not place undue reliance
on these forward-looking statements, which reflect our opinions only as of the date of this Annual Report. We undertake no
obligation to release publicly any revisions to the forward-looking statements after the date of this Annual Report. You should
carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by us in our 2012 fiscal year, which runs from July 1,
2011 to June 30, 2012.
ITEM 1. BUSINESS
Overview
We provide payment solutions and transaction processing services across a wide range of industries and in various
geographies.
We have developed and market a smart-card based alternative payment system for the unbanked and underbanked
populations of developing economies. Our market-leading system enables 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. Our universal electronic payment system, or UEPS, uses
biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by major banking
institutions that require immediate access through a communications network to a centralized computer. This offline capability
means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long
as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level
of availability and affordability by removing any elements that are costly and are prone to outages. In addition to effecting
purchases, cash-backs and any form of payment, our system can be used for banking, health care management, international
money transfers, voting and identification.
We also develop and provide secure transaction technology solutions and services, and offer transaction processing, financial
and clinical risk management solutions to various industries. Our core competencies around secure online transaction processing,
cryptography, mobile telephony and integrated circuit card (chip/smart card) technologies are principally applied to electronic
commerce transactions in the telecommunications, banking, payroll, retail, health care, petroleum and utility industries.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our UEPS
technology, to over 3.2 million recipients in five of South Africa’s nine provinces, process debit and credit card payment
transactions on behalf of retailers that we believe represent nearly 65% of retailers within the formal retail sector in South Africa
through our EasyPay system, process value-added services such as bill payments and prepaid electricity for the major bill issuers
and local councils in South Africa and provide mobile telephone top-up transactions for all of the South African mobile carriers.
We are the largest provider of third-party payroll payments in South Africa through our FIHRST service that processes monthly
payments for approximately 1,250 employers representing over 850,000 employees. Our MediKredit service provides the
majority of funders and providers of healthcare in South Africa with an on-line real-time management system for healthcare
transactions. We perform a similar service in the US through our XeoHealth subsidiary.
During the second quarter of fiscal 2011, we acquired KSNET, the second largest transaction processor by volume in Korea,
which offers card processing, payment gateway and banking value-added services in that country. The acquisition of KSNET
expands our international footprint as well as diversifies our revenue, earnings and product portfolio.
All references to “Net1,” “the Company,” “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.
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Market Opportunity
Services for the Under-banked: According to the United States Census Bureau, the world’s population is currently
approximately seven 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
formal financial services. This situation arises when either banking fees are too high relative to an individual’s income, a bank
account provides little or no meaningful benefit or there is insufficient infrastructure to provide financial services economically in
the individual’s geographic location. We refer to these people as the unbanked and the under-banked. These individuals typically
receive wages, welfare benefits, money transfers or loans in the form of cash, and conduct commercial transactions, including the
purchase of food and clothing, in cash.
The use of cash, however, presents significant risks. In the case of recipients, they generally have no secure way of
protecting their cash other than by converting it immediately into goods, carrying it with them or hiding it. In cases where an
individual has access to a bank account, the typical deposit, withdrawal and account fees meaningfully reduce the money
available to meet basic needs. For government agencies and employers, using cash to pay welfare benefits or wages results in
significant expense due to the logistics of obtaining that cash, moving it to distribution points and protecting it from theft.
With over 25 million cardholders in more than ten developing countries around the world, our track record and scale
uniquely positions us to continue further geographical penetration of our technology in additional emerging countries.
Online transaction processing services: The rapid global growth of retail credit and debit card transactions is reflected in the
March 2011 Nilson Report, according to which worldwide annual general purpose card purchase volume increased 16.4% to
$12.7 trillion in 2010. General purpose cards include the major card network brands such as MasterCard, Visa, China UnionPay
and American Express. We operate the largest bank-independent transaction processing service in South Africa through EasyPay,
where we have developed a suite of value-added services such as bill payment, airtime top-up, gift card, money transfer and pre-
paid utility purchases that we offer as a complete solution to merchants and retailers. Following our acquisition of KSNET, we
operate the second largest transaction processor by volume in Korea, where we provide card processing, banking value-added
services and payment gateway functionality to the retail industry. Our expertise in on-line transaction processing and value-added
services provides us with the opportunity to participate globally in this rapidly growing market segment.
Mobile Payments: In February 2010, the United Nations International Telecommunications Union estimated that there were
now approximately 4.6 billion mobile phone subscribers deployed globally, and we believe that this number includes subscribers
in the majority of our targeted emerging economies. Despite lacking access to formal financial services, large proportions of the
under-banked customer segment own and utilize mobile phones. As a result, mobile phones are increasingly being viewed as a
channel through which this underserved population can gain access to formal financial and other services. Today, most mobile
payment solutions offered by various participants in the industry largely provide access to information and basic services, such as
allowing consumers to check account balances or transfer funds between existing accounts with the financial institution, but they
offer limited functionality and ability to use the mobile device as an actual payments and banking instrument. Our UEPS solution
is enabled to run on the SIM cards in mobile phones and provides our users with secure payment and banking functionality.
Our proprietary Net1 Mobile Virtual Card, or MVC, technology, when used on a mobile device, is ideally suited to
significantly reducing fraud in card not present transactions typically performed in developed economies such as the United States
and Western Europe and is also a comprehensive banking and payment solution for the under-banked population in developing
economies.
Healthcare: Given the lack of broad-based healthcare services in many emerging countries, governments are increasingly
focused on driving initiatives to provide affordable and accessible healthcare services to their populations. Similarly, countries
such as the United States are embarking on expansive overhauls of their existing healthcare systems.
Through our MediKredit service we combine our payments expertise with our real-time rules engine and claims processing
technology to offer governments, funders and providers of healthcare a comprehensive solution that offers a completely
automated healthcare rules adjudication and payment system, reducing both cost and time.
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Our Key Products
The UEPS Technology
We developed our core UEPS technology to enable the affordable delivery of financial products and services to the world’s
unbanked and under-banked populations. Our 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. Unlike a traditional credit or debit card where the operation of the account occurs on a centralized computer, each
of our smart cards effectively operates as an individual bank account for all types of transactions. All transactions that take place
through our system occur between two smart cards at the POS as all of the relevant information necessary to perform and record
transactions reside on the smart cards.
The transfer of money or other information can take place without any communication with a centralized computer since all
validation, creation of audit records, encryption, decryption and authorization take place on, or are generated between, the smart
cards themselves. Importantly, the cards are protected through the use of biometric fingerprint identification, which is designed to
ensure the security of funds and card holder information. Transactions are generally settled by merchants and other commercial
participants in the system by sending transaction data to a mainframe computer on a batch basis. Settlements can be performed
online or offline. The mainframe computer provides a central database of transactions, creating a complete audit trail that enables
us to replace lost smart cards while preserving the notional account balance, and to identify fraud.
Our UEPS technology includes functionality that allows the following:
• Transparent and automatic recovery of transactions;
• Transaction cancellation;
• Refunds;
• Multiple audit trails;
• Offline loading;
• Biometric identification;
• Continuous debit;
• Multiple wallets;
•
• Automatic credit;
• Automatic debit;
•
•
Interest calculations; and
“Milking” / batching of large transaction volumes in an off-line environment.
“Morphing” of other common payment systems, such as the EuroPay, Mastercard and Visa global standard, or EMV;
Our UEPS technology incorporates the software, smart cards, payment terminals, back-end infrastructure and transaction
security to provide a complete payment and transaction processing solution.
Within industry, our UEPS technology is applied to electronic commerce transactions in the fields of social security, wage
distribution, banking, medical and patient management, international money transfers, voting and identification systems. Market
sectors include government and NGOs, healthcare, telecoms, financial institutions, retailers, petroleum and utilities.
Payment Transaction Management
Our payment transaction management service incorporates the entire electronic funds transfer, or EFT, and non-EFT
transactions suites, allowing merchants to accept a range of payment tokens/instruments and banks to acquire those payment
tokens/instruments. This encompasses conventional magnetic-stripe cards, credit, debit and private label cards, and contact and
contact-less smart cards with PIN and/or biometric cardholder verification.
The service utilizes a complex set of processing rules defined by the card associations, central banks and local issuers
governing the acceptance or rejection of the payment token/instrument presented to a merchant. These rules are applied for goods
or services and vary by merchant category as background tasks of the transaction management service.
We provide a complete end-to-end reconciliation and settlement service to our business partners, including dynamic
reconciliation, report and screen-query tools for down-to-store-level management and control purposes, backed by 24x7x365
monitoring and support, reconciliation, settlement, reporting, full disaster recovery and redundancy services.
Our flexible transaction management solutions enable simple integration to various hardware platforms and pay-point
applications within large retail groups, smaller stores and franchises. These platforms include: retail POS, EFT terminals,
standalone PCs, self service terminals and kiosks, ATMs, mobile phones and the internet.
4
We also provide a range of value-added services as part of our transaction management offering, such as bill payments, gift
cards, prepaid airtime, prepaid utilities and money transfers.
Healthcare Transaction Management
We offer financial and clinical risk management solutions to both funders and providers of healthcare, through online real-
time management of healthcare transactions. Our adaptable healthcare claims processing and managed care services are designed
to accommodate the complex benefit design as well as other processing requirements of our clients and our functionality extends
to all healthcare claim types, including pharmacy, doctor, public and private hospital claims. Our service is enabled by our
proprietary claims processing and managed care systems that adjudicate medical claims allowing patients and healthcare
providers to have immediate and accurate information on the financial and clinical impacts of, and payment responsibilities for
services and products provided by healthcare providers.
Our proprietary software allows for real-time claim adjudication involving the submission of an electronic data interchange
claim and receipt of a response with the adjudication details within seconds. Our system allows for real-time messaging with an
immediate response to an enquiry within a single, synchronous communication session. Our intellectual property incorporates
“rule stacking” technology that allows for the creation of a rule for a specific patient for a specific healthcare product or service,
which rule is then used to adjudicated against in real-time. This unique technology offers complex rule applications in a scalable
and flexible manner on all medical claim types – it is a heuristic computerized framework that dynamically creates scenario-
specific rules.
Payroll Transaction Management
Our payroll transaction management service offers employers an easy and flexible method of making payments to creditors
arising from payroll processing. Our solution enhances the electronic movement of money in the business and financial
community, assisting our clients to manage net pay, third party, garnishee order and creditor payments correctly, promptly and
securely. In addition, we provide the relevant information to the recipient organization via predefined schedules or payment
remittance advices, thus simplifying the process of reconciliation.
MVC
We have developed an innovative mobile phone-based payment solution, MVC, that enables secure purchases with no
disruption to existing merchant infrastructures and significant incentives for all stakeholders.
The MVC solution utilizes existing and traditional payment methods but enhances them by replacing plastic card data with a
one-time-use virtual card data, hence eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual card data
replaces digit-for-digit the credit (or debit) card number, the expiration date and the card verification value with only the issuer
bank identification number (first 6-digit) remaining constant.
The MVC solution uses the mobile phone to generate virtual cards. The mobile phone is the most available, cost-effective,
secure and portable platform for generating virtual cards for remote payments (online, phone and catalogue orders). Following a
simple registration process, the virtual card application is activated over-the-air, enabling the phone to generate virtual card
numbers completely off-line. MVCs are used like traditional plastic credit or debit cards, except that as soon as the transaction is
authorized, the generated card number expires immediately.
Consumers can easily generate a new card on their mobile phone to shop on the internet or to place a catalogue or telephone
order. MVCs are completely secure and can also be sent in a single click to family, friends, and service providers. Once the
authorization request reaches the issuing bank processor, our servers decrypt the virtual card data, authenticate the consumer and
pass the transaction request to the card issuer for authorization. MVC can be offered as a prepaid solution or directly linked to a
subscriber’s credit or debit card or other funding account. Subscribers can load prepaid virtual accounts with cash at participating
locations, or electronically via their bank accounts or via direct deposit.
The benefits of MVC include, for:
• Card issuers - increased transactional revenues from existing accounts, driving more transactional revenues and
elimination of fraudulent card use.
• Mobile network operators- revenues from payments, reduced churn, opportunities for powerful co-branding schemes.
• Consumers- peace of mind, ease of use, rewards.
• Merchants- elimination of charge-backs and fraud at no extra cost.
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Financial services
We have developed a suite of financial services that is offered to customers utilizing our payment solutions. We are able to
provide our customers with competitive microfinance, insurance and money transfer products based on our understanding of their
risk profiles and lifestyle requirements.
Hardware solutions
We provide hardware solutions that have been developed to optimize the performance of our payment and transaction
processing solutions. These hardware solutions include;
• Cryptographic solutions - Our internally-developed range of PIN encryption devices, card acceptance modules and
hardware security modules are primarily aimed at the financial, retail, telecommunication, utilities and petroleum sectors.
These devices and modules are suited for high-speed transaction processing requirements, acceptance of multiple
payment tokens, value-added services at point of transaction, and adherence to stringent transaction security and payment
association standards such as TDES and EMV.
• Chip and GSM licensing - We supply chip cards into the South African and other international markets. We work with
mobile network operators, card manufacturers and semiconductor manufacturers to provide card technology, solutions
and software that enable mobile telephony, mobile transactions and value-added services to take place in a trusted, secure
and convenient manner. These chip products and technology include operating system and application development, card
manufacture and production, from concept and design through, printing, packaging and distribution. At the core of our
chip business is the strategy of licensing chip software to a wide spectrum of other industry participants.
• POS solutions – We supply our secure, integrated POS payment products and systems, including:
o FlexiLANE – An in-store controller ideally suited to multi-lane retail and petroleum station environments. The in-
store controller forms an interfacing and concentration layer between a group of distributed terminal devices and a
centralized payment and value-added service, or VAS, aggregator. This helps large retailers and petroleum
companies to overcome the challenges associated with processing multiple transactions from multiple access
devices using multiple tender types;
o FlexiGATE – A terminal and payment gateway that manages the routing of all FlexiLANE traffic and enables
retailers to supply VAS such as airtime top-up, electricity payment and bill payment;
o FlexiPOS – An innovative retail solution that allows the retailer's various payment and VAS solution requirements
to be streamlined into a single payment terminal. FlexiPOS transforms the POS terminal into a convenient and
consumer friendly place of purchase, place of payment and place of service; and
o EMV – Net1’s payment expertise helps ensure that retailers together with their acquirers meet the requirements of
upgrading software, terminals and security for conformity with the latest international chip card standards.
Ingenico POS equipment
o
• Virtual top-up - our VTU solution facilitates mobile phone-based prepaid airtime vending. The VTU technology enables
prepaid cell phone users to purchase additional airtime simply, securely and conveniently. The vendor uses its GSM
handset to purchase bulk airtime from a mobile network operator. Airtime value, as opposed to a virtual voucher, is then
‘transferred’ directly from the vendor’s cellular handset to that of the customer. When the vendor runs out of airtime
value, it is a simple task to purchase more to resell to customers.
Our Strategy
We intend to provide the leading transacting system for the world’s estimated four billion unbanked and under-banked
people to engage in electronic transactions, as well as to provide our transaction processing, value-added services processing, new
secure mobile payment technologies and health care processing services globally. To achieve these goals, we are pursuing the
following strategies:
Build on our significant and established South African infrastructure—In South Africa, we are one of the leading
independent transaction processors, as the leading provider of social welfare payment distribution services to the country’s large
unbanked and under-banked population, the largest third-party processor of retail merchant transactions and the leading processor
of third-party payroll payments. We believe that our large cardholder base, proprietary technology and payment infrastructure,
together with our strong government and business relationships, position us at the epicenter of commerce in the country.
6
We believe that we are well-positioned to continue to gain market share and build upon the critical mass that we have
developed in South Africa and have identified the following opportunities to continue to drive growth in our South African
business:
• Government focus on expansion of social benefits—As a result of the South African government’s focus on the provision
of social grants as a core element of its social assistance and poverty alleviation policies, we believe that we remain well-
positioned to continue to provide our payment services to the government and beneficiaries. We believe that there is a
compelling argument for the South African Social Security Agency, or SASSA, and other government agencies to utilize
our innovative, off-line, secure, efficient and low-cost payment solution to reach beneficiaries across the country, even in
the most remote and deep rural areas where the communication and electricity infrastructure is sparse or non-existent.
•
•
Increasing adoption of existing services—Our technology supports a variety of other products and smart card to smart
card, or S2S, services that expand the use of our technology and provide us with new sources of transaction-based
revenues. During the last several years, we have introduced these new products and services in South Africa for existing
and newly-enrolled cardholders. We have installed our POS terminals in thousands of mostly rural merchant locations
throughout the country which allows beneficiaries to receive their grants at these locations and transact business with the
retailers using our smart card. During fiscal 2011, we processed 19.1 million transactions with a total value of ZAR 11.6
billion at these merchant locations.
Introduction of new services–We are also poised to benefit from the introduction and adoption of new services across our
various platforms, which we believe will generate significant incremental transaction fee revenue from current and new
users at a relatively low cost to us. Some of these services include:
o Acceptance of UEPS cards in traditional POS terminals—We are currently enabling our cards to be compliant
with international EMV standards, which will allow our cardholder base to purchase goods and services at
merchant POS locations that currently accept MasterCard-branded cards. This additional functionality will allow
us to expand significantly the number of terminals that use our smart card, capturing fees from new transactions
and positioning our cards to be used by a larger share of the banked population.
o Value-added services through multiple EasyPay platforms —EasyPay is the largest bank-independent financial
switch and merchant processor in South Africa for credit and debit card transactions. EasyPay processed 708
million transactions with a total value of ZAR 164.9 billion during fiscal 2011. Our technology also allows us to
provide a variety of additional, value-added payment services, such as bill payment, prepaid mobile top-up,
prepaid utility services and gift cards, that we can sell into our existing card holder base as well as to new
customers. We have developed additional platforms to access EasyPay’s offerings such as a self service kiosks, or
EasyPay Kiosk, and web and mobile phone applications to create a larger, seamless, value-added payments eco-
system.
o Third-party payments from payroll processing through FIHRST—Through our FIHRST service, we offer
employers an easy and flexible method of making payments to employees and payroll-related creditors. By
combining the FIHRST service and the EasyPay product suite, we can provide employees with the ability to pay
their bills or purchase prepaid airtime and utilities as a payroll deduction or by providing them with credit
facilities.
Using our “first wave/second wave” approach to expand into new markets—We use what we refer to as a “first
wave/second wave” approach to market expansion. In the “first wave,” we seek to identify an application for which there is a
demonstrated and immediate need in a particular territory and then sell and implement our technology to fulfill this initial need.
As a result, we achieve the deployment of the required technological infrastructure as well as the registration of a critical mass of
cardholders. During this phase, we generate revenues from the sale of our software and hardware devices, as well as ongoing
revenues from transaction fees, maintenance services and the use of our biometric verification engine. Once the infrastructure has
been deployed and we achieve a critical mass of customers, we focus on the “second wave,” which allows us to use this
infrastructure to provide users, at a low incremental cost to us, with a wide array of financial products and services for which we
can charge fees based on the value of the transactions performed.
Leveraging our new payment technologies to gain access to developed economies—While our business has traditionally
focused on marketing products and services to the world’s unbanked and under-banked population, we have developed and
acquired proprietary technology, such as our MVC application for mobile telephones that is designed to eliminate fraud associated
with card not present credit card transactions, which are those effected by telephone or over the internet. We have recently
introduced this technology, as well as our healthcare management system in the United States, and we plan to expand our offering
into Western Europe and other developed economies.
7
Pursue strategic acquisition opportunities to gain access to new markets or complimentary product —We will continue to
pursue acquisition opportunities that provide us with an entry point for our existing products into a new market, or provides us
with technologies or solutions complementary to our current offerings.
Our Clusters and Business Units
Our company is organized into the following “clusters” and within each cluster, separate business units.
Transactional Solutions Cluster
Cash Paymaster Services (“CPS”)
Our CPS business unit deploys our UEPS – Social Grant Distribution technology to distribute social welfare grants on a
monthly basis to roughly 3.2 million beneficiaries in five of South Africa’s nine provinces. These social welfare grants are
distributed on behalf of SASSA. During our 2011, 2010 and 2009 fiscal years, we derived 47%, 66% and 65% of our revenues
respectively, from CPS’ social welfare grant distribution business.
CPS provides a secure and affordable transacting channel between social welfare grant beneficiaries, SASSA and formal
businesses. CPS enrolls 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 is issued to the beneficiary on site and utilizes optical fingerprint sensor technology to identify and verify a beneficiary.
The beneficiary simply inserts a smart card into the POS device and is prompted to present his fingerprint. If the fingerprint
matches the one stored on the smart card, the smart card is loaded with the value created for that particular smart card.
The smart card provides the holder with access to all of the UEPS functionality, which includes the ability to have the smart
card funded with pension or welfare payments, make retail purchases, enjoy the convenience of pre-paid facilities and qualify for
a range of affordable financial services, including insurance and short-term loans. 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.
Our UEPS - Social Grant Distribution technology provides numerous benefits to government agencies and beneficiaries. The
system offers government a reliable service at a reasonable price. For beneficiaries, our smart card offers convenience, security,
affordability 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.
This business unit has been allocated to our South African transaction-based activities and smart card accounts reporting
segments.
KSNET
Our KSNET business unit is a significant payment solutions provider in Korea, has the broadest product offering in the
country, a base of approximately 200,000 merchants and an extensive direct and indirect sales network. KSNET is based in Seoul,
Korea. KSNET’s core operations comprise of three project offerings, namely card value-added network, or VAN, payment
gateway, or PG, and banking VAN. KSNET is able to realize significant synergies across these core operations because it is the
only payment solutions provider that offers all three of these offerings in Korea. Over 90% of KSNET’s revenue comes from the
provision of payment processing services to merchants and card issuers through its card VAN.
KSNET’s core product offerings are described in more detail below:
• Card VAN—KSNET’s card VAN offering manages credit and other non-cash alternative payment mechanisms for retail
transaction processing for a wide range of merchants and every credit card issuer in Korea. Non-cash alternative payment
mechanisms for which KSNET provides processing services include all credit and debit cards and e-currency (K-cash
and TMoney). KSNET also records cash transactions for the Korean National Tax Service in the form of cash receipts.
8
• PG—KSNET offers PG services to the rapidly growing number of merchants that are moving online in Korea. PG
provides these merchants with a host of alternative payment solutions including the ability to accept credit and debit
cards, gift and other prepaid cards, and bank account transfers. PG also provides virtual account capabilities. KSNET is
currently the only card VAN provider that also provides PG services in Korea. PG offers us an attractive growth
opportunity as e-commerce transactions represent an increasing share of payments, driven by increased wireline and
wireless broadband penetration, an increasing number of merchants moving online, and the enhanced security of online
transactions driving consumer acceptance. We believe that KSNET can become the leading provider in the PG industry
by leveraging its existing merchant base and entering into new markets earlier than competitors.
• Banking VAN—KSNET’s banking VAN operations currently include account transaction processing services, payment
and collections to banks, corporate firms, governmental bodies, and educational institutions. We distinguish card VAN
from banking VAN because in the Korean VAN market, banking VAN is recognized as a distinct service from card
VAN. We are the only card VAN provider that also provides banking VAN services. Because the banking VAN business
industry is at a nascent stage, the market at this time is relatively small.
This business unit has been allocated to our international transaction-based activities reporting segments.
EasyPay
Our EasyPay business unit operates the largest bank-independent financial switch in Southern Africa and is based in Cape
Town, South Africa. EasyPay focuses on the provision of high-volume, secure and convenient payment, prepayment and value-
added services to the South African market. EasyPay’s infrastructure connects into all major South African banks and switches
both debit and credit card EFT transactions for some of South Africa’s leading retailers and petroleum companies. It is a South
African Reserve Bank, or SARB, approved third-party payment processor.
In addition to its core transaction processing and switching operations, EasyPay provides a complete end-to-end
reconciliation and settlement service to its customers. This service includes dynamic reconciliation as well as easy-to-use report
and screen-query tools for down-to-store-level, management and control purposes.
The EasyPay suite of services includes:
• EFT—EasyPay switches credit, debit and fleet card transactions for leading South African retailers and petroleum
companies;
• EasyPay bill payment—EasyPay offers consumers a point-of-sale bill payment service which is integrated into a large
number of national retailers, the internet, self service kiosks and mobile handsets. EasyPay processes monthly account
payment transactions for over 300 different bill issuers including major local authorities, telephone companies, utilities,
medical service providers, traffic departments, mail order companies, banks and insurance companies;
• EasyPay prepaid electricity—This service enables local utility companies such as Eskom Holdings Limited and a
growing number of local authorities on a national basis to sell prepaid electricity to their customers;
• Prepaid airtime—EasyPay vends airtime at retail POS terminals for all the South African mobile telephone network
operators;
• Electronic gift voucher—EasyPay supports the electronic generation, issuance and redemption of paper or card-based
gift vouchers;
• EasyPay licenses—EasyPay enables the issuance of new South African Broadcasting television licenses and the
capturing of existing license details within retail environments via a web-based user interface;
• Third party switching and processing support—EasyPay switches transactions from retail POS systems to the relevant
back-end systems; and
• Hosting services—EasyPay’s infrastructure supports the hosting of payment servers and applications on behalf of third
parties, including financial institutions.
• EasyPay Kiosk—We have developed a biometrically enabled, self service kiosk that allows our EasyPay customers to
access all the value-added services provided by EasyPay and to create and load their EasyPay virtual wallets with value.
• EasyPay Web and Mobile—This service enables EasyPay customers to access all the value-added services provided by
EasyPay, such as bill payments and the purchase of prepaid airtime and utilities through a secure website that may be
accessed through personal computers or through mobile handsets.
EasyPay provides 24x7 monitoring and support services, reconciliation, automated clearing bureau settlement, reporting, full
disaster recovery and redundancy services.
This business unit has been allocated to our South African transaction-based activities reporting segment.
9
MediKredit/ XeoHealth
Our MediKredit business unit operates and markets our Healthcare Transaction Management systems and solutions in South
Africa and is based in Johannesburg, South Africa. We estimate that MediKredit’s products affect 4.2 million of the seven million
health-insured lives in South Africa. We also service the claims-processing needs of 100 medical schemes plans and ten of the
major healthcare administrators in South Africa. Our functionality caters for all healthcare claim types which include pharmacy,
doctor, private and public hospital claims.
Our business development in the US of our real time adjudication, or RTA, solutions for the end-to-end electronic
processing of medical claims information is marketed through XeoHealth. We are currently assessing a number of ventures in the
US whereby XeoHealth will act either as the primary contractor for the provision of our RTS solution to customers, or as a sub-
contractor to parties contracted to provide an adjudication solution.
This business unit has been allocated to our South African transaction-based activities reporting segment.
FIHRST
FIHRST offers South African employers our payroll transaction management service and is based in Johannesburg, South
Africa. FIHRST currently processes payments exceeding R68.5 billion on behalf of our clients every year, enabling salaries
departments to achieve greater levels of efficiency and employee service. We have been chosen as the preferred payments partner
by more than 1,250 companies of all sizes across all sectors of the economy, representing 850,000 employees. FIHRST is
recognized by and works in partnership with the majority of third party payroll organizations including pension fund and medical
aid administrators.
This business unit has been allocated to our South African transaction-based activities reporting segment.
Universal Electronic Technological Solutions (“UETS”)
Our UETS business unit is based in Johannesburg, South Africa and focuses on the sale, implementation and support of our
UEPS technology, ranging from large scale, national projects to smaller, product specific regional projects. UETS focuses on
identifying, defining and activating an entry point to commence operations in Africa (excluding South Africa), and in Iraq.
UETS markets the following solutions and products:
• The UEPS national switching, settlement, clearing and smart card solutions offering interoperability with existing
•
•
banking infrastructure;
“Wave 2” opportunities, such as financial services in countries with an established UEPS infrastructure;
Individual stand-alone UEPS applications, with processing outsourced to Net1 regional offices, similar to the model
deployed for the payment of welfare grants in Iraq;
• UEPS mobile banking solutions targeted at banks and/or mobile operators;
• E-Government applications such as multi-purpose national identity cards and national welfare & healthcare solutions;
and
• Secure verification of existing EMV Debit / credit card transactions using Net1’s biometric identification technology.
Our UETS team also provides business development support in territories where UEPS systems have been sold and
implemented, such as Ghana, Malawi, Namibia, Botswana and Nigeria.
This business unit has been allocated to our international transaction-based activities and hardware, software and related
technology sales reporting segments.
Net1 UTA
Our Net1 UTA business unit provides smart card-based payment systems to banks, enterprises and government authorities in
Russia, Ukraine, Uzbekistan, India and Oman. Net1 UTA is headquartered in Vienna, Austria, and has subsidiaries in India and
Russia. Following the decline in Net1 UTA’s revenues during fiscal 2011 and 2010 as a result of the difficult market and trading
conditions in its traditional markets, we recently completed a significant restructuring of its business activities. Net1 UTA now
consists of a scaled-down department, based in Moscow, that provides ongoing support to its existing customers and a business
development, implementation and support department, based in Vienna, that focuses on commercializing our MVC technology
globally, excluding the US.
This business unit has been allocated to our hardware, software and related technology sales reporting segment.
10
Net1 Virtual Card
Our Net1 Virtual Card business unit is based in Dallas, Texas, and is responsible for the commercialization of our MVC
technology in the US. Our launch customer in the US, MetroPCS, is one of the top five US wireless carriers. MetroPCS offers our
MVC technology under the VCPay brand as an application that is pre-loaded on new smart phones. We believe our VCPayTM
application is the first mobile phone-based prepaid program with no requirement for the user to have a physical card or bank
account. In addition, we have entered into agreements with MoneyGram, International, a global money transfer company, and
GreenDot Corporation, a major issuer of prepaid credit cards in the United States, to enable subscribers to load their prepaid
virtual accounts with cash at any of MoneyGram’s and GreenDot’s 100,000 US agents, which are located in most communities
including many grocery, pharmacy and convenience store chains, or electronically via their bank accounts or via direct deposit.
This business unit has been allocated to our international transaction-based activities reporting segments.
Hardware and Software Sales Cluster
We have dedicated business units responsible for the development, production, marketing, maintenance and support of our
Hardware Solutions. These business units are:
• Cryptographic solutions—based in Johannesburg and Durban, South Africa, this business unit manages our Incognito
range of PIN encryption devices, card acceptance modules and hardware security modules. These solutions are used
globally by numerous customers in the financial, retail, telecommunication, utilities and petroleum sectors and by all
other Net1 business units that operate payment and transaction processing services.
• Chip and GSM licensing—this business unit is a supplier of chip cards and GSM licenses into the South African and
other international markets. We operate our own small factory in Johannesburg, South Africa and license numerous
mobile network operators, card manufacturers and semiconductor manufacturers to provide card technology, solutions
and software that enable mobile telephony, mobile transactions and value-added services.
• POS solutions—based in Johannesburg, South Africa, our POS Solutions business unit is responsible for marketing in
South Africa our secure, integrated POS payment products and systems.
• VTU—based in Johannesburg, South Africa, our VTU business unit is responsible for the global marketing and support
of our VTU solution.
These business units have been allocated to our hardware, software and related technology sales reporting segment.
Financial Services Cluster
Finance Holdings
This business unit is responsible for identifying financial services products that can be provided to our UEPS cardholders in
South Africa and then marketing and implementing the provision of those products. We currently provide micro-loans to our
UEPS cardholders who receive social welfare grants through our system in the KwaZulu-Natal and Northern Cape provinces. We
provide the loans ourselves and generate revenue from the service fees charged on these loans. We also sell life insurance
products on behalf of registered underwriters and earn revenue through the commissions we receive on the sale of policies.
Our wage payment system offers wage earners a UEPS card that allows them to receive payment, transact and access other
financial services in a secure, cost-effective way.
This business unit has been allocated to our financial services reporting segment.
Corporate Cluster
The Corporate Cluster provides global support services to our business units, joint ventures and investments for the
following activities:
• Group executive—responsible for the overall company management, defining our global strategy, investor relations and
corporate finance activities.
• Finance and administration—provides company-wide support in the areas of accounting, treasury, human resources,
administration, legal, secretarial, taxation, compliance and internal audit.
• Group information technology—defines our overall IT strategy and the overall systems architecture and is responsible
•
for the identification and management of the group’s research and development activities.
Joint ventures and investments unit—provides governance support to our joint ventures and assists with the evaluation of
new investment opportunities.
11
Competition
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment
systems and the providers of financial services, there are a number of other products that use smart card technology in connection
with a funds transfer system. While it is impossible for us to estimate the total number of competitors in the global payments
marketplace, we believe that the most competitive product in this marketplace is EMV, a system that is promoted by most of the
major card companies such as Visa, Mastercard, JCB and American Express. The competitive advantage of our UEPS offering is
that our technology can operate real-time, but in an off-line environment, using biometric identification instead of the standard
PIN methodology employed by our competitors. We estimate that we process less than 1% of all global payment transactions in
the international marketplace.
In South Africa, and specifically in the payment of social welfare grants, our competitors 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 South African banks and the South African Post Office, or SAPO, also offer beneficiaries the
option to open low cost bank accounts that enable the beneficiaries to receive their welfare grants through the formal banking
payment networks.
We compete primarily on the basis of the innovative nature and security of our technology. We are able to load social
welfare grants on behalf of the South African government directly onto a biometrically secured UEPS smart card in rural areas
where there is little or no infrastructure or in semi-urban areas through our merchant acquiring system. Our UEPS-enabled smart
cards are therefore used as a means of identification, security and as a transacting instrument. Grants loaded onto our UEPS-
enabled smart cards can be used both online and offline and beneficiaries pay no monthly account or transaction fees. The
usefulness of a traditional bank card to its holder is dependent on the availability of a branch network, ATM infrastructure and
merchants accepting the card. Access to bank branches, ATMs and merchants accepting traditional bank cards are limited or non-
existent in the rural areas of South Africa. We believe the security, functionality and simplicity of our smart card provides us with
a unique ability to service these rural areas of South Africa. Our technology eliminates the risk associated with receiving social
welfare grants in cash as well as the costs associated with transaction fees charged by banks when beneficiaries exceed the
minimum number of free transactions per month.
We believe that SASSA considers the technology utilized, pricing of the payment service rendered and other factors such as
black economic empowerment, or BEE, rating as the most important factors when considering potential service providers. We
compete with other service providers on these aspects through SASSA’s tender processes, when applicable, or through contract
extension negotiations.
We have identified 10 major card VAN companies in Korea, of which KSNET is one of the four largest. The other three
large VAN companies are NICE Information & Telecommunication Inc., First Data Korea Limited and Korea Information &
Communications Company, Limited. Entities operating in the VAN industry in Korea compete on pricing and customer service.
EasyPay’s competitors include BankservAfrica, UCS, eCentric and Transaction Junction. BankservAfrica is the largest
transaction processor in South Africa which processes all transactions on behalf of the South African banks and claims to process
in excess of 2.6 billion transactions valued at trillions of rands annually. During fiscal 2011, EasyPay processed 708 million
transactions with an approximate value of ZAR164.9 billion.
In addition to our traditional competitors, we expect that we will increasingly compete with a number of emerging entities in
the mobile payments industry. While the industry is still in its infancy, a number of entities are establishing their presence in this
space. Specifically indentified entities include traditional payment networks such as Visa, MasterCard and American Express;
commercial banks such as Barclays and Citigroup; established technology companies such as Apple, Google and PayPal; mobile
operators such as AT&T, Verizon, Vodafone and Bharti Airtel; as well as companies specifically focused on mobile payments
such as M-Pesa, Monetise and Square.
Research and Development
During fiscal 2011, 2010 and 2009, we incurred research and development expenditures of $5.7 million, $7.6 million and
$8.9 million, respectively. These expenditures consist primarily of the salaries of our software engineers and developers. Our
research and development activities relate primarily to the continual revision and improvement of our core UEPS software and its
functionality and the design and development of our MVC concept. For example, we continually advance our security protocols
and algorithms as well as develop new UEPS features that we believe will enhance the attractiveness of our product and service
offerings. Our research and development efforts also focus on taking advantage of improvements in the hardware platforms that
are not proprietary to us but which form part of our system.
12
Intellectual Property
Our success depends in part on our ability to develop, maintain and protect our intellectual property. We rely on a
combination of patents, copyrights, trademarks and trade secret laws, as well as non-disclosure agreements to protect our
intellectual property. We seek to protect new intellectual property developed by us by filing new patents worldwide. We hold a
number of trademarks in various countries.
Financial Information about Geographical Areas and Operating Segments
Note 19 to our consolidated financial statements included in this annual report contains detailed financial information about
our operating segments for fiscal 2011, 2010 and 2009. Revenues based on the geographic location from which the sale originated
and geographic location where long-lived assets are held for the years ended June 30, are presented in the table below:
2011
$264,485
68,392
10,465
78
$343,420
Revenue
2010
$267,478
-
12,301
585
$280,364
2009
2011
Long-lived assets
2010
2009
$220,408
-
19,560
6,854
$246,822
$115,809
258,791
139
6,817
$381,556
$111,430
-
42,489
8,081
$162,000
$98,694
-
101,371
9,128
$209,193
South Africa ..................
Korea .............................
Europe ...........................
Rest of world .................
Total ...........................
Employees
As of June 30, 2011, we had 2,290 employees. On a segmental basis, 216 employees were part of our management, 1,558
were employed in South African transaction-based activities, 173 were employed in international transaction-based activities, 2
were employed in financial services and 341 were employed in smart card, hardware, software and related technology sales and
corporate activities.
On a functional basis, four of our employees were part of executive management, 171 were employed in sales and
marketing, 188 were employed in finance and administration, 312 were employed in information technology and 1,615 were
employed in operations.
As of June 30, 2011, approximately 120 of the 270 employees we have in the Limpopo Province in South Africa who were
performing transaction-based activities were members of the South African Commercial Catering and Allied Workers Union and
approximately 154 of the 175 employees we have in Korea who perform international transaction-based activities were members
of the KSNET Union. We believe we have a good relationship with our employees and these unions.
Corporate history
Net1 was incorporated in Florida in May 1997. Until June 2004, Net1 was a development stage company and its business
consisted only of holding a license to payment systems intellectual property and an exclusive marketing agreement for the UEPS
technology outside South Africa, Namibia, Botswana and Swaziland. In June 2004, Net1 acquired Net1 Applied Technologies
Holdings Limited, or Aplitec, a public company listed on the JSE Limited, or JSE. Aplitec owned the payment systems
intellectual property in South Africa, Namibia, Botswana and Swaziland and one of its subsidiaries was the other party to the
marketing agreement described above. The primary purpose of the Aplitec transaction was to consolidate all intellectual property
into one company, to establish a first-mover advantage in developing economies for the commercialization of the UEPS
technology, and to exploit market opportunities for growth through strategic alliances and acquisitions. The transaction permitted
Aplitec’s shareholders to reinvest the sale proceeds in Net1, but under South African exchange control regulations, those
shareholders were not permitted to hold Net1’s securities directly. In 2005, Net1 completed an initial public offering and listed on
the Nasdaq Stock Market. In October 2008, Net1 listed on the JSE, in a secondary listing, which enabled the former Aplitec
shareholders (as well as South African residents generally) to hold Net1 common stock directly.
Available information
We maintain an Internet website at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports are available free of charge through the “SEC filings” portion of
our website, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. The information
posted on our website is not incorporated into this Annual Report on Form 10-K.
13
Executive Officers and Significant Employees of the Registrant
Executive officers
The table below presents our executive officers, their ages and their titles:
Name
Dr. Serge C.P. Belamant
Mr. Herman G. Kotze
Mr. Phil-Hyun Oh
Mr. Nitin Soma
Age
57
41
52
43
Title
Chief executive officer, chairman and director
Chief financial officer, treasurer, secretary and director
Chief executive officer and president, KSNET, Inc.
Senior vice president information technology
Dr. Belamant is one of the founders of our company and has been our chief executive officer since October 2000 and the
chairman of our board since February 2003. He was also chief executive officer of Aplitec. Dr. Belamant also serves on the
boards of a number of other companies that perform welfare distribution services and the provision of microfinance to customers.
Dr. Belamant spent ten years working as a computer scientist for Control Data Corporation where he won a number of
international awards. Later, he was responsible for the design, development, implementation and operation of the Saswitch ATM
network in South Africa that rates today as the third largest ATM switching system in the world. Dr. Belamant has patented a
number of inventions, including our original funds transfer system patent, ranging from biometrics to gaming-related inventions.
Dr. Belamant has more than 30 years of experience in the fields of operations research, security, biometrics, artificial intelligence
and online and offline transaction processing systems. Dr. Belamant holds a PhD in Information Technology and Management.
Mr. Kotze has been our chief financial officer, secretary and treasurer since June 2004. From January 2000 until June 2004,
he served on the board of Aplitec as group financial director. Mr. Kotzé joined Aplitec in November 1998 as a strategic financial
analyst. Mr. Kotzé is a member of the South African Institute of Chartered Accountants.
Mr. Soma has served as our Senior Vice President of Information Technology since June 2004. Mr. Soma joined Aplitec in
1997. He specializes in transaction switching and interbank settlements. Mr. Soma represented Nedcor Bank in assisting with the
technical specifications for the South African Interbank Standards. He is also responsible for the ATM settlement process to
balance ATMs with the host as well as balance the host with different card users. Mr. 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 15
years of experience in the development and design of smart card payment systems.
Mr. Oh has served as chief executive officer and president since 2007. Prior to that, he was the Managing Partner at Dasan
Accounting Firm and was the Head of the Investment Banking Division at Daewoo Securities. Mr. Oh is responsible for the day
to day operations of KSNET and as its chief executive officer and president is instrumental in setting and implementing its
strategy and objectives.
Significant employees
Business Functions:
Dr. Gerhard Claassen (52): General Manager – Cryptographic Solutions – Dr. Claasen joined us in August 2000 and is
responsible for the marketing and business development of our cryptographic solutions consisting of the internally developed
Incognito range of security solutions, as well as ToDos authenticators and the Cybertrust PKI products.
Leonid Delberg (65): Managing director: Net1 UTA – Mr. Delberg has been the CEO of Net1 UTA since 1997. Net1 UTA
is responsible for the marketing and business development of our payment solutions in Russia, the CIS, Oman, India and Asia.
Wimpie du Plessis (59): Managing director: MediKredit – Mrs. du Plessis joined us in January 1999 and is responsible for
the marketing and business development of our MediKredit offering worldwide.
K. H. Kang (45): Division Director - Marketing Division 2 – Mr. Kang joined us in December 1994 and is responsible for
KSNET’s market division that focuses primarily on banking VAN, PG and market development.
M. B. Lee (46): Division Director - Marketing Division 1 – Mr. Lee joined us in August 1994 and is responsible for
KSNET’s market division that focuses primarily on card VAN.
Kanam Mann (36): Business Unit Leader: EP Kiosk and General Manager: Chip and GSM licensing – Ms. Mann joined us
in February 2005 and is responsible for marketing and business development of our EP Kiosk and our Chip and GSM licensing
business.
14
Eric Meniere (45): Managing director: MVC – Mr. Meniere joined us in March 2008 and is responsible for the marketing
and business development of our MVC product in the US.
Nanda Pillay (40): General Manager: CPS and EasyPay – Mr. Pillay joined us in May 2000 and is responsible for our South
African operations, consisting of CPS and EasyPay.
Richard Schweger (47): Financial & operations director: Net1 UTA – Mr. Schweger has been the CFO and COO of Net1
UTA since 1997. Net1 UTA is responsible for the marketing and business development of our payment solutions in Russia, the
CIS, Oman, India and Asia.
James Sneedon (43): Business Unit Leader: VTU – Mr. Sneedon joined us January 2001 and is responsible for the marketing
and business development of our VTU products.
Brenda Stewart (53): Managing director: Net1 Universal Electronic Technological Solutions – Mrs. Stewart joined us in
1997 and is responsible for the marketing and business development of our UEPS solutions in Africa (excluding South Africa)
and Iraq.
Mark Stuckenberg (49): Managing director: FIHRST – Mr. Stuckenberg joined us in March 2010 and is responsible for the
marketing and business development of our FIHRST offering.
Support functions:
Chris Britz (50): Vice President - Group production, repairs & maintenance – Mr. Britz joined us in April 2001 and is
responsible for the group’s production facilities, as well as all internal and external repairs and maintenance of terminals and other
hardware.
Lawrie Chalmers (50): Vice President - Group Human Resources – Mr. Chalmers joined us in April 1998 and is responsible
for the group’s South African human resources activities, including recruitment, payroll, training and industrial relations.
Y. H. Cho (45): Head of research director – Mr. Cho joined us in July 1999 and is responsible for KSNET’s information
technology department.
M. Y. Jun (43): Head of Strategy, Planning and Finance – Mr. Jun joined us in September 2000 and is responsible for
KSNET’s financial function, including financial accounting, taxation and statutory reporting.
Dhruv Chopra (37): Vice President: Investor Relations – Mr. Chopra joined us in June 2009 and was previously an analyst
at Morgan Stanley, specializing in the payment processing and IT services sectors.
Paul Encarnacao (35): Vice President – Finance – Mr. Encarnacao joined us in June 2004 and is responsible for the
preparation of the group’s generally accepted accounting principles in the United States of America, or US GAAP, consolidated
accounts and statutory reports.
Warren Segall (46): Vice President: Compliance – Mr. Segall joined us in July 2006 and is our compliance officer.
Trevor Smit (54): Vice President: Joint Ventures and Investments – Mr. Smit joined us in May 2007 and provides
governance support to our joint ventures as our representative on the various boards of directors.
Cara van Straaten (50): Group Financial Controller – Ms. Van Straaten joined us in July 2004 and is responsible for the
group’s South African financial function, including financial accounting, taxation and statutory reporting.
15
ITEM 1A. RISK FACTORS
OUR OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE
OF OUR COMMON STOCK.
Risks Relating to Our Business
We derive a substantial portion of our revenues from the social welfare grants distribution service
that we perform for SASSA. Our contract with SASSA currently expires on March 31, 2012, and we are
participating in a competitive tender process for the award of new contracts for all of South Africa’s nine
provinces. If we do not obtain a new contract and were to discontinue providing our distribution service
to SASSA, we would lose all of these revenues.
We currently derive a substantial portion of our revenues from the social welfare grants distribution service that we perform
under contract for SASSA, whereby we distribute these grants in five of the nine provinces of South Africa. SASSA is our largest
customer and for the foreseeable future, our business will be highly dependent on our SASSA contract. For the years ended June
30, 2011, 2010 and 2009, we derived approximately 47%, 66% and 65%, respectively, of our revenues from this contract. Our
current contract expires on March 31, 2012. In late April 2011, SASSA commenced a tender process for the award of new
contracts. We are participating in the tender process and have submitted our proposal. If we do not obtain a new contract and were
to discontinue providing our distribution service to SASSA past the expiration of our current contract, we would lose all of these
revenues.
We cannot predict with certainty the timing or ultimate outcome of the tender process and we cannot assure you that it will
result in our receiving a contract to continue to distribute social welfare grants in each of the five South African provinces where
we currently distribute them. Even if we do receive a new contract, or one or more extensions of the existing contract, we cannot
predict the terms that such contract will contain. Any new contract or extension we receive may contain pricing or other terms that
would be unfavorable to us.
Our current contract with SASSA is the latest in a series of short-term contracts and extensions that resulted from the
conduct of a tender process which began in early 2007 and was ultimately terminated by SASSA in late November 2008 without
awarding new contracts. We participated in the tender process and timely submitted proposals for each of South Africa’s nine
provinces, as well as a proposal for the entire country. There were a series of extensive delays during the tender process which
resulted in numerous extensions of our bid proposals as well as an extension of our existing contract. In March 2009, we signed a
new one-year contract with SASSA which expired on March 31, 2010 and which was subsequently extended to June 30, 2010.
We signed our current agreement with SASSA on August 24, 2010 which was retroactively effective to July 1, 2010. The contract
was originally scheduled to expire on March 31, 2011, was extended to September 30, 2011 and has been further extended to
March 31, 2012.
The current tender process, as well as the previous one, and the negotiation of the additional contracts and extensions have
consumed a substantial amount of our management’s time and attention during the past four years. Our management has been
required to devote substantial resources to the process which has impacted their ability to focus on other matters, including
potential international business development activities. In addition, we have initiated several lawsuits against SASSA, including
one which challenged the cancellation of the previous tender process and another one in which we unsuccessfully challenged
SASSA’s right to contract with SAPO to provide banking or payment services relating to social grant beneficiaries. We cannot
predict the outcome of our remaining lawsuits against SASSA, or whether or how our litigation against SASSA will affect the
outcome of the current tender process.
Moreover, even if we were to receive a new contract or contract extensions containing similar economic terms to those of
our current contract, our profit margin could be adversely affected to the extent that any such contracts would require us to incur
significant capital expenditures during the initial implementation phase. Historically, we have incurred a significant portion of the
expenses, and recognized operating losses, associated with these contracts during the initial implementation phase, which
averages approximately 18 months, and have historically enjoyed higher profit margins on these contracts after the completion of
the implementation period. Therefore, to the extent that we were to be awarded a new contract that required significant capital
expenditures, our profit margins would be adversely affected if the contract were to be terminated for any reason during the
implementation period.
Finally, if we were to be awarded one or more contracts by SASSA, an unsuccessful tenderor could seek to challenge the
award, which could result in the contract being set aside or could require us to expend time and resources in an attempt to defeat
any such challenge.
16
Our current contract with SASSA is less favorable to us than our previous contract which has
adversely affected our results of operations. Furthermore, the terms of any further renewals or
extensions or a contract awarded under the current tender process may be even less favorable to us than
the current contract. To the extent that we are unsuccessful in diversifying our business and reducing our
dependence on SASSA, our business and profitability will likely suffer.
Our current contract with SASSA contains a standard pricing formula for all provinces based on a transaction fee per
beneficiary paid, regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum number
of beneficiaries per month. The current contract is less favorable to us than the one it replaced. Because we continue to derive a
substantial percentage of our revenues from our SASSA contract, the terms of the current contract have adversely affected our
revenues and operating income. Further, as described in the immediately preceding risk factor, it is possible that any further
extension or renewal of the current contract or a contract which we may be awarded under the recently initiated tender process
may be even less favorable to us. While we are making significant efforts to reduce our dependence on our SASSA contract by
diversifying our business in South Africa and expanding internationally, to the extent that these efforts are not successful, we may
not be able to offset the effects of the current and possible future less favorable terms from SASSA which would have a material
adverse effect on our results of operations, financial position and cash flows.
We were unsuccessful in our lawsuit against SASSA challenging SASSA’s right to contract with
SAPO to provide banking or payment services relating to social grant beneficiaries. If SASSA provides
this business to SAPO rather than to us, the revenue and operating income we derive from our current
SASSA contract could be substantially reduced, which could have a material adverse effect on us.
In 2009, we instituted a lawsuit against SASSA in the South African High Court, or High Court, in which we challenged
SASSA’s right to contract with SAPO to provide banking or payment services relating to social grant beneficiaries. The High
Court ruled in our favor and prohibited SASSA from contracting with SAPO for these services, finding that SASSA had not
followed a proper procurement process to comply with the South African Constitution and the Public Finance Management Act,
or PFMA, when the previous executive management team at SASSA contracted with SAPO for the payment of grants in 2009.
SASSA appealed the High Court’s judgment to the South African Supreme Court of Appeal, which overturned the High Court’s
judgment in March 2011. We applied for leave to appeal to the South African Constitutional Court, which was denied in June
2011. Although our SASSA contract remains in effect through its current expiration date of March 31, 2012, the failure of our
court challenge has enabled SASSA to pursue contracts with SAPO to provide banking or payment services relating to social
grant beneficiaries, which would reduce the number of beneficiaries we serve under our SASSA contract. Although our SASSA
contract guarantees us a transaction fee per beneficiary based on a guaranteed minimum number of beneficiaries, our revenues
from the contract would suffer from a diversion of business to SAPO because presently we serve more than the minimum number
of beneficiaries. Because we continue to derive a substantial portion of our revenue from our SASSA contract, if this source of
revenue were to decline substantially, our results of operations, financial condition and cash flows would suffer.
We may undertake acquisitions that could increase our costs or liabilities or be disruptive to our
business.
Acquisitions are a significant part of our long-term growth strategy as we seek to grow our business internationally and to
deploy our technologies in new markets both inside and outside South Africa. However, we may not be able to locate suitable
acquisition candidates at prices that we consider appropriate. If we do identify an appropriate acquisition candidate, we may not
be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the
acquired business into our existing business. These transactions may require debt financing or additional equity financing,
resulting in additional leverage or dilution of ownership.
Acquisitions of businesses or other material operations and the integration of these acquisitions will require significant
attention from our senior management which may divert their attention from our day to day business. The difficulties of
integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. We also may not be able to maintain key employees
or customers of an acquired business or realize cost efficiencies or synergies or other benefits that we anticipated when selecting
our acquisition candidates. Finally, acquisition candidates may have liabilities or adverse operating issues that we fail to discover
through due diligence prior to the acquisition.
17
We have had to record impairments of our intangible assets related to a prior acquisition, which
negatively affected our earnings for fiscal 2011 and 2010. We may need to record additional writedowns
from any future impairments, which could reduce our future reported earnings.
As a result of our acquisitions, a significant portion of our total assets consist of intangible assets (including goodwill).
Goodwill and intangible assets, net of amortization, together accounted for approximately 42% and 31% of the total assets on our
balance sheet as of June 30, 2011 and 2010, respectively. We may not realize the full fair value of our intangible assets and
goodwill. We expect to engage in additional acquisitions, which may result in our recognition of additional intangible assets and
goodwill. We evaluate on a regular basis whether all or a portion of our goodwill and other intangible assets may be impaired.
Under current accounting rules, any determination that impairment has occurred would require us to write off the impaired portion
of goodwill and such intangible assets, resulting in a charge to our earnings. For example, during fiscal years 2011 and 2010, we
recorded aggregate goodwill and intangible asset impairment charges of approximately $79.2 million related to our August 2008
acquisition of Net 1 UTA. Specifically, in the third quarter of fiscal 2011, we recognized an impairment loss of approximately
$41.8 million related to acquired Net1 UTA customer relationships. This loss was in addition to an impairment loss of $37.4
million we recorded in the fourth quarter of fiscal 2010. These impairment losses substantially reduced our operating income for
the relevant periods. Additional impairment charges could adversely affect our financial condition and results of operations.
We have a significant amount of indebtedness that requires us to comply with restrictive and
financial covenants. If we are unable to comply with these covenants, we could default on this debt,
which would have a material adverse effect on our business and financial condition.
As of June 30, 2011, we had approximately $121 million of outstanding indebtedness, which we incurred to finance the
KSNET acquisition. These loans are secured by substantially all of KSNET’s assets, a pledge by Net1 Korea of its entire equity
interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire equity interest
in Net1 Korea. The terms of the loan facility require Net1 Korea and its consolidated subsidiaries to maintain certain specified
financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict their ability to make certain distributions
with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make capital
expenditures above specified levels, engage in certain business combinations and engage in other corporate activities. Although
these covenants only apply to our Korean subsidiaries, these security arrangements and covenants may reduce our operating
flexibility or our ability to engage in other transactions that may be beneficial to us. If we are unable to comply with these
covenants, we could be in default and the indebtedness could be accelerated. If this were to occur, we might not be able to obtain
waivers of default or to refinance the debt with another lender and as a result, our business and financial condition would suffer.
A prolonged economic slowdown or lengthy or severe recession in South Africa or elsewhere could
harm our operations.
A prolonged economic downturn or recession could materially impact our results from operations. A recessionary economic
environment could have a negative impact on mobile phone operators, our cardholders and retailers and could reduce the level of
transactions we process and the take-up of financial services we offer, which would, in turn, negatively impact our financial
results. If financial institutions and retailers experience decreased demand for their products and services our hardware, software
and related technology sales will reduce, resulting in lower revenue.
The loss of the services of Dr. Belamant or any of our other executive officers would adversely affect
our business.
Our future financial and operational performance depends, in large part, on the continued contributions of our senior
management, in particular, Dr. Serge Belamant, our Chief Executive Officer and Chairman and Herman Kotze, our Chief
Financial Officer. Many of our key responsibilities are performed by these two individuals, and the loss of the services of either of
them could disrupt our development efforts or business relationships and our ability to continue to innovate and to meet
customers’ needs, which could have a material adverse effect on our business and financial performance. We do not have
employment agreements with these executive officers and they may terminate their employment at any time.
In addition, the success of our KSNET business depends heavily on the continued services of its president, Phil-Hyun Oh
and the other senior members of the KSNET management team. We do not maintain any “key person” life insurance policies.
18
We face a highly competitive employment market and may not be successful in attracting and
retaining a sufficient number of skilled employees, particularly in the technical and sales areas and
senior management.
Our future success depends on our ability to continue to develop new products and to market these products to our target
users. In order to succeed in our product development and marketing efforts, we need to identify, attract, motivate and retain
sufficient numbers of qualified technical and sales personnel. An inability to hire and retain such technical personnel would
adversely affect our ability to enhance our existing intellectual property, to introduce new generations of technology and to keep
abreast of current developments in technology. Demand for personnel with the range of capabilities and experience we require is
high and there is no assurance that we will be successful in attracting and retaining these employees. The risk exists that our
technical skills and sales base may be depleted over time because of natural attrition. Furthermore, social and economic factors in
South Africa have led, and continue to lead, numerous qualified individuals to leave the country, thus depleting the availability of
qualified personnel in South Africa. In addition, our multi-country strategy will also require us to hire and retain highly qualified
managerial personnel in each of these markets. If we cannot recruit and retain people with the appropriate capabilities and
experience and effectively integrate these people into our business, it could negatively affect our product development and
marketing activities.
We face competition from the incumbent retail banks in South Africa and SAPO in the unbanked
market segment, which could limit growth in our transaction-based activities segment.
The incumbent South African retail banks have created a common banking product, generally referred to as a “Mzansi”
account, for unbanked South Africans, which offers limited transactional capabilities at reduced charges, when compared to the
accounts traditionally offered by these banks. According to the FinScope survey, which is an annual survey conducted by the
FinMark Trust, a non-profit independent trust, approximately 4.4 million and 3.5 million people in South Africa claimed to use a
Mzansi account in 2009 and 2008, respectively. The 2009 survey also indicated that 22% of those surveyed opened a Mzansi
account in order to receive a social welfare grant. In addition, SAPO also offers a Mzansi product which is used by some social
welfare grant recipients to receive their social grants.
It is possible for a social welfare beneficiary to receive grants through a Mzansi or other low-cost banking account. SASSA
does not pay us a fee for the disbursement of grants through Mzansi or other low cost bank accounts and to the extent that
beneficiaries use these accounts, rather than our smart card, to receive their grants, we will not be able to generate additional
revenues from retail spending by these beneficiaries. In contrast, when a beneficiary receives grants through our smart card, we
are able to generate incremental revenues from the use of our card in our merchant acquiring system because merchants
participating in our merchant acquiring systems are also able to accept UEPS-based smart cards. Thus, our ability to increase our
revenues and operating margins will be adversely affected to the extent that there is an increase in the number or percentage of
South Africans using Mzansi or other low cost bank accounts to receive their social welfare grants.
Moreover, as our product offerings increase and gain market acceptance in South Africa, the banks and SAPO may seek
governmental or other regulatory intervention if they view us as disrupting their funds transfer or other businesses.
We may face competition from other companies that offer smart card technology, other innovative
payment technologies and payment processing, which could result in loss of our existing business and
adversely impact our ability to successfully market additional products and services.
Our primary competitors in the payment processing market include other independent processors, as well as financial
institutions, independent sales organizations, and, potentially card networks. Many of our competitors are companies who are
larger than we are and have greater financial and operational resources than we have. These factors may allow them to offer better
pricing terms to customers, which could result in a loss of our potential or current customers or could force us to lower our prices
as well. Either of these actions could have a significant effect on our revenues and earnings.
In addition to competition that our UEPS system faces from the use of cash, checks, credit and debit cards, existing payment
systems and the providers of financial services and low cost bank accounts, there are a number of other products that use smart
card technology in connection with a funds transfer system. During the past several years, smart card technology has become
increasingly prevalent. We believe that the most competitive product in this marketplace is EMV, a system that is promoted by
most of the major card companies such as Visa, Mastercard, JCB and American Express. Also, governments and financial
institutions are, to an increasing extent, implementing general-purpose reloadable prepaid cards as a low-cost alternative to
provide financial services to the unbanked population. Moreover, while we see the acceptance over time of using a mobile phone
to facilitate financial services as an opportunity, there is a risk that other companies will be able to introduce such services to the
marketplace successfully and that customers may prefer those services to ours, based on technology, price or other factors.
19
The period between our initial contact with a potential customer and the sale of our UEPS products
or services to that customer tends to be long and may be subject to delays which may have an impact on
our revenues.
The period between our initial contact with a potential customer and the purchase of our UEPS products and services is often
long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures. A lengthy sales cycle may have an impact on the timing of our revenues, which may
cause our quarterly operating results to fall below investor expectations. A customer’s decision to purchase our products and
services is often discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles.
To sell our products and services successfully we generally must educate our potential customers regarding the uses and benefits
of our products and services, which can require the expenditure of significant time and resources; however, there can be no
assurance that this significant expenditure of time and resources will result in actual sales of our products and services.
Our proprietary rights may not adequately protect our technologies.
Our success depends in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our
technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending
this intellectual property against third-party challenges. We will only be able to protect our technologies from unauthorized use by
third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them.
In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies,
products and processes. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means
afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
We cannot predict the breadth of claims that may be allowed or enforced in our patents. For example, we might not have
been the first to make the inventions covered by each of our patents and patent applications or to file patent applications and it is
possible that none of our pending patent applications will result in issued patents. It is possible that others may independently
develop similar or alternative technologies. Also, our issued patents may not provide a basis for commercially viable products, or
may not provide us with any competitive advantages or may be challenged, invalidated or circumvented by third parties.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or
obtainable. However, trade secrets are difficult to protect. We have confidentiality agreements with employees, and consultants to
protect our trade secrets and proprietary know-how. These agreements may be breached and or may not have adequate remedies
for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants or others may
unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally
obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome
would be unpredictable. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it
will be more difficult for us to enforce our rights and our business could be harmed. If we are not able to defend the patent or
trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing
competing technologies.
We also rely on trademarks to establish a market identity for some of our products. To maintain the value of our trademarks,
we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our
registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and might
have to defend our registered trademark and pending trademark applications from challenge by third parties.
Defending our intellectual property rights or defending ourselves in infringement suits that may be
brought against us is expensive and time-consuming and may not be successful.
Litigation to enforce our patents, trademarks or other intellectual property rights or to protect our trade secrets could result in
substantial costs and may not be successful. Any loss of, or inability to protect, intellectual property in our technology could
diminish our competitive advantage and also seriously harm our business. In addition, the laws of certain foreign countries may
not protect our intellectual property rights to the same extent as do the laws in countries where we currently have patent
protection. Our means of protecting our intellectual property rights in countries where we currently have patent or trademark
protection, or any other country in which we operate, may not be adequate to fully protect our intellectual property rights.
Similarly, if third parties claim that we infringe their intellectual property rights, we may be required to incur significant costs and
devote substantial resources to the defense of such claims. We may be required to discontinue using and selling any infringing
technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for
other technology. In addition, if we are unsuccessful in defending any such third-party claims, we could suffer costly judgments
and injunctions that could materially adversely affect our business, results of operations or financial condition.
20
System failures, including breaches in the security of our system, could harm our business.
We may experience system failures from time to time, and any lengthy interruption in the availability of our back-end
system computer could harm our revenues and profits, and could subject us to the scrutiny of our customers.
Frequent or persistent interruptions in our services could cause current or potential customers and users to believe that our
systems are unreliable, leading them to avoid our technology altogether, and could permanently harm our reputation and brands.
These interruptions would increase the burden on our engineering staff, which, in turn, could delay our introduction of new
applications and services. Finally, because our customers may use our products for critical transactions, any system failures could
result in damage to our customers’ businesses. These customers could seek significant compensation from us for their losses.
Even if unsuccessful, this type of claim could be time consuming and costly for us to address.
Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they
remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar events. Some of our systems are not fully redundant, and
our disaster recovery planning may not be sufficient for all eventualities.
Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security
features, including encryption software, biometric identification and secure hardware, into our solutions to protect against fraud in
electronic transactions and to provide for the privacy and integrity of card holder data. Our solutions may be vulnerable to
breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform.
Security vulnerabilities could jeopardize the security of information transmitted using our solutions. If the security of our
solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would
cause our business to suffer, and we may become subject to damage claims. We have not yet experienced any security breaches
affecting our business.
Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems with our system
could result in lengthy interruptions in our services. Our current business interruption insurance may not be sufficient to
compensate us for losses that may result from interruptions in our service as a result of system failures.
Our strategy of partnering with companies outside South Africa may not be successful.
In order for us to expand our operations into foreign markets, it may be necessary for us to establish partnering arrangements
with companies outside South Africa, such as the ones we have established in Namibia, Botswana, Nigeria and Colombia. The
success of these endeavors is, however, subject to a number of factors over which we have little or no control, such as finding
suitable partners with the appropriate financial, business and technical backing and continued governmental support for planned
implementations. In some countries, finding suitable partners and obtaining the appropriate support from the government involved
may take a number of years before we can commence implementation. Some of these partnering arrangements may take the form
of joint ventures in which we receive a minority interest. Minority ownership carries with it numerous risks, including dependence
on partners to provide knowledge of local market conditions and to facilitate the acquisition of any necessary licenses and
permits, as well as the inability to control the joint venture vehicle and to direct its policies and strategies. Such a lack of control
could result in the loss of all or part of our investment in such entities. In addition, our foreign partners may have different
business methods and customs which may be unfamiliar to us and with which we disagree. Our joint venture partners may not be
able to implement our business model in new areas as efficiently and quickly as we have been able to do in South Africa.
Furthermore, limitations imposed on our South African subsidiaries by South African exchange control regulations, as well as
limitations imposed on us by the Investment Company Act of 1940, may limit our ability to establish partnerships or entities in
which we do not obtain a controlling interest.
We may have difficulty managing our growth, especially as we expand our business internationally.
We continue to experience growth, both in the scope of our operations and size of our organization. This growth is placing
significant demands on our management, especially as we expand our business internationally. Continued growth would increase
the challenges involved in implementing appropriate operational and financial systems, expanding our technical and sales and
marketing infrastructure and capabilities, providing adequate training and supervision to maintain high quality standards, and
preserving our culture and values. International growth, in particular, means that we must become familiar and comply with
complex laws and regulations in other countries, especially laws relating to taxation.
Additionally, continued growth will place significant additional demands on our management and our financial and
operational resources, and will require that we continue to develop and improve our operational, financial and other internal
controls. If we cannot scale and manage our business appropriately, we will not experience our projected growth and our financial
results may suffer.
21
We pre-fund the payment of social welfare grants through our merchant acquiring system in South
Africa and pre-fund the settlement of certain customers in Korea and a significant level of payment
defaults by these merchants or customers would adversely affect us.
We pre-fund social welfare grants through the merchants who participate in our merchant acquiring system in the South
African provinces where we operate as well as prefund the settlement of funds to certain customers in Korea. These pre-funding
obligations expose us to the risk of default by these merchants and customers. Although we have not experienced any material
defaults by merchants or customers in the return of pre-funded amounts to us, we cannot guarantee that material defaults will not
occur in the future. A material level of merchant or customer defaults could have a material adverse effect on us, our financial
position and results of operations.
We may incur material losses in connection with our distribution of cash to 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 on reasonable terms. 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. The Company did not incur any material losses resulting from cash distribution during fiscal 2011, 2010 and
2009, but there is no assurance that we will not incur material losses in the future.
We depend upon third-party suppliers, making us vulnerable to supply shortages and price
fluctuations, which could harm our business.
We obtain our smart cards, POS devices and the other hardware we use in our business from a limited number of suppliers,
and do not manufacture this equipment ourselves. We generally do not have long-term agreements with our manufacturers or
component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of parts or products when
we need them, or if they increase their prices, we may not be able to find alternative sources in a timely manner and could be
faced with a critical shortage. This could harm our ability to implement new systems and cause our revenues to decline. Even if
we are able to secure alternative sources in a timely manner, our costs could increase. A supply interruption or an increase in
demand beyond current suppliers’ capabilities could harm our ability to distribute our equipment and thus, to acquire a new
source of customers who use our UEPS technology. Any interruption in the supply of the hardware necessary to operate our
technology, or our inability to obtain substitute equipment at acceptable prices in a timely manner, could impair our ability to
meet the demand of our customers, which would have an adverse effect on our business.
Shipments of our electronic payment systems may be delayed by factors outside of our control, which
can harm our reputation and our relationships with our customers.
The shipment of payment systems requires us or our manufacturers, distributors or other agents to obtain customs or other
government certifications and approvals and, on occasion, to submit to physical inspection of our systems in transit. Failure to
satisfy these requirements, and the very process of trying to satisfy them, can lead to lengthy delays in the delivery of our
solutions to our direct or indirect customers. Delays and unreliable delivery by us may harm our reputation and our relationships
with our customers.
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Risks Relating to Operating in South Africa and Other Foreign Markets
Fluctuations in the value of the South African rand have had, and will continue to have, a
significant impact on our reported results of operations, which may make it difficult to evaluate our
business performance between reporting periods and may also adversely affect our stock price.
The South African rand, or ZAR, is the primary operating currency for our business operations while our financial results are
reported in US dollars. This means that as long as the ZAR remains our primary operating currency, depreciation in the ZAR
against the US dollar, and to a lesser extent, the euro, would negatively impact our reported revenue and net income, while a
strengthening of the ZAR would have the opposite effect. Depreciation in the ZAR may negatively impact the prices at which our
stock trades. The US dollar/ZAR exchange rate has historically been volatile and we expect this volatility to continue. The ZAR
was significantly weaker overall during 2009 than during 2011 and 2010, which negatively affected our reported 2009 results of
operations when compared to 2011 and 2010. We provide detailed information about historical exchange rates in Item 7—
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Currency Exchange Rate
Information.”
Due to the significant fluctuation in the value of the ZAR and its impact on our reported results, you may find it difficult to
compare our results of operations between financial reporting periods even though we provide supplemental information about
our results of operations determined on a ZAR basis. This difficulty may increase as we expand our business internationally and
record additional revenue and expenses in the euro and other currencies. It may also have a negative impact on our stock price.
We generally do not engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations, other than economic hedging relating to our inventory purchases which are
settled in US dollars or euros. We have used forward contracts in order to hedge our economic exposure to the ZAR/US dollar and
ZAR/euro exchange rate fluctuations from these foreign currency transactions. We cannot guarantee that we will enter into
hedging transactions in the future or, if we do, that these transactions will successfully protect us against currency fluctuations.
South Africa’s high levels of poverty, unemployment and crime may increase our costs and impair
our ability to maintain a qualified workforce.
While South Africa has a highly developed financial and legal infrastructure, it also has high levels of crime and
unemployment and there are significant differences in the level of economic and social development among its people, with large
parts of the population, particularly in the rural areas, having limited access to adequate education, healthcare, housing and other
basic services, including water and electricity. In addition, South Africa has a high prevalence of HIV/AIDS and tuberculosis.
Government policies aimed at alleviating and redressing the disadvantages suffered by the majority of citizens under previous
governments may increase our costs and reduce our profitability, all of which could negatively affect our business. These
problems may prompt emigration of skilled workers, hinder investment into South Africa and impede economic growth. As a
result, we may have difficulties attracting and retaining qualified employees.
The economy of South Africa is exposed to high inflation and interest rates which could increase our
operating costs and thereby reduce our profitability.
The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation
and interest rates that are substantially higher than those prevailing in the United States and other highly developed economies.
High rates of inflation could increase our South African-based costs and decrease our operating margins. Although higher interest
rates would increase the amount of income we earn on our cash balances, they would also adversely affect our ability to obtain
cost-effective debt financing in South Africa.
23
If we do not achieve applicable black economic empowerment objectives in our South African
businesses, we risk losing our government and private contracts. In addition, it is possible that we may be
required to achieve black shareholding of our company in a manner that could dilute your ownership.
The South African government, through the Broad-Based Black Economic Empowerment Act, 2003, established a
legislative framework for the promotion of BEE. The law recognizes two distinct mechanisms for the achievement of BEE
objectives—compliance with codes of good practice, which have already been issued, and compliance with industry-specific
transformation charters. Although the charter that will likely apply to our company has not yet been finalized, we believe it is
likely that the charter will not differ substantially from the codes of good practice. Achievement of BEE objectives is measured
by a “scorecard” which establishes a weighting to various components of BEE. One component of BEE is achieving a
certain percentage of shareholdings by black South Africans in South African businesses over a period of years. This
shareholding component carries the highest BEE scorecard weighting. Other components include procuring goods and
services from black-owned businesses or from businesses that have earned good BEE scores and achieving certain levels
of black South African employment. Compliance with the codes and applicable charters are not enforced through civil or
criminal sanction, but compliance does affect the ability of a company to secure contracts in the public and private sectors.
Thus, it will be important for us to achieve applicable BEE objectives. Failing to do so could jeopardize our ability to
maintain existing business, including our South African pension and welfare business, or to secure future business.
We have taken a number of actions as a company to increase empowerment of black South Africans. However, it is
possible that these actions may not be sufficient to enable us to achieve applicable BEE objectives. In that event, in order to
avoid risking the loss of our government and private contracts, we may have to seek to comply through other means, including
by selling shares of Net1 or of our South African subsidiaries to black South Africans. Such sales of shares could have a
dilutive impact of your ownership interest, which could cause the market price of our stock to decline.
South African exchange control regulations could hinder our ability to make foreign investments
and obtain foreign-denominated financing.
South Africa’s exchange control regulations restrict the export of capital from South Africa, the Republic of Namibia and the
Kingdoms of Lesotho and Swaziland, known collectively as the Common Monetary Area without the prior approval of SARB.
While the South African government has relaxed exchange controls in recent years, it is difficult to predict whether or how it will
further relax or abolish exchange control measures in the foreseeable future.
Although Net1 is a US corporation and is not itself subject to South African exchange control regulations, these regulations
do restrict the ability of our South African subsidiaries to raise and deploy capital outside the Common Monetary Area, to borrow
money in currencies other than the South African rand and to hold foreign currency. Exchange control restrictions may also affect
the ability of these subsidiaries to pay dividends to Net1 unless the affected subsidiary can show that any payment of such
dividend will not place it in an over-borrowed position. As of June 30, 2011, approximately 76% of our cash and cash equivalents
were held by our South African subsidiaries. Exchange control regulations could make it difficult for our South African
subsidiaries to: (i) export capital from South Africa; (ii) hold foreign currency or incur indebtedness denominated in foreign
currencies without the approval of SARB; (iii) acquire an interest in a foreign venture without the approval of SARB and first
having complied with the investment criteria of SARB; (iv) repatriate to South Africa profits of foreign operations; and (v) limit
our business to utilize profits of one foreign business to finance operations of a different foreign business.
Under current exchange control regulations, SARB approval would be required for any acquisition of our company which
would involve payment to our South African shareholders of any consideration other than South African rand. This restriction
could limit our management in its ability to consider strategic options and thus, our shareholders may not be able to realize the
premium over the current trading price of our shares.
Most of South Africa’s major industries are unionized, and the majority of employees belong to trade
unions. We face the risk of disruption from labor disputes and new South African labor laws.
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. Although only approximately 12% percent of our workforce is unionized and we have not
experienced any labor disruptions in recent years, such labor disruptions may occur in the future. In addition, developments in
South African labor laws may increase our costs or alter our relationship with our employees and trade unions, which may have
an adverse effect on us, our financial condition and our operations.
24
Operating in South Africa and other emerging markets subjects us to greater risks than those we
would face if we operated in more developed markets.
Emerging markets such as South Africa, as well as some of the other markets into which we have recently begun to expand,
including African countries outside South Africa, South America, Southeast Asia and Central and Eastern Europe, are subject to
greater risks than more developed markets. While we focus our business primarily on emerging markets because that is where we
perceive there to be the greatest opportunities to market our products and services successfully, the political, economic and market
conditions in many of these markets present risks that could make it more difficult to operate our business successfully.
Some of these risks include:
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political and economic instability, including higher rates of inflation and currency fluctuations;
high levels of corruption, including bribery of public officials;
loss due to civil strife, acts of war or terrorism, guerrilla activities and insurrection;
a lack of well-developed legal systems which could make it difficult for us to enforce our intellectual property
and contractual rights;
logistical and communications challenges;
potential adverse changes in laws and regulatory practices, including import and export license requirements
and restrictions, tariffs, legal structures and tax laws;
difficulties in staffing and managing operations and ensuring the safety of our employees;
restrictions on the right to convert or repatriate currency or export assets;
greater risk of uncollectible accounts and longer collection cycles;
indigenization and empowerment programs; and
exposure to liability under US securities and foreign trade laws, including the Foreign Corrupt Practices Act, or
FCPA, and regulations established by the US Department of Treasury’s Office of Foreign Assets Control, or
OFAC.
Many of these countries and regions are in various stages of developing institutions and political, legal and regulatory
systems that are characteristic of democracies. However, institutions in these countries and regions may not yet be as firmly
established as they are in democracies in the developed world. Many of these countries and regions are also in the process of
transitioning to a market economy and, as a result, are experiencing changes in their economies and their government policies that
can affect our investments in these countries and regions. Moreover, the procedural safeguards of the new legal and regulatory
regimes in these countries and regions are still being developed and, therefore, existing laws and regulations may be applied
inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and
regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries
and regions face uncertainty as to the security of their investments. Any unexpected changes in the political or economic
conditions in these or neighboring countries or others in the region may have a material adverse effect on the international
investments that we have made or may make in the future, which may in turn have a material adverse effect on our business,
operating results, cash flows and financial condition.
Risks Relating to Government Regulation
We are required to comply with certain US laws and regulations, including the Foreign Corrupt
Practices Act as well as economic and trade sanctions, which could adversely impact our future growth.
We must comply with the FCPA, which prohibits US companies or their agents and employees from providing anything of
value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help
obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. In addition, OFAC
administers and enforces economic and trade sanctions against targeted foreign countries, entities and individuals based on US
foreign policy and national security goals.
25
Any failure by us to adopt appropriate compliance procedures and ensure that our employees, agents and business partners
comply with the FCPA could subject us to substantial penalties. In addition, the requirement that we comply with the FCPA could
put us at a competitive disadvantage with companies that are not required to comply with the FCPA or could otherwise harm our
business. For example, in many emerging markets, there may be significant levels of official corruption, and thus, bribery of
public officials may be a commonly accepted cost of doing business. Our refusal to engage in illegal behavior, such as paying
bribes, may result in us not being able to obtain business that we might otherwise have been able to secure or possibly even result
in unlawful, selective or arbitrary action being taken against us by foreign officials. Furthermore, the trade sanctions administered
and enforced by OFAC target countries which are typically less developed countries. Since less developed countries present some
of the best opportunities for us to expand our business internationally, restrictions against entering into transactions with those
foreign countries, as well as with certain entities and individuals in those countries, can adversely affect our ability to grow our
business.
Changes in current South African government regulations relating to social welfare grants could
adversely affect our revenues and cash flows.
We derive a substantial portion of our current business from the distribution of social welfare grants 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 South African government, any changes to or reinterpretations of the government regulations relating to
social welfare may result in the non-renewal or reduction of grants for certain individuals, or a determination that currently
eligible social welfare grant 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 do not have a South African banking license and therefore we provide our wage payment
solution through an arrangement with a third-party bank, which limits our control over this business and
the economic benefit we derive from it. If this arrangement were to terminate, we would not be able to
operate our wage payment business without alternate means of access to a banking license
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 or to have access to an existing banking license. We are not currently so registered, but we have entered
into an agreement with Grindrod Bank Limited that enables us to implement our wage payment solution in compliance with the
relevant laws and regulations. If the agreement were to be terminated, we would not be able to operate our wage payment business
unless we were able to obtain access to a banking license through alternate means.
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. If we fail to obtain this license, we may be
stopped from continuing this part of our business in South Africa.
Our payment processing businesses are subject to substantial governmental regulation and may be
adversely affected by liability under, or any future inability to comply with, existing or future regulations
or requirements.
Our payment processing activities are subject to extensive regulation. Compliance with the requirements under these various
regulatory regimes may cause us to incur significant additional costs and failure to comply with such requirements could result in
the shutdown of the non-complying facility, the imposition of liens, fines and/or civil or criminal liability.
26
We may be subject to regulations regarding privacy, data use and/or security which could adversely
affect our business.
We are subject to regulations in a number of the countries in which we operate relating to the collection, use, retention,
security and transfer of personally identifiable information about the people who use our products and services, in particular,
personal financial and health information. New laws in this area have been passed by several jurisdictions, and other jurisdictions
are considering imposing additional restrictions. The interpretation and application of user data protection laws are in a state of
flux. These laws may be interpreted and applied inconsistently from country to country and our current data protection policies
and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could
cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure,
or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer protection-related
laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant
penalties and negative publicity and adversely affect us. In addition, as noted above, we are subject to the possibility of security
breaches, which themselves may result in a violation of these laws.
Risks Relating to our Common Stock
Our stock price has been and may continue to be volatile.
Our stock price has experienced recent significant volatility. During the 2011 fiscal year, our stock price ranged from a low
of $8.24 to a high of $15.04. We expect that the trading price of our common stock may continue to be volatile as a result of a
number of factors, including, but not limited to the following:
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developments or the absence of developments in obtaining a contract from SASSA;
fluctuations in currency exchange rates, particularly the US dollar/ZAR exchange rate;
quarterly variations in our operating results, especially if our operating results fall below the expectations of securities
analysts and investors;
announcements of acquisitions, disposals or impairments of intangible assets;
the timing of or delays in the commencement, implementation or completion of major projects;
large purchases or sales of our common stock;
general conditions in the markets in which we operate; and
economic and financial conditions.
Approximately 40% of our outstanding common stock is owned by two shareholders. The interests of
these shareholders may conflict with those of our other shareholders.
There is a concentration of ownership of our outstanding common stock because approximately 40% of our outstanding
common stock is owned by two shareholders. Based on its most recent SEC filing disclosing its ownership of our shares,
International Value Advisers, LLC, or IVA, beneficially owned 25.4% of our outstanding common stock. In addition, investment
entities affiliated with General Atlantic LLC owned 14.2% of our outstanding common stock. General Atlantic also has
representation on our board of directors. The interests of IVA and General Atlantic may be different from or conflict with the
interests of our other shareholders. As a result of the ownership by IVA and General Atlantic, as well as General Atlantic’s board
seat, they will be able, if they act together, to influence our management and affairs and all matters requiring shareholder
approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying or preventing a change of control of our company, thus depriving shareholders of a premium for
their shares, or facilitating a change of control that other shareholders may oppose.
We may seek to raise additional financing by issuing new securities with terms or rights superior to
those of our shares of common stock, which could adversely affect the market price of our shares of
common stock.
We may require additional financing to fund future operations, including expansion in current and new markets,
programming development and acquisition, capital costs and the costs of any necessary implementation of technological
innovations or alternative technologies, or to fund acquisitions. Because of the exposure to market risks associated with
economies in emerging markets, we may not be able to obtain financing on favorable terms or at all. If we raise additional funds
by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new
equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the
market price and voting power of shares of common stock. If we raise additional funds by issuing debt securities, the holders of
these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of
these debt securities could impose restrictions on operations and create a significant interest expense for us.
27
We may have difficulty raising necessary capital to fund operations or acquisitions as a result of
market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and
the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the
operations, performance, underlying asset values or prospects of such companies. For these reasons, our shares of common stock
can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our
business development plans are successful, we may require additional financing to continue to develop and exploit existing and
new technologies, to expand into new markets and to make acquisitions, all of which may be dependent upon our ability to obtain
financing through debt and equity or other means.
Issuances of significant amounts of stock in the future could potentially dilute your equity ownership
and adversely affect the price of our common stock.
We believe that it is necessary to maintain a sufficient number of available authorized shares of our common stock in order
to provide us with the flexibility to issue shares for business purposes that may arise from time to time. For example, we could sell
additional shares to raise capital to fund our operations or to acquire other businesses, issue additional shares under our stock
incentive plan or declare a stock dividend. Our board may authorize the issuance of additional shares of common stock without
notice to, or further action by, our shareholders, unless shareholder approval is required by law or the rules of the NASDAQ Stock
Market. The issuance of additional shares could dilute the equity ownership of our current shareholders. In addition, additional
shares that we issue would likely be freely tradable which could adversely affect the trading price of our common stock.
Failure to maintain effective internal control over financial reporting in accordance with Section 404
of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material adverse
effect on our business and stock price. Our management evaluation and auditor attestation regarding the
effectiveness of our internal control over financial reporting as of June 30, 2011, excluded the operations
of KSNET. If we are not able to integrate KSNET’s operations into our internal control over financial
reporting, our internal control over financial reporting may not be effective.
Under Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management certification
and auditor attestation regarding the effectiveness of our internal control over financial reporting. We are required to report,
among other things, control deficiencies that constitute a “material weakness” or changes in internal control that materially affect,
or are reasonably likely to materially affect, internal control over financial reporting. A “material weakness” is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
The requirement to evaluate and report on our internal controls also applies to companies that we acquire. As a private
company, KSNET was not required to comply with Sarbanes prior to the time we acquired it. The integration of KSNET into our
internal control over financial reporting has required significant time and resources from our management and other personnel and
may increase our compliance costs. Our management evaluation and auditor attestation regarding the effectiveness of our internal
control over financial reporting as of June 30, 2011, excluded the operations of KSNET. If we fail to successfully integrate these
operations into our internal control over financial reporting, our internal control over financial reporting may not be effective.
While we continue to dedicate resources and management time to ensuring that we have effective controls over financial
reporting, including with respect to KSNET’s operations, failure to achieve and maintain an effective internal control environment
could have a material adverse effect on the market’s perception of our business and our stock price.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or
bringing original actions based upon U.S. laws, including the federal securities laws or other foreign
laws, against us or our directors and officers and experts.
While Net1 is incorporated in the state of Florida, United States, the company is headquartered in Johannesburg, South
Africa and substantially all of the company’s assets are located outside the United States.
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In addition, the majority of Net1’s directors and officers reside outside of the United States and our experts, including our
independent registered public accountants, are based in South Africa. As a result, even though you could effect service of legal
process upon Net1, as a Florida corporation, in the United States, you may not be able to collect any judgment obtained against
Net1 in the United States, including any judgment based on the civil liability provisions of the U.S. federal securities laws,
because substantially all of our assets are located outside the United States. Moreover, it may not be possible for you to effect
service of legal process upon the majority of our directors and officers or upon our experts within the United States or elsewhere
outside South Africa and any judgment obtained against any of our foreign directors, officers and experts in the United States,
including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States
and may not be enforced by a South African court. A foreign judgment is not directly enforceable in South Africa, but constitutes
a cause of action which will be enforced by South African courts provided that:
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the court or arbitral body which pronounced the judgment had international jurisdiction and competence to entertain the
case according to the principles recognized by South African law with reference to the jurisdiction of foreign courts;
the judgment is final and conclusive (that is, it cannot be altered by the court which pronounced it);
the judgment has not lapsed;
the recognition and enforcement of the judgment by South African courts would not be contrary to public policy in South
Africa, including observance of the rules of natural justice which require that no award is enforceable unless the
defendant was duly served with documents initiating proceedings, that he was given a fair opportunity to be heard and
that he enjoyed the right to be legally represented in a free and fair trial before an impartial tribunal;
the judgment was not obtained by improper or fraudulent means;
the judgment does not involve the enforcement of a penal or foreign revenue law or any award of multiple or punitive
damages; and
the enforcement of the judgment is not otherwise precluded by the provisions of the Protection of Business Act 99 of
1978 (as amended), of the Republic of South Africa.
It has been the policy of South African courts to award compensation for the loss or damage actually sustained by the person
to whom the compensation is awarded. South African courts have awarded compensation to shareholders who have suffered
damages as a result of a diminution in the value of their shares based on various actions by the corporation and its management.
Although the award of punitive damages is generally unknown to the South African legal system, that does not mean that such
awards are necessarily contrary to public policy. Whether a judgment was contrary to public policy depends on the facts of each
case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot
enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign court. Further, if a
foreign judgment is enforced by a South African court, it will be payable in South African currency. Also, under South Africa’s
exchange control laws, the approval of SARB is required before a defendant resident in South Africa may pay money to a non-
resident plaintiff in satisfaction of a foreign judgment enforced by a court in South Africa.
It is doubtful whether an original action based on United States federal securities laws may be brought before South African
courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings
being initiated in South Africa. Furthermore, the Rules of the High Court of South Africa require that documents executed outside
South Africa must be authenticated for the purpose of use in South African courts.
In reaching the foregoing conclusions, we consulted with our South African legal counsel, Cliffe Dekker Hofmeyr Inc.
We may become subject to a US 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-US holders that
elected to receive units in a trust representing beneficial interests in one of our subsidiaries in connection with our 2004
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 the subsidiary. As such, we and our affiliates did not withhold any amounts for US
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 US federal income tax
purposes. In such case, distributions received with respect to the interests in the subsidiary could be subject to US 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 US federal withholding tax may also subject us to penalties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We lease our corporate headquarters facility which consists of 84,193 square feet in Johannesburg, South Africa. We also
lease properties throughout South Africa, a 12,088 square foot manufacturing facility in Lazer Park, a 14,230 square foot
manufacturing facility in Brakpan and 73 depot facilities. We also lease additional office space in Johannesburg, Pretoria, Cape
Town and Durban, South Africa; Vienna, Austria; Seoul, Republic of Korea; Moscow, Russia; New York, New York; Dallas,
Texas; Fredrick, Maryland; and New Delhi, India. These leases expire at various dates through the year 2011 and 2014,
respectively.
We own land and buildings in Ahnsung,Kyung-gi, Republic of Korea, which facility is used for the storage of business
documents. We believe we have adequate facilities for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
In 2009, we instituted a lawsuit against SASSA in the High Court, alleging that it unlawfully moved beneficiaries to SAPO
in violation of our contract and the PFMA, seeking injunctive relief. In January 2010, the High Court ruled in our favor and
directed SASSA to discontinue the registration of any beneficiaries with SAPO until a proper procurement process had been
completed. SASSA appealed the High Court’s ruling to the South African Supreme Court of Appeal, which overturned the High
Court’s judgment in March 2011. We applied for leave to appeal to the South African Constitutional Court, which was denied in
June 2011. See also “1a. Risk Factors – We were unsuccessful in our lawsuit against SASSA challenging SASSA’s right to
contract with SAPO to provide banking or payment services relating to social grant beneficiaries. If SASSA provides this
business to SAPO rather than to us, the revenue and operating income we derive from our current SASSA contract could be
substantially reduced, which could have a material adverse effect on us.”
We also made application to the High Court for the review and setting aside of the decision to withdraw the previous
SASSA tender and we are currently responding to SASSA’s answering affidavit, where after the parties will apply for a hearing
date.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to our business, to
which we are a party or of which any of our property is the subject.
ITEM 4. RESERVED
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol
“UEPS” and on the JSE in South Africa under the symbol “NT1.” The Nasdaq is our principal market for the trading of our
common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by
Nasdaq.
Period
Quarter ended September 30, 2009...........
Quarter ended December 31, 2009 ...........
Quarter ended March 31, 2010 ..................
Quarter ended June 30, 2010 .....................
Quarter ended September 30, 2010...........
Quarter ended December 31, 2010 ...........
Quarter ended March 31, 2011 ..................
Quarter ended June 30, 2011 .....................
High
$22.47
$21.77
$20.22
$18.50
$15.04
$12.97
$12.31
$8.92
Low
$12.36
$17.11
$16.50
$13.14
$10.72
$10.35
$8.24
$7.29
Our transfer agent in the United States is The Bank of New York Mellon, One Wall Street, New York, New York, 10286.
According to the records of our transfer agent, as of August 11, 2011, there were 19 shareholders of record of our common
stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares are
held of record by banks, brokers, and other financial institutions. Our transfer agent in South Africa is Link Market Services
South Africa (Pty) Ltd, 16th Floor, 11 Diagonal Street, Johannesburg, 2001, South Africa.
Dividends
We have not paid any dividends on our shares of common stock during our last two fiscal years and presently intend to
retain future earnings to finance the expansion of the business. We do not anticipate paying any cash dividends in the
foreseeable future. The future dividend policy will depend on our earnings, capital requirements, expansion plans, financial
condition and other relevant factors.
Issuer Purchases of Equity Securities
The table below presents information relating to purchases of our common stock during the fourth quarter of fiscal 2011:
(a)
Total number
of shares
purchased
(b)
Average price
paid per
share
(US dollars)
-
8.17
8.02
(c)
Total number
of shares
purchased as
part of
publicly
announced
plans or
programs
(d)
Maximum
dollar value
of shares that
may yet be
purchased
under the
plans or
programs (1)
100,000,000
99,086,062
98,977,410
Period
April 2011 ...............................................
May 2011 ................................................
June 2011 ................................................
Total ..................................................
(1) On February 5, 2010, we announced that our Board of Directors had authorized the repurchase of up to $50 million of our common stock from time to
time in open market transactions. On May 5, 2010, we announced that our Board of Directors had increased this authorization to an aggregate of up to $100
million. The authorization has no expiration date.
-
111,842
13,550
125,392
-
111,842
13,550
125,392
31
The table below presents our common stock purchased during fiscal 2011 per quarter:
Period
First .........................................................
Second .....................................................
Third ........................................................
Fourth ......................................................
Total fiscal 2011 .................................
Share performance graph
Total number
of shares
purchased
-
-
-
125,392
125,392
Average price
paid per
share
(US dollars)
-
-
-
8.16
8.16
The chart below compares the five-year cumulative return, assuming the reinvestment of dividends, where applicable, on
our common stock with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph assumes $100 was invested
on June 30, 2006, in each of our common stock, the S&P 500 companies, and the companies in the NASDAQ Industrial Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(AMONG NET 1, THE S&P 500 INDEX AND THE NASDAQ INDUSTRIAL INDEX)
s
r
a
l
l
o
D
140
120
100
80
60
40
20
-
NASDAQ Industrial Index
S&P 500 Index
Net1
2006
2007
2008
2009
Fiscal year ended June 30,
2010
2011
32
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read together with Item 7—“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Item 8—“Financial Statements and
Supplementary Data.” The following selected historical financial data as of June 30, 2011 and 2010, and for the three years
ended June 30, 2011 has been derived from our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected historical consolidated financial data presented below as of June 30, 2009, 2008 and 2007 and for the
years ended June 30, 2008 and 2007, have been derived from our consolidated financial statements, which are not included
herein. The selected historical financial data as of each date and for each period presented are prepared in accordance with US
GAAP. These historical results are not necessarily indicative of results to be expected in any future period.
Consolidated Statements of Operations Data
(in thousands, except per share data)
Revenue ......................................................................................
Cost of goods sold, IT processing, servicing and support ...
Selling, general and administrative(2)....................................
Depreciation and amortization ................................................
Profit on sale of microlending business .................................
Impairment losses(3) .................................................................
Operating income ......................................................................
Foreign exchange gain related to short-term investment(4)
Interest income (expense), net .................................................
Income before income taxes ....................................................
Income tax expense(5) ..............................................................
Income from continuing operations ........................................
Net income attributable to Net1 ..............................................
Income from continuing operations per share:......................
Basic ........................................................................................
Diluted .....................................................................................
2011(1)
$343,420
109,858
119,692
34,671
-
41,771
37,428
-
(1,018)
36,410
33,525
2,647
2,647
Year Ended June 30
2009
$246,822
70,091
64,833
17,082
455
1,836
93,435
26,657
10,828
130,920
42,744
86,601
86,601
2008
$254,056
67,486
65,362
10,822
-
-
110,386
-
15,722
126,108
39,192
86,695
86,695
2010
$280,364
72,973
80,854
19,348
-
37,378
69,811
-
9,069
78,880
40,822
38,990
38,990
2007
$223,968
54,417
61,625
11,050
-
-
96,876
-
4,401
101,277
37,574
63,679
63,679
$0.06
$0.06
$0.84
$0.84
$1.53
$1.53
$1.50
$1.49
$1.12
$1.11
(1) KSNET was acquired effective November 1, 2010, and our reported results for fiscal 2011 include KSNET revenues of
$68.4 million, earnings before interest, tax and amortization of $18.2 million and a net loss of $4.1 million, after acquisition-
related intangible assets amortization, deferred taxes related to acquisition-related intangible asset amortization and interest
related to financing obtained to partially fund the acquisition.
(2) Selling, general and administrative expense includes a charge of $1.7 million (2011), $5.5 million (2010), $4.9 million
(2009), $3.8 million (2008) and $0.6 million (2007), respectively, in respect of stock-based compensation.
(3) Customer relationships acquired in the acquisition of Net1 UTA were impaired in fiscal 2011. Goodwill related to the
hardware, software and related technology sales segment was impaired during fiscal 2010, and goodwill related to the financial
services segment was impaired during fiscal 2009.
(4) The foreign exchange gain related to a short-term investment in the form of an asset swap arrangement which matured
during fiscal 2009.
(5) The fully-distributed tax rate for fiscal 2011, 2010 and 2009 was 34.55%, for fiscal 2008 it was 35.45% and for fiscal 2007
it was 36.89%. Our income tax expense for fiscal 2011 includes valuation allowances created related to our Net1 UTA business
of $8.9 million and a reversal of $10.4 million related to the customer impairment loss. Our income tax expense for fiscal 2009
and 2008 includes the impact of the change in the fully-distributed rate during those fiscal years of approximately $3.5 million
and $5.4 million, respectively.
Additional Operating Data:
(in thousands, except percentages)
Cash flows provided by operating activities .................
Cash flows used in investing activities ..........................
Cash flows provided by (used in) financing activities .
Operating income margin .................................................
2011
$66,223
$323,685
$183,269
11%
33
Year ended June 30,
2009
$106,768
$107,856
$(40,248)
38%
2008
$118,760
$3,903
$2,864
43%
2010
$68,683
$90,186
$(48,478)
25%
2007
$65,466
$91,540
$3,225
43%
Consolidated Balance Sheet Data:
(in thousands)
Cash and cash equivalents ................................................
Total current assets before settlement assets .................
Goodwill (1) .......................................................................
Intangible assets (1) ..........................................................
Total assets .........................................................................
Total current liabilities before settlement obligations ..
Total long-term debt .........................................................
Total Net1 equity ...............................................................
2011
$95,263
213,421
209,570
119,856
781,645
104,396
111,776
$323,006
2010
$153,742
226,429
76,346
68,347
472,090
57,927
4,343
$285,878
As of June 30,
2009
$220,786
290,294
116,197
75,890
499,487
77,809
4,185
$373,217
2008
$272,475
345,734
76,938
22,216
454,071
76,503
3,766
$340,328
2007
$171,727
247,982
85,871
31,609
376,090
54,698
4,100
$281,073
(1) Refer to note 9 to our consolidated financial statements for discussion of the movement in our goodwill and intangible assets
during fiscal 2011.
34
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Item 6—“Selected Financial Data” and Item 8—
“Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, the following
discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A—
“Risk Factors” and “Forward Looking Statements.”
Overview
We provide payment solutions and transaction processing services across a wide range of industries and in various
geographies.
We have developed and market a smart-card based alternative payment system for the unbanked and underbanked
populations of developing economies. Our market-leading system enables 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. Our UEPS uses biometrically secure smart cards that operate in
real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate access
through a communications network to a centralized computer. This offline capability means that users of our system can
conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is
often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability
by removing any elements that are costly and are prone to outages. In addition to effecting purchases, cash-backs and any form
of payment, our system can be used for banking, health care management, international money transfers, voting and
identification.
We also develop and provide secure transaction technology solutions and services, and offer transaction processing,
financial and clinical risk management solutions to various industries. Our core competencies around secure online transaction
processing, cryptography, mobile telephony and integrated circuit card (chip/smart card) technologies are principally applied to
electronic commerce transactions in the telecommunications, banking, payroll, retail, health care, petroleum and utility
industries.
Our technology is widely used in South Africa today, where we distribute pension and welfare payments, using our UEPS
technology, to over 3.2 million recipients in five of South Africa’s nine provinces, process debit and credit card payment
transactions on behalf of retailers that we believe represent nearly 65% of retailers within the formal retail sector in South Africa
through our EasyPay system, process value-added services such as bill payments and prepaid electricity for the major bill
issuers and local councils in South Africa and provide mobile telephone top-up transactions for all of the South African mobile
carriers. We are the largest provider of third-party payroll payments in South Africa through our FIHRST service that processes
monthly payments for approximately 1,250 employers representing over 850,000 employees. Our MediKredit service provides
the majority of funders and providers of healthcare in South Africa with an on-line real-time management system for healthcare
transactions. We perform a similar service in the United States through our XeoHealth subsidiary.
During the second quarter of fiscal 2011, we acquired KSNET, for KRW 270 billion (approximately $241 million).
KSNET is the second largest transaction processor by volume in Korea and offers card VAN, PG and banking VAN in that
country. The acquisition of KSNET expands our international footprint as well as diversifies our revenue, earnings and product
portfolio.
Sources of Revenue
We generate our revenues by charging transaction fees to government agencies, merchants, financial service providers,
employers and healthcare providers; by providing loans and insurance products and by selling hardware, licensing software and
providing related technology services.
We have structured our business and our business development efforts around four related but separate approaches to
deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related
technology to a customer. As an example, in Ghana, we sold a complete UEPS to the Central Bank, which owns and operates
the resulting transaction settlement system. The revenue and costs associated with this approach are reflected in our hardware,
software and related technology sales segment.
35
We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a
supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the
system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of
the South African government and wages on behalf of employers on a fixed fee basis, but charge a fee on an ad valorem basis
for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our
smart card accounts, South African transaction-based activities and financial services segments. We have adopted a variation of
this approach in Iraq, where we operate a UEPS system on an outsourced basis on behalf of a consortium consisting of the Iraqi
government and local Iraqi banks, in return for transaction fees based on the volume and value of transactions processed through
the system.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to
supply those services and products directly where the business case is compelling. For instance, we provide short-term UEPS-
based loans to our smart card holders. This is an example of the third approach that we have taken. Here we can act as the
principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the
provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our financial
services segment.
Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 200,000
merchants and to card issuers in Korea through our value-added network. In the US, we earn transaction fees from our
customers who utilize our VCPay™ technology to generate a unique, one-time use prepaid virtual card number to securely
purchase goods and services or perform bill payments in any card not present environment. The revenue and costs at KSNET
and VCPay™, as well as those from our Iraqi contract, are reflected in our international transaction-based activities segment.
We also generate fees from transaction processing for both funders and providers of healthcare in South Africa and from
providing a third party payroll payments solution to South African companies. In both cases, the revenue and costs associated
with these services are reflected in our South African transaction-based activities segment.
Finally, we have entered into business partnerships or joint ventures to introduce our UEPS and VTU solutions to new
markets such as Botswana, Namibia, Nigeria and Colombia. In these situations, we take an equity position in the business while
also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined
approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively
engaged in the management of the new business. In most instances, the joint venture or partnership has a license to use the
UEPS in the specific territory, including the back-end system. We account for our equity investments using the equity method.
When we equity-account these investments, we are required under US GAAP to eliminate our share of the net income generated
from sales of hardware and software to the investee. We recognize this net income from these equity-accounted investments
during the period in which the hardware and software is utilized in the investee’s operations, or has been sold to third-party
customers, as the case may be.
We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the
implementation of our technology.
Business Developments during Fiscal 2011
South Africa
SASSA contract
Under our SASSA contract, we provide our social welfare grants distribution service to SASSA in five of South Africa’s
nine provinces (KwaZulu-Natal, Limpopo, North West, Northern Cape and Eastern Cape). The contract contains a standard
pricing formula for all provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants
paid per beneficiary, calculated on a guaranteed minimum number of beneficiaries per month.
We signed our current agreement with SASSA on August 24, 2010 which was retroactively effective to July 1, 2010. The
contract was originally scheduled to expire on March 31, 2011, was extended to September 30, 2011 and has been further
extended to March 31, 2012 on the same terms and conditions. In April 2011, SASSA publicly commenced a tender process for
the award of new contracts. We are participating in the tender process and have submitted our proposal.
See Item 1A—“Risk Factors” and Item 3—“Legal Proceedings” for more information and the risks associated with our
SASSA contract, the recently initiated new tender process and for an update on litigation between us and SASSA.
36
EasyPay Kiosk pilot project
In September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at select locations in the Gauteng province
of South Africa. The EP Kiosk enables users to purchase prepaid electricity and airtime and perform any post paid bill payment
service requirements using the interactive user-friendly touch screen kiosk interface. The user will also be able to transfer
prepaid voucher value to other mobile phone users. Users can register their own prepaid voucher wallet on the EP Kiosk, with
access to the wallet guaranteed via biometric identification of the user at time of registration. A five digit personal identification
number, or PIN, is also required by the user so as to facilitate transactions done via their own mobile phones or via the website.
We have already deployed several EP Kiosks and we expect to sign additional agreements during fiscal 2012.
South African transaction processors
During fiscal 2011, our South African transaction processors were awarded various new business contracts to perform
transaction processing including for a top five petroleum company, a medium-size retailer and four smaller-sized retailers, as
well as to perform distribution of prepaid electricity for two large metropolitan areas. In addition, FIHRST continues to expand
its client base and number and value of transactions processed.
Outside South Africa
Republic of Korea
On October 29, 2010, we acquired 98.73% of KSNET, a leading Republic of Korea payment processor, for KRW 270
billion (approximately $240 million based on October 29, 2010 exchange rates). Most of KSNET’s revenue is derived from the
provision of payment processing services to approximately 200,000 merchants and to card issuers in Korea through its VAN.
KSNET has a diverse product offering and we believe it is the only total payments solutions provider offering card VAN,
payment gateway and banking VAN services in Korea, which differentiates KSNET from other Korean payment solution
providers and allows it to cross-sell its products across its customer base.
The acquisition of KSNET expands our international footprint as well as diversifies our revenue, earnings and product
portfolio and provides an established base in Asia for further business development activities in the region.
KSNET’S operating performance during fiscal 2011 has been largely in-line with our expectations and the integration of
KSNET has progressed well since the acquisition closed at the end of October 2010. We have commenced a number of strategic
initiatives in the Republic of Korea to maintain our current market share and to expand into adjacent markets. Specifically, we
have embarked on a number of medium-term initiatives which will be funded from our existing Korean cash reserves. We do
not expect to use funds generated by our other operations to fund these initiatives in Korea. Our management teams are actively
engaged in identifying and evaluating opportunities in the Korean market place.
The African Continent and Iraq
During fiscal 2011, NUETS recorded revenue from transaction fees and the delivery of UEPS-enabled smartcards under its
contract with the government of Iraq. NUETS expects to generate ongoing revenues from transaction fees under the Iraqi
contract during fiscal 2012. NUETS has entered the second phase of its initiative in Ghana and now generates recurring income
in the form of hardware and software maintenance fees.
NUETS continued to service its current customers on the African continent and in Iraq and continued its business
development efforts, including responding to a number of tenders, in multiple new countries on the African continent during the
year.
During fiscal 2011, SmartSwitch Namibia generated incremental transaction fees from transactions conducted between
Namibian merchants and UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees during fiscal 2011 from
the payment of food voucher grants. We expect SmartSwitch Namibia and Botswana to continue generating transaction fees
during fiscal 2012.
SmartSwitch Namibia is no longer dependent on shareholder funding and commenced repayment of its shareholder loans
and interest during fiscal 2011. The shareholders of SmartSwitch Botswana agreed to convert their loan funding to equity
funding and waive all interest due. The net effect of the reversal of the interest and related foreign exchange effects are included
in our results for fiscal 2011. We sold our entire interest in VinaPay during fiscal 2011.
37
Net1 UTA
During the third quarter of fiscal 2011, one of Net1 UTA’s largest customers advised us of its intention to transition to an
alternative payment platform which will negatively impact our revenue, net income and cash flow in the medium term. As a
consequence of this development, as well as deteriorating trading conditions and uncertainty surrounding the timing and
quantum of future net cash inflows, we reviewed customer relationships acquired as part of the Net1 UTA acquisition for
impairment. As a result of this review, we recognized an impairment loss of approximately $41.8 million related to the entire
carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008. In addition, we reversed the
deferred tax liability of $10.4 million associated with this intangible asset.
The impairment loss has been allocated to our hardware, software and related technology sales operating segment.
In late fiscal 2011, Net1 UTA’s management prepared an updated forecast for the remainder of calendar 2011 and for 2012
to determine the viability and sustainability of its operations. Based on this forecast we believe that it will take a number of
years for Net1 UTA to return to profitability and that in the short term it will require additional funding. The Net1 UTA
management has proposed and implemented a cost containment plan and operations in the CIS, including employee headcount,
have been substantially reduced. As a result of the forecast provided, the anticipated short-term losses and the failure of Net1
UTA to generate revenues using its new transaction-based business model, we have determined to provide a valuation
allowance of approximately $8.9 million for the full amount of deferred tax assets at Net1 UTA as of June 30, 2011.
In July, 2011, Net1 UTA signed a contract with Banamex, a leading bank in Mexico and part of Citigroup, for the delivery
of VCpay™. Banamex will offer VCpay™ to its customers as an application that can be downloaded to a mobile phone and
linked to the customer’s credit and/or debit card accounts. VCpay™ allows consumers to securely generate an offline, one-time
use MVC number for a specific limit or purchase amount on their mobile handsets to buy goods and services or perform bill
payments in any card not present environment.
Net1 Virtual Card
We launched our VCPayTM offering in the United States during fiscal 2011. Our mobile phone-based virtual payment card
application is designed to eliminate fraud in CNP transactions. We have teamed up with MetroPCS Communications, Inc., or
MetroPCS, The Bancorp Bank, a wholly-owned subsidiary of The Bancorp, Inc., FSV Payment Systems and MoneyGram
International to offer a comprehensive card issuing, processing and distribution network to wireless subscribers in the United
States.
MetroPCS offers our VCPayTM to its prepaid customers as an application that is pre-loaded on new Smartphones or can be
downloaded on select existing devices. VCPayTM allows a subscriber to generate a unique, one-time use prepaid virtual card
number to securely purchase goods and services or perform bill payments in any CNP environment. We believe that the
VCPayTM application is the first mobile phone-based prepaid program with no requirement for the user to have a physical card or
a bank account. Subscribers can load their prepaid virtual accounts with cash at any of MoneyGram and Green Dot’s 100,000
U.S. agent locations, which are located in most communities including many grocery, pharmacy and convenience store chains,
or electronically via their bank accounts or via direct deposit.
XeoHealth
During fiscal 2011, XeoHealth intensified its marketing efforts in the United States of its RTA solutions for the end-to-end
electronic processing of medical claims information. There has been significant interest from various participants in the United
States healthcare industry in the solutions offered by XeoHealth for the current and newly mandated Health Insurance
Portability and Accountability Act, electronic data interchange transactions and we will expect to conclude our first agreements
for the provision of our technology during fiscal 2012.
New international transaction-based activities operating segment
Effective October 1, 2010, we have allocated our international transaction-based activities to a new operating segment,
namely international transaction-based activities. This operating segment comprises the transaction processing activities of
KSNET, Net1 Virtual Card, and NUETS’ transaction processing activities for its initiative in Iraq.
KSNET currently contributes the majority of the revenue, operating income and net income of this segment.
Segment results for fiscal 2010 and 2009 have not been restated due to the insignificance of the transaction processing
activities of Net1 Virtual Card, and NUETS transaction processing activities for its initiative in Iraq. However, for comparative
purposes in future periods, our reported results for fiscal 2011 include all legacy international transaction-processing activities
from July 1, 2010 and include KSNET from November 1, 2010.
38
Operating Segments
We analyze our business and operations in terms of five inter-related but independent operating segments: (1) South
African transaction-based activities, (2) international transaction-based activities (3) smart card accounts, (4) financial services,
and (5) hardware, software and related technology sales. Corporate and corporate office activities as well as any inter-segment
eliminations are included in corporate/ eliminations. See Note 19 to our consolidated financial statements for further
information about our operating segments.
South African transaction-based activities
The South African transaction-based activities operating segment consists primarily of (1) our South African social welfare
payments distribution operations which we conduct through our subsidiary Cash Paymaster Services (Proprietary) Limited, or
CPS, and (2) our South African transaction processors, which consist of EasyPay, MediKredit and FIHRST (collectively,
“transaction processors”). CPS utilizes the UEPS technology to administer and distribute social welfare grants in five of South
Africa’s nine provinces. Segment revenues include all fees that we earn from SASSA 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,
prepayment of mobile phone airtime and transaction fees from customers of our transaction processors. The expenses associated
with our social welfare payments activities are primarily variable expenses such as security and guarding expenses we incur to
help insure 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. The expenses
associated with our transaction processors’ operations are primarily variable expenses such as data communication and bank
charges for switching transactions and fixed expenses such as salaries, depreciation of switch fixed assets and property rental.
International transaction-based activities
The international transaction-based activities operating segment consists primarily of (1) KSNET, (2) Net1 Virtual Card,
and (3) NUETS’ transaction processing activities. Segment revenues include primarily transaction processing fees that we earn
from our activities in Korea, the US and Iraq. The expenses associated with these activities are primarily variable expenses such
as cash incentives to agents and merchants and data communication charges and our fixed expenses include primarily salaries,
depreciation of switch fixed assets, insurance and property rental.
We expect to allocate the activities of XeoHealth to this operating segment in fiscal 2012 if it achieves commercial
viability. XeoHealth is expected to generate fees from adjudication and process services and its margin profile is expected to be
similar to our other international transaction processors.
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. 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 service fees charged 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 South African
transaction-based activities operating segment. The fixed expenses associated with the financial services operating segment
consist primarily of costs of administrative personnel and depreciation of computer equipment.
We operated a traditional microlending business in South Africa which we sold during the third quarter of fiscal 2009. The
business extended short-term loans for periods ranging from 30 days up to four months, with the majority of loans being 30-day
loans.
39
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 UEPS system. Typical components for a UEPS 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, 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.
Three of our largest customers in this segment are the International Smart Card LLC, of the Iraqi Consortium, the Central
Bank of Ghana and Nedbank, one of South Africa’s largest banks by asset size. In Ghana, we created a national payment system
in which all Ghanaian banks are required to participate. We have an arrangement with Nedbank relating to the outsourcing of its
entire POS device management system, front-end switching Stratus computer platform, development of their software systems,
smart cards and POS device maintenance. We also supply hardware to Nedbank in the form of POS devices and card readers on
an ad hoc basis.
Included in our hardware, software and related technology sales segment are Net1 UTA, Net1 UETS, cryptographic
solutions, chip and GSM licensing, and POS solutions. Net1 UTA is currently focusing on a transaction-based activities
business model and we expect to allocate revenues and expenses associated with this business to our international transaction-
based activities segment beginning in fiscal 2012.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with US GAAP, which requires management to
make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the
determination of estimates requires management’s judgment based on a variety of assumptions and other determinants such as
historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes
that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the
understanding of the results of our operations.
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 are more likely than not to be realized in future periods. In
the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount,
an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income, or
additional paid in capital, as appropriate, in the period such determination was made. Likewise, should it be determined that all
or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation
allowance would be charged to income in the period such determination is made. In assessing the need for a valuation
allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing
prudent and practicable tax planning strategies are considered. During fiscal 2011, 2010, and 2009, we recorded increases to our
valuation allowance of $19.5 million, $5.0 million, and $16.5 million, respectively.
40
Stock-based Compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based
compensation charges under current accounting standards. These standards require all share-based compensation to employees
to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods
and also requires an estimation of forfeitures when calculating compensation expense. We utilize the Cox Ross Rubinstein
binomial model to measure the fair value of stock options granted to employees and directors and recognize compensation cost
on a straight line basis. Option-pricing models require estimates of a number of key valuation inputs including expected
volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on
historic employee behavior under similar compensation plans. No stock options were granted during fiscal 2010. During fiscal
2009, our assumptions regarding volatility changed significantly as a result of general economic conditions and trading prices of
our customers and suppliers. Accordingly, the fair value of stock options is affected by the assumptions selected. Net stock-
based compensation expense from continuing operations was $1.7 million, $5.7 million and $5.0 million for fiscal 2011, 2010
and 2009, respectively. Net stock-based compensation expense for fiscal 2011, includes a reversal of $3.5 million related to a
portion of the restricted stock granted in August 2007 that did not vest as the performance condition prescribed in the terms of
the awards was not met.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using
the purchase method of accounting. We completed acquisitions during fiscal 2011, 2010 and 2009, where we identified and
recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income
approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding
expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates,
exchange rates, cash tax charges and useful lives.
The valuations were based on information available at the time of the acquisition and the expectations and assumptions
that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events
associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from
forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets
may be necessary. For instance, during fiscal 2011, we recognized an impairment loss of approximately $41.8 million related to
the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008.
Business Combinations and the Recoverability of Goodwill
A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations.
The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the
net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business
combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions
using certain valuation techniques, including discount rates and timing of future cash flows.
We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have
occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the
reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities
that form part of the reporting unit.
The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In
determining the fair value of reporting units, we consider the value of our business as a whole and allocate this value across our
reporting units based on the weighted average of the returns of the reporting units.
We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In
addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units.
The results of our impairment tests during fiscal 2011 indicated that the fair value of our reporting units exceeded their
carrying values and therefore our reporting units were not at risk of potential impairment. During the fourth quarter of 2010 we
determined that the carrying value of goodwill of the hardware, software and related technology sales segment reporting unit
exceeded the fair value and, as a result, recorded an impairment loss of $37.4 million.
41
Accounts Receivable and Provision for Doubtful Debts
We maintain a provision for doubtful debts related to our hardware, software and related technology sales and international
transaction-based activities segments as a result of sales or rental of hardware, support and maintenance services provided; or
sale of licenses to customers; or the provision of transaction processing services to our customers. Our policy is to regularly
review the aging of outstanding amounts due from customers and adjust the provision based on management’s estimate of the
recoverability of the amounts outstanding. Management considers factors including period outstanding, creditworthiness of the
customers, past payment history and the results of discussions by our credit department with the customer. We consider this
policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our
customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when
due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these
receivables, including on-going evaluation of the creditworthiness of each customer.
Research and Development
Accounting standards require product development costs to be charged to expenses as incurred until technological
feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been
determined viable for its intended use. The time between the attainment of technological feasibility and completion of software
development has been short. Accordingly, we did not capitalize any development costs during the years ended June 30, 2011,
2010 or 2009, particularly because the main part of our development is the enhancement and upgrading of existing products.
Costs to develop software for our internal use is expensed as incurred, except to the extent that these costs are incurred
during the application development stage. All other costs including those incurred in the project development and post-
implementation stages are expensed as incurred.
A significant amount of judgment is required to separate research costs, new development costs and ongoing development
costs based as the transition between these stages. A multitude of factors need to be considered by management, including an
assessment of the state of readiness of the software and the existence of markets for the software. The possibility of capitalizing
development costs in the future may have a material impact on the group’s profitability in the period when the costs are
capitalized, and in subsequent periods when the capitalized costs are amortized.
Recent Accounting Pronouncements
Recent accounting pronouncements adopted
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements,
including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of June 30, 2011
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet
adopted as of June 30, 2011, including the expected dates of adoption and effects on financial condition, results of operations
and cash flows.
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows:
Table 1
ZAR : $ average exchange rate ............
Highest ZAR : $ rate during period ......
Lowest ZAR : $ rate during period ......
Rate at end of period ............................
Year ended June 30,
2010
7.6117
8.3187
7.1731
7.6529
2011
7.0286
7.7809
6.4925
6.8449
2009
9.0484
11.8506
7.1556
7.8821
42
ZAR: US $ Exchange Rates
First quarter
Second quarter
Third quarter
Fourth quarter
12.00
11.50
11.00
10.50
10.00
:
$
S
U
R
A
Z
9.50
9.00
8.50
8.00
7.50
7.00
6.50
6.00
J
u
n
-
3
0
J
u
l
-
3
1
A
u
g
-
3
1
S
e
p
-
3
0
O
c
t
-
3
1
N
o
v
-
3
0
D
e
c
-
3
1
J
a
n
-
3
1
F
e
b
-
2
9
M
a
r
-
3
1
A
p
r
-
3
0
M
a
y
-
3
1
J
u
n
-
3
0
Fiscal 2011
Fiscal 2010
Fiscal 2009
Translation exchange rates
We are required to translate our results of operations from ZAR to US dollars on a monthly basis. Thus, the average rates
used to translate this data for the years ended June 30, 2011, 2010 and 2009, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are the rates shown in the following table:
Table 2
Income and expense items: $1 = ZAR .
Year ended
June 30,
2010
7.6092
2009
8.9397
2011
6.9962
Balance sheet items: $1 = ZAR ............
6.8449
7.6529
7.8821
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited
consolidated financial statements which are prepared in accordance with US GAAP. We analyze our results of operations both
in US dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional
currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions
are initially incurred and measured. Due to the significant impact of currency fluctuations between the US dollar and ZAR on
our reported results and because we use the US dollar as our reporting currency, we believe that the supplemental presentation
of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.
Fiscal 2011 results include MediKredit and FIHRST for the entire period and KSNET from November 1, 2010. Fiscal
2010 results include MediKredit and FIHRST from January 1, 2010 and March 31, 2010, respectively, and do not include
KSNET. Fiscal 2009 results do not include KSNET, MediKredit or FIHRST. In addition, on March 1, 2009, we sold our
traditional microlending business and therefore, our fiscal 2009 results include revenue and operating loss from this business for
the first eight months of that year.
43
Fiscal 2011 Compared to Fiscal 2010
The following factors had an influence on our results of operations during fiscal 2011 as compared with the same period in
the prior year:
•
Impairment loss related to Net1 UTA customer relationships: We recorded an impairment loss of $41.8 million
related to Net1 UTA’s customer relationships;
• SASSA price and volume reductions: Our current contract with SASSA has reduced our revenue and operating
income as a result of price and volume reductions from our previous contract;
• Valuation allowances related to Net1 UTA deferred tax assets: During fiscal 2011, we created valuation allowance
totaling $8.9 million related to Net1 UTA deferred tax assets;
• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 8% compared to the ZAR during
•
•
•
•
fiscal 2011 compared to fiscal 2010 which has had a positive impact on our reported results;
Increased revenue from KSNET at lower operating margins, before acquired intangible asset amortization, than our
legacy business: Our KSNET acquisition in October 2010 positively impacted our revenue during fiscal 2011,
however, because KSNET has an operating margin, before acquired intangible asset amortization, that is lower than
our legacy businesses, it negatively impacted our operating margin. The inclusion of KSNET in our results has also
contributed to the increase in selling, general and administration and depreciation and amortization expenses;
Increased transaction volumes at EasyPay: Our reported results were positively impacted by increased transaction
volumes at EasyPay resulting from growth in value-added services and higher than expected activity at retailers during
the Christmas season;
Increased revenue from MediKredit and FIRHST at lower operating margins than other South African transaction-
based activity business: Our MediKredit and FIHRST acquisitions positively impacted our revenue during fiscal 2011,
however, because MediKredit generated an operating loss and FIHRST has operating margin that is lower than our
other transaction-based activity businesses, they negatively impacted our operating margin. The inclusion of these
businesses in our results has also contributed to the increase in selling, general and administration expense;
Increased user adoption in Iraq: Our reported results were positively impacted by increased transaction revenues at
NUETS from the adoption of our UEPS technology in Iraq;
• Lower revenues and margins from hardware, software and related technology sales segment: Our hardware,
software and related technology sales segment was adversely impacted by lower revenues from all contributors to this
operating segment;
Intangible asset amortization related to acquisitions: Our reported results for fiscal 2011, were adversely impacted by
additional intangible asset amortization related to the acquisitions of KSNET, MediKredit and FIHRST;
•
• Lower interest income and increased interest expense resulting from KSNET acquisition: Our reported results were
adversely impacted by lower interest income due to the payment of a portion of the KSNET purchase price in cash and
increased interest expense due to the payment of a portion of the KSNET purchase price utilizing long-term debt and
facility fees of approximately $2.0 million;
• Reversal of stock-based compensation charges: Our reported results were positively impacted by the reversal of
stock-based compensation charge of $3.5 million (ZAR 24.5 million), primarily as a result of the forfeitures of a
portion of the performance-based restricted stock granted in August 2007; and
• Transaction-related expenses included in selling, general and administration expense: During fiscal 2011, we
incurred transaction-related expenses of $6.0 million, primarily for the acquisition of KSNET.
44
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
The following tables show the changes in the items comprising our statements of operations, both in US dollars and in
ZAR:
Table 3
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Operating income before depreciation, amortization and impairment loss ...
Depreciation and amortization ......................................................................
Impairment loss .............................................................................................
Operating income ..........................................................................................
Interest (expense) income, net .......................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before earnings (loss) from equity-accounted investments ........
(Loss) Earnings from equity-accounted investments ....................................
Net income ....................................................................................................
Add: net loss attributable to non-controlling interest ....................................
Net income attributable to us ........................................................................
Table 4
Revenue ........................................................................................................
Cost of goods sold, IT processing, servicing and support ............................
Selling, general and administration ..............................................................
Operating income before depreciation, amortization and impairment loss ..
Depreciation and amortization .....................................................................
Impairment loss ............................................................................................
Operating income .........................................................................................
Interest (expense) income, net ......................................................................
Income before income taxes .........................................................................
Income tax expense ......................................................................................
Net income before earnings (loss) from equity-accounted investments .......
(Loss) Earnings from equity-accounted investments ...................................
Net income ...................................................................................................
Add: net loss attributable to non-controlling interest ...................................
Net income attributable to us .......................................................................
In United States Dollars
(US GAAP)
Year ended June 30,
2011
$ ’000
343,420
109,858
119,692
113,870
34,671
41,771
37,428
(1,018)
36,410
33,525
2,885
(339)
2,546
(101)
2,647
2010
$ ’000
280,364
72,973
80,854
126,537
19,348
37,378
69,811
9,069
78,880
40,822
38,058
93
38,151
(839)
38,990
In South African Rand
(US GAAP)
Year ended June 30,
2011
ZAR
’000
2,402,634
768,589
837,389
796,656
242,565
292,238
261,853
(7,122)
254,731
234,548
20,183
(2,372)
17,811
(707)
18,518
2010
ZAR
’000
2,133,374
555,274
615,243
962,857
147,225
284,420
531,212
69,009
600,221
310,627
289,594
708
290,302
(6,384)
296,686
%
change
22%
51%
48%
(10)%
79%
12%
(46)%
(111)%
(54)%
(18)%
(92)%
(465)%
(93)%
(88)%
(93)%
%
change
13%
38%
36%
(17%)
65%
3%
(51)%
(110)%
(58)%
(24)%
(93)%
(435)%
(94)%
(89)%
(94)%
Analyzed in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing and support for fiscal 2011 was
primarily due to the inclusion of KSNET, FIHRST and MediKredit, an increase in the number of UEPS-based loans made and
increased transaction volumes at EasyPay. This increase was partially offset by lower revenues from our SASSA contract, and
fewer sales from our hardware, software and related technology sales segment.
Included in fiscal 2011 selling, general and administration expense are transaction-related costs of $6.0 million (ZAR 42.3
million), primarily related to the KSNET acquisition. The increase in selling, general and administration expense was offset by a
reversal of stock-based compensation charge of $3.5 million (ZAR 24.5 million), primarily as a result of forfeitures (based on
failure to achieve the required vesting conditions) of a portion of performance-based restricted stock granted in August 2007.
The net fiscal 2011 stock-based compensation charge was $1.7 million (ZAR 12.0 million), which is significantly lower than the
fiscal 2010 charge of $5.7 million (ZAR 43.1 million). Fiscal 2010 selling, general and administration expenses include
acquisition-related costs of $0.6 million (ZAR 4.7 million).
45
Our operating income margin decreased to 11% from 25% resulting primarily from the impairment of intangibles, as well
as from the price and volumes reductions under our SASSA contract. We discuss the components of the operating income
margin in more detail under “—Results of operations by operating segment”.
Our direct costs of maintaining a listing on Nasdaq and the JSE, as well as compliance with the Sarbanes-Oxley Act of
2002, or Sarbanes, particularly Section 404 of Sarbanes, primarily includes independent directors’ fees, legal fees, fees paid to
Nasdaq and the JSE, investor relations expenses, our compliance officer’s salary, fees paid to consultants who assist with
Sarbanes compliance and fees paid to our independent accountants related to the audit and review process. This has resulted in
expenditures of $3.2 million (ZAR 22.7 million) and $2.4 million (ZAR 17.9 million) during fiscal 2011 and 2010, respectively.
In ZAR, depreciation and amortization increased during fiscal 2011 primarily as a result of intangible asset amortization
related to the KSNET, MediKredit and FIHRST acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the tables below:
Table 5
Amortization included in depreciation and amortization expense: .....
South African transaction-based activities ......................................
International transaction-based activities ........................................
Hardware, software and related technology sales ...........................
Table 6
Amortization included in depreciation and amortization expense: .....
South African transaction-based activities ......................................
International transaction-based activities ........................................
Hardware, software and related technology sales ...........................
Year ended June 30,
2010
2011
$ ’000
$ ’000
21,692
5,702
8,602
7,388
14,138
4,205
-
9,933
Year ended June 30,
2010
2011
ZAR ’000
ZAR ’000
107,588
151,761
31,999
39,891
60,181
-
75,589
51,689
During fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition in August 2008 were reviewed for
impairment following deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash
inflows. As a consequence of this review, we have recognized an impairment loss of approximately $41.8 million related to the
entire carrying value of customer relationships acquired. In addition, we have reversed the deferred tax liability of $10.4 million
associated with this intangible asset.
During fiscal 2010, we recognized an impairment loss of approximately $37.4 million on goodwill allocated to the
hardware, software and related technology sales segment as a result of deteriorating trading conditions of this segment,
particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact future cash
flows.
Interest on surplus cash for fiscal 2011 decreased to $7.7 million (ZAR 53.4 million) from $10.1 million (ZAR 77.0
million) for fiscal 2010. The decrease resulted primarily from lower average daily ZAR cash balances during fiscal 2011 as a
result of the payment of a portion of the KSNET purchase price in cash as well as lower deposit rates resulting from the
decrease in the South African prime interest rate from an average of approximately 10.43% per annum for fiscal 2010 to 9.29%
per annum for fiscal 2011.
Fiscal 2011 interest expense increased to $8.7 million (ZAR 60.5 million) from $1.0 million (ZAR 8.0 million) for fiscal
2010 due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense includes
amortized debt facility fees of $2.0 million (ZAR 13.7 million).
Total tax expense for fiscal 2011 decreased to $33.5 million (ZAR 234.5 million) from $40.8 million (ZAR 310.6 million)
in fiscal 2010. Deferred tax assets and liabilities are measured utilizing the enacted fully-distributed tax rate. Excluding the
impact of reversal of the Net1 UTA customer relationships deferred tax liability and the Net1 UTA valuation allowances, our
total tax expense decreased primarily due to lower taxable income resulting from the SASSA price and volume reductions and a
decrease in overall profitability. As discussed above, our tax expense was reduced by the reversal of $10.4 million related to
deferred tax liabilities related to impaired Net1 UTA customer relationships. Our tax expense increased due to valuation
allowances of $8.9 million created related to Net1 UTA deferred tax assets. Our effective tax rate for fiscal 2011 was 92.08%,
compared to 51.8% for fiscal 2010. The change in our effective tax rate was primarily due to an increase in non-deductible
expenses, including stock-based compensation charges, interest expenses related to our Korean debt facilities and acquisition-
related expenses, and the Net1 UTA valuation allowance.
46
Net1 loss from equity-accounted investments for fiscal 2011 were $0.3 million (ZAR 2.4 million) compared with earnings
of $0.1 million (ZAR 0.7 million) during fiscal 2010. Net loss from equity-accounted investments for fiscal 2011 was primarily
due to waiver of interest and related currency effects at SmartSwitch Botswana offset by an increase in transaction fees
generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and VinaPay incurred losses during fiscal 2011
and 2010, respectively. VinaPay was sold in April 2011.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below.
In United States Dollars (US GAAP)
Year ended June 30,
2010
$ ’000
% of
total
% of
total
55%
20%
10%
2%
13%
100%
199%
5%
40%
15%
(133)%
(26)%
100%
191,362
-
31,971
4,023
53,008
280,364
106,036
110,241
(4,205)
-
-
-
14,532
2,881
(42,524)
4,787
(47,311)
(11,114)
69,811
68%
-
11%
1%
20%
100%
152%
21%
4%
(61)%
(16)%
100%
%
change
(1)%
nm
4%
82%
(17)%
22%
(30)%
(27)%
36%
nm
nm
nm
4%
96%
17%
(116)%
4%
(12)%
(46)%
Table 7
Operating Segment
Consolidated revenue:
South African transaction-based activities ..........
International transaction-based activities ............
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Total consolidated revenue ..........................
Consolidated operating income (loss):
South African transaction-based activities ..........
Operating income before amortization ...........
Amortization ..................................................
International transaction-based activities ............
Operating income before amortization ...........
Amortization ..................................................
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Operating income before amortization and
impairment of intangibles...............................
Amortization and impairment of intangibles ..
Corporate/eliminations ........................................
Total consolidated operating income ..........
2011
$ ’000
188,590
69,947
33,315
7,313
44,255
343,420
74,642
80,344
(5,702)
1,707
10,309
(8,602)
15,140
5,658
(49,930)
(771)
(49,159)
(9,789)
37,428
47
Table 8
Operating Segment
Consolidated revenue:
South African transaction-based activities ..........
International transaction-based activities ............
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Total consolidated revenue ..........................
Consolidated operating income (loss):
South African transaction-based activities ..........
Operating income before amortization ...........
Amortization ..................................................
International transaction-based activities ............
Operating income before amortization ...........
Amortization ..................................................
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Operating income before amortization and
impairment of goodwill ..................................
Amortization and impairment of goodwill .....
Corporate/eliminations ........................................
Total consolidated operating income ..........
2011
ZAR
’000
1,319,413
489,363
233,078
51,163
309,617
2,402,634
522,210
562,101
(39,891)
11,943
72,124
(60,181)
105,922
39,584
(349,320)
(5,393)
(343,927)
(68,486)
261,853
South African transaction-based activities
In South African Rand (US GAAP)
Year ended June 30,
2010
ZAR
’000
% of
total
% of
total
55%
20%
10%
2%
13%
100%
199%
5%
40%
15%
(133)%
(21)%
100%
1,456,131
243,277
30,612
403,354
2,133,374
806,860
838,859
(31,999)
-
-
110,578
21,922
(323,578)
36,431
(360,009)
(84,570)
531,212
68%
11%
1%
20%
100%
152%
21%
4%
(61)%
(16)%
100%
%
change
(9)%
nm
(4)%
67%
(23)%
13%
(35)%
(33)%
25%
nm
nm
nm
(4)%
81%
8%
(115)%
(4)%
(19)%
(51)%
In ZAR, the decreases in revenue were primarily due to the new SASSA contract at lower economics, which was partially
offset by increased transaction volumes at EasyPay and the inclusion of MediKredit and FIHRST.
Revenues for South African transaction-based activities include the transaction fees we earn through our merchant
acquiring system and reflect the elimination of inter-company transactions.
Operating income margin of our South African transaction-based activities decreased to 40% from 55% a year ago. The
decrease was primarily due to the lower revenues generated under our SASSA contract, additional intangible asset amortization
related to the acquisition of MediKredit and FIHRST and lower margins in our recently-acquired transaction processing
operations compared with legacy South African transaction-based activities.
Pension and welfare operations:
Our revenue and operating income related to our pension and welfare operations were negatively impacted by our new
contract discussed under “—Business Developments during Fiscal 2011—South Africa—SASSA contract.” Our pension and
welfare operations continue to generate the majority of our revenues and operating income in this operating segment and for us
as a whole.
South African transaction processors:
The table below presents the total volume and value processed during fiscal 2011 and 2010 by our transaction processors:
Table 9
Transaction
processor
EasyPay ..................
MediKredit .............
FIHRST ..................
Total volume (‘000)
2011
2010
707,622
9,805
21,954
655,176
5,411
5,260
Total value $ (‘000)
2010
2011
18,904,176
23,574,378
227,881
513,503
1,858,590
9,792,178
Total value ZAR (‘000)
2010
2011
164,931,066
3,592,572
68,508,034
143,847,549
1,734,015
14,142,572
48
Our results for fiscal 2011 include intangible asset amortization related to our MediKredit and FIHRST acquisitions but
exclude RMT’s intangible assets which were fully amortized during fiscal 2010. Fiscal 2010 includes amortization related to the
RMT intangible assets for three quarters, MediKredit intangible assets for two quarters and FIHRST’s intangible assets for one
quarter.
Continued adoption of our merchant acquiring system:
The key statistics and indicators of our merchant acquiring system on a quarterly basis during the last 18 months in each of
the South African provinces where we distribute social welfare grants are summarized in the table below.
The increase in the number of POS devices since June 30, 2010, is due to increased rental or purchase of POS devices by
current merchants requesting additional equipment and new merchants joining our UEPS merchant acquiring system. The
decrease in the number of participating UEPS retail locations is due to us cancelling contracts due to non-payment by the
merchants. Under our normal credit control procedures we regularly scrutinize and review long outstanding debtors accounts,
and after all efforts have been exhausted, we cancel our relationship with these defaulting merchants. The cancellation of these
contracts has not, and should not, have a significant impact on our results of operations and as demonstrated by the key statistics
below, we believe that our merchant acquiring system is functioning optimally.
Table 10
Mar 31,
2010
Jun 30,
2010
Three months ended
Dec 31,
Sep 30,
2010
2010
Mar 31,
2011
Jun 30,
2011
Total POS devices installed as of period end .....
4,700
4,794
4,772
4,823
4,835
4,921
Number of participating UEPS retail locations
as of period end ..................................................
Value of transactions processed through POS
devices during the quarter (1) (in $ ’000) ...........
Value of transactions processed through POS
devices during the completed pay cycles for the
quarter (2) (in $ ’000) .........................................
2,552
2,513
2,511
2,562
2,541
2,482
397,141
388,277
399,637
393,691
411,233
446,068
381,993
402,294
395,479
394,924
401,723
444,750
Value of transactions processed through POS
devices during the quarter (1) (in ZAR ’000) ..... 2,992,828
Value of transactions processed through POS
devices during the completed pay cycles for the
quarter (2) (in ZAR ’000) ................................... 2,878,675
Number of grants paid through POS devices
during the quarter (1) ......................................... 4,370,553
Number of grants paid through POS devices
during the completed pay cycles for the quarter
(2) ....................................................................... 4,699,620
2,935,543
2,940,416
2,728,101
2,920,454
3,037,006
3,041,514
2,909,818
2,736,648
2,852,913
3,028,036
4,618,013
4,819,458
4,580,255
4,804,540
4,850,146
4,741,737
4,710,596
4,599,893
4,739,062
4,839,106
Average number of grants processed per
terminal during the quarter (1) ...........................
Average number of grants processed per
terminal during the completed pay cycles for
the quarter (2) .....................................................
933
973
1,008
955
995
994
1,003
999
985
959
981
992
(1) Refers to events occurring during the quarter (i.e., based on three calendar months).
(2) Refers to events occurring during the completed pay cycle.
International transaction-based activities
KSNET currently contributes the majority of our revenues in this operating segment. Operating margin for the segment is
lower than our legacy South African transaction-based businesses and was negatively impacted by start-up expenditures related
to our Virtual Card launch in the United States, but partially offset by improving profitability of NUETS’ initiative in Iraq.
Operating income margin for fiscal 2011 was 2%.
Our results for fiscal 2011 include the intangible asset amortization related to our KSNET acquisition from November 1,
2010.
49
Smart card accounts
Operating income margin from providing smart card accounts was constant at 45% for each of fiscal 2011 and 2010.
In ZAR, revenue from the provision of smart card-based accounts increased in proportion to the increased number of
beneficiaries serviced through our SASSA contract. A total number of 3,561,105 smart card-based accounts were active at June
30, 2011, compared to 3,532,620 active accounts as at June 30, 2010.
Financial services
Revenue from UEPS-based lending increased primarily due to an increase in the number of loans granted. Our current
UEPS-based lending portfolio comprises loans made to elderly pensioners in some of the provinces where we distribute social
welfare grants. We insure the UEPS-based lending book against default and thus no allowance is required.
Operating income margin for the financial services segment increased to 77% from 72%.
Hardware, software and related technology sales
The following table presents our revenue and operating income during fiscal 2011 and 2010:
Table 11
Revenue
Hardware, software and related technology sales excluding Net1 UTA ........................
Net1 UTA .......................................................................................................................
Year ended June 30,
2010
2011
$ ’000
$ ’000
44,255
33,790
10,465
53,008
40,707
12,301
Operating (loss) income before amortization of intangible assets and impairment of
intangibles ...........................................................................................................................
(771)
4,787
Operating income
Hardware, software and related technology sales excluding Net1 UTA ........................
Net1 UTA .......................................................................................................................
Net1 UTA excluding impairment of intangibles and amortization of acquisition
related intangible assets ..............................................................................................
Impairment of intangibles ...........................................................................................
Amortization of acquisition related intangible assets .................................................
Table 12
Revenue
Hardware, software and related technology sales excluding Net1 UTA ........................
Net1 UTA .......................................................................................................................
(49,930)
1,147
(51,077)
(2,570)
(41,771)
(6,736)
(42,524)
6,332
(48,856)
(2,144)
(37,378)
(9,334)
Year ended June 30,
2011
2010
ZAR ’000
ZAR ’000
403,354
309,617
309,752
236,402
93,602
73,215
Operating (loss) income before amortization of intangible assets and impairment of
intangibles ...........................................................................................................................
(5,393)
36,431
Operating income
Hardware, software and related technology sales excluding Net1 UTA ........................
Net1 UTA .......................................................................................................................
Net1 UTA excluding impairment of intangibles and amortization of acquisition
related intangible assets ..............................................................................................
Impairment of intangibles ...........................................................................................
Amortization of acquisition related intangible assets .................................................
(349,320)
8,024
(357,344)
(17,980)
(292,238)
(47,126)
(323,578)
48,181
(371,759)
(16,314)
(284,420)
(71,025)
In ZAR, the decrease in revenue and operating income was primarily due to lower revenues by all major contributors to
this operating segment as a result of challenging trading conditions. Net1 UTA has failed to retain and expand hardware and
software sales to its existing customer base and certain of our South African businesses have been impacted by increased
competition. UETS was impacted by significantly lower hardware sales, primarily terminals and cards, as these sales are
generally made on an ad hoc basis. The majority of these sales occur within the first two years after the commencement of a
project, such as in Ghana and Iraq.
50
Revenue and operating income for fiscal 2011 comprised:
•
software development and customization, and sales of smart cards related to our Ghana and Iraq contracts;
•
•
•
•
•
sales of licenses, smart cards and terminals to Net1 UTA clients , mainly in Russia and Uzbekistan;
sales of SIM cards to customers;
sales of cryptographic solutions to customers;
rental of terminals to merchants participating in our merchant acquiring system; and
repairs and maintenance services to customers.
During fiscal 2011, customer relationships of $41.8 million acquired as part of the Net1 UTA acquisition was impaired.
During fiscal 2010, we recognized a goodwill impairment loss of approximately $37.4 million (ZAR 284.4 million) as a result
of deteriorating trading conditions of this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization
dates which were expected to impact future cash flows.
Amortization of Prism intangible assets during fiscal 2011 and 2010, respectively, was approximately $0.7 million (ZAR
4.6 million) and $0.6 million (ZAR 4.6 million) and reduced our operating income.
As we expand internationally, whether through traditional selling arrangements to provide products and services (such as
in Ghana and Iraq) or through joint ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect to
receive revenues from sales of hardware and from software customization and licensing to establish the infrastructure of POS
terminals and smart cards necessary to enable utilization of the UEPS technology in a particular country. To the extent that we
enter into joint ventures and account for the investment as an equity investment, we are required to eliminate our portion of the
sale of hardware, software and licenses to the investees. The sale of hardware, software and licenses under these arrangements
occur on an ad hoc basis as new arrangements are established, which can materially affect our revenues and operating income in
this segment from period to period.
Corporate/ Eliminations
The decrease in our corporate expenses resulted primarily from the reversal of stock-based compensation charges of $3.5
million (ZAR 24.5 million), primarily as a result of forfeitures (based on failure to achieve the required vesting conditions) of
performance-based restricted stock issued in August 2007. These reductions were offset by higher corporate head office-related
expenditure, including the effects of inflation in South Africa, and transaction related expenditures of $6.0 million (ZAR 42.3
million), primarily related to the acquisition of KSNET.
Our corporate expenses also includes expenditure related to compliance with Sarbanes; non-executive directors’ fees;
employee and executive salaries and bonuses; stock-based compensation; legal and audit fees; directors and officer’s insurance
premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and
elimination entries.
51
Fiscal 2010 Compared to Fiscal 2009
The following factors had an influence on our results of operations during fiscal 2010 as compared with the same period in
the prior year:
• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 15% compared to the ZAR
•
•
during fiscal 2010 which has had a positive impact on our reported results;
Increased transaction volumes at EasyPay: Our reported results were positively impacted by increased transaction
volumes at EasyPay resulting from growth in value-added services and higher than expected activity at retailers during
the Christmas season;
Increased user adoption in Iraq: Our reported results were favorably impacted by increased transaction revenues from
the adoption of our UEPS technology in Iraq;
• Lower revenues and margins from hardware, software and related technology sales segment: Our hardware,
software and related technology sales segment was adversely impacted by fewer ad hoc sales to the Bank of Ghana,
lower revenues and overall margin generated by Net1 UTA and weaker demand for our products as well as pricing
pressures resulting from the global recession in calendar 2009, all of which was partially offset by hardware sales to
Iraq;
• Lower net interest income: Our interest income, net, was adversely impacted by lower average daily ZAR cash
balance and a lower average deposit rate during fiscal 2010 compared to fiscal 2009;
• Lower intangible asset amortization: In ZAR, our reported results for fiscal 2010 were positively impacted by lower
intangible asset amortization as the majority of Prism and EasyPay acquisition-related intangible assets were fully
amortized in fiscal 2009;
• Fiscal 2010 goodwill impairment losses: During fiscal 2010, we recognized a goodwill impairment loss of $37.4
million (ZAR 284.4 million); and
• Non-recurring fiscal 2009 items: During fiscal 2009, we recognized a foreign exchange gain of $26.7 million (ZAR
238.3 million) resulting from an asset swap arrangement and recognized a profit on the sale of our traditional
microlending business of $0.5 million (ZAR 4.1 million).
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
The following tables show the changes in the items comprising our statements of operations, both in US dollars and in
ZAR:
Table 13
Revenue .........................................................................................................
Cost of goods sold, IT processing, servicing and support .............................
Selling, general and administration ...............................................................
Operating income before depreciation, amortization and impairment of
goodwill .......................................................................................................
Depreciation and amortization ......................................................................
Profit on sale of microlending business ........................................................
Impairment of goodwill .................................................................................
Operating income ..........................................................................................
Foreign exchange gain related to short-term investment ...............................
Interest income, net .......................................................................................
Income before income taxes ..........................................................................
Income tax expense .......................................................................................
Net income before earnings (loss) from equity-accounted investments ........
Earnings (Loss) from equity-accounted investments ....................................
Net income ....................................................................................................
(Add) Less: net (loss) income attributable to non-controlling interest ..........
Net income attributable to us ........................................................................
52
In United States Dollars
(US GAAP)
Year ended June 30,
2010
$ ’000
280,364
72,973
80,854
126,537
19,348
-
37,378
69,811
-
9,069
78,880
40,822
38,058
93
38,151
(839)
38,990
2009
$ ’000
246,822
70,091
64,833
111,898
17,082
(455)
1,836
93,435
26,657
10,828
130,920
42,744
88,176
(874)
87,302
701
86,601
%
change
14%
4%
25%
13%
13%
nm
nm
(25)%
nm
(16)%
(40)%
(5)%
(57)%
nm
(56)%
nm
(55)%
Table 14
Revenue ..................................................................................................
Cost of goods sold, IT processing, servicing and support ......................
Selling, general and administration ........................................................
Operating income before depreciation, amortization and impairment of
goodwill .................................................................................................
Depreciation and amortization ...............................................................
Profit on sale of microlending business .................................................
Impairment of goodwill ..........................................................................
Operating income ...................................................................................
Foreign exchange gain related to short-term investment ........................
Interest income, net ................................................................................
Income before income taxes ...................................................................
Income tax expense ................................................................................
Net income before earnings (loss) from equity-accounted investments .
Earnings (Loss) from equity-accounted investments .............................
Net income .............................................................................................
(Add) Less: net (loss) income attributable to non-controlling interest ...
Net income attributable to us .................................................................
In South African Rand
(US GAAP)
Year ended June 30,
2010
ZAR
’000
2,133,374
555,274
615,243
2009
ZAR
’000
2,206,512
626,592
579,587
962,857
147,225
-
284,420
531,212
-
69,009
600,221
310,627
289,594
708
290,302
(6,384)
296,686
1,000,333
152,708
(4,068)
16,413
835,280
238,306
96,799
1,170,385
382,118
788,267
(7,813)
780,454
6,267
774,187
%
change
(3)%
(11)%
6%
(4)%
(4)%
nm
nm
(36)%
nm
(29)%
(49)%
(19)%
(63)%
nm
(63)%
nm
(62)%
Analyzed in ZAR, the decrease in revenue and cost of goods sold, IT processing, servicing and support for fiscal 2010 was
primarily due to lower revenues in our hardware, software and related technology sales segment. This decrease was offset by an
increase in South African transaction-based activities which resulted primarily from increased volumes at EasyPay and the
inclusion of MediKredit and FIHRST operations for a portion of the year.
Our operating income margin decreased to 25% from 38% resulting primarily from the impairment of goodwill. The other
contributors to operating income varied from fiscal 2010 compared with fiscal 2009 as presented in tables 7 and 8 below.
Operating income contributions, based on operating margin, from our South African transaction-based activities and smart card
accounts segments were comparable; however, our financial services segment contributed more and our hardware, software and
related technology sales segment contributed less during fiscal 2010 compared with fiscal 2009. We discuss the components of
the operating income margin in more detail under “—Results of operations by operating segment”.
Analyzed in ZAR, selling, general and administration expenses were higher in fiscal 2010 primarily due to increases in
goods and services purchased from third parties and the inclusion of MediKredit’s and FIHRST’s operations. Fiscal 2010
selling, general and administration expenses include acquisition-related costs of $0.6 million (ZAR 4.7 million) and the stock-
based compensation charge related to stock options awarded in May 2009 and restricted stock granted in August 2009.
Our direct costs of maintaining a listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with the
Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of Sarbanes, includes independent directors’ fees, legal fees,
fees paid to Nasdaq and the JSE, our compliance officer’s salary, fees paid to consultants who assist with Sarbanes compliance,
fees paid to our independent accountants related to the audit and review process and, during fiscal 2009, fees paid to our
consultants and advisors assisting with the JSE listing. This has resulted in expenditures of $2.4 million (ZAR 17.9 million) and
$2.1 million (ZAR 18.7 million) during fiscal 2010 and 2009, respectively.
In ZAR, depreciation and amortization decreased during fiscal 2010 primarily as a result of lower Prism intangible asset
amortization, offset by the intangible asset amortization related to the Net1 UTA, RMT, MediKredit and FIHRST acquisitions.
The intangible asset amortization and deferred tax effects related to our various acquisitions are summarized in the tables below:
Table 15
Amortization included in depreciation and amortization expense: .....
South African transaction-based activities ......................................
Hardware, software and related technology ....................................
Year ended June 30,
2009
2010
$ ’000
$ ’000
14,138
4,205
9,933
12,387
1,895
10,492
53
Table 16
Amortization included in depreciation and amortization expense: .....
South African transaction-based activities ......................................
Hardware, software and related technology ....................................
Year ended June 30,
2009
2010
ZAR ’000
ZAR ’000
110,734
107,588
16,938
31,999
93,796
75,589
During the fourth quarter of fiscal 2010, we recognized an impairment loss of approximately $37.4 million on goodwill
allocated to the hardware, software and related technology sales segment as a result of deteriorating trading conditions of this
segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact
future cash flows. With regards to the latter, through the end of the third quarter of fiscal 2010, we expected to sign our first
agreement that reflects the transformed business model for Net1 UTA during the fourth quarter of fiscal 2010. However, it
subsequently became clear to us that this project had been delayed due to key executive management changes at our target
customer.
During fiscal 2009, we sold our traditional microlending business and recognized a profit of approximately $0.5 million
(ZAR 4.1 million) and impaired goodwill of $1.8 million (ZAR 16.4 million).
We recognized a foreign exchange gain of $26.7 million (ZAR 238.3 million) during fiscal 2009 resulting from an asset
swap arrangement we entered into in August 2008.
Interest on surplus cash for fiscal 2010 decreased to $10.1 million (ZAR 77.0 million) from $20.3 million (ZAR 181.4
million) for fiscal 2009. The decrease in interest on surplus cash held in South Africa was due to a lower average daily ZAR
cash balance during fiscal 2010 compared with fiscal 2009 and lower deposit rates resulting from the adjustment in the South
African prime interest rate from an average of approximately 14.32% per annum for fiscal 2009 to 10.43% per annum for fiscal
2010. The lower cash balances resulted primarily from our repurchase of approximately 9.2 million of our shares from Brait
S.A’s investment affiliates in August 2009 for $124.5 million.
Included in interest expense for fiscal 2009 is the facility fee of approximately $1.1 million (ZAR 9.7 million) that we paid
to the lender under the short-term loan facility we obtained to fund the Net1 UTA acquisition and approximately $0.8 million
(ZAR 7.3 million) interest on the short-term loan facility. Excluding the impact of this facility fee and the interest on the short-
term loan facility, interest expense decreased during fiscal 2010 due to a decrease in the average rates of interest on our short-
term facilities and the elimination of our obligation to prefund social welfare grants under our SASSA contract. In ZAR,
excluding the impact of the facility fee, finance costs decreased to $1.0 million (ZAR 8.0 million) for fiscal 2010 from $7.6
million (ZAR 67.6 million) for fiscal 2009.
Total tax expense for fiscal 2010 was $40.8 million (ZAR 310.6 million) compared with $42.7 million (ZAR 382.1
million) during the same period in the prior fiscal year. Deferred tax assets and liabilities are measured utilizing the enacted
fully-distributed tax rate. Accordingly, a reduction in the fully-distributed tax rate from 35.45% to 34.55% results in lower
deferred tax assets and liabilities and the net change of $3.5 million (ZAR 26.5 million) is included in our income tax expense
for fiscal 2009. Our total tax expense decreased primarily due to the foreign exchange gain discussed above. Our effective tax
rate for fiscal 2010 was 51.8%, compared to 32.7% for fiscal 2009. The change in our effective tax rate was primarily due to an
increase in non-deductible expenses, including the goodwill impairment described above, stock-based compensation charges
and non-deductible acquisition-related expenses during fiscal 2010.
Earnings from equity-accounted investments for fiscal 2010 were $0.1 million (ZAR 0.7 million) compared with a net loss
of $0.9 million (ZAR 7.8 million) during fiscal 2009. SmartSwitch Namibia generated net income during the year ended June
30, 2010, and we no longer account for the equity accounted losses in VTU Colombia as the accumulated losses have exceeded
our initial investments.
54
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below.
Table 17
Operating Segment
Consolidated revenue:
South African transaction-based activities ..........
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Total consolidated revenue ..........................
Consolidated operating income (loss):
South African transaction-based activities ..........
Operating income before amortization ...........
Amortization ..................................................
Smart card accounts ............................................
Financial services ................................................
Operating income before profit on sale of
microlending business and impairment of
goodwill .........................................................
Profit on sale of microlending business and
impairment of goodwill ..................................
Hardware, software and related technology sales
Operating income before amortization and
impairment of goodwill ..................................
Amortization and impairment of goodwill .....
Corporate/eliminations ........................................
Total consolidated operating income ..........
Table 18
Operating Segment
Consolidated revenue:
South African transaction-based activities ..........
Smart card accounts ............................................
Financial services ................................................
Hardware, software and related technology sales
Total consolidated revenue ..........................
Consolidated operating income (loss):
South African transaction-based activities ..........
Operating income before amortization ...........
Amortization ..................................................
Smart card accounts ............................................
Financial services ................................................
Operating income before profit on sale of
microlending business and impairment of
goodwill .........................................................
Profit on sale of microlending business and
impairment of goodwill ..................................
Hardware, software and related technology sales
Operating income before amortization and
impairment of goodwill ..................................
Amortization and impairment of goodwill .....
Corporate/eliminations ........................................
Total consolidated operating income ..........
2010
$ ’000
191,362
31,971
4,023
53,008
280,364
106,036
110,241
(4,205)
14,532
2,881
2,881
-
(42,524)
4,787
(47,311)
(11,114)
69,811
2010
ZAR
’000
1,456,131
243,277
30,612
403,354
2,133,374
806,860
838,859
(31,999)
110,578
21,922
21,922
-
(323,578)
36,431
(360,009)
(84,570)
531,212
55
In United States Dollars (US GAAP)
Year ended June 30,
2009
$ ’000
% of
total
% of
total
68%
11%
1%
20%
100%
152%
21%
4%
(61)%
(16)%
100%
148,399
29,576
5,430
63,417
246,822
83,509
85,404
(1,895)
13,442
(34)
1,347
(1,381)
5,498
15,990
(10,492)
(8,980)
93,435
60%
12%
2%
26%
100%
89%
14%
-%
6%
(9)%
100%
In South African Rand (US GAAP)
Year ended June 30,
2009
ZAR
’000
% of
total
% of
total
68%
11%
1%
20%
100%
152%
21%
4%
(61)%
(16)%
100%
1,326,641
264,400
48,543
566,928
2,206,512
746,545
763,483
(16,938)
120,167
(304)
12,041
(12,345)
49,150
142,946
(93,796)
(80,278)
835,280
60%
12%
2%
26%
100%
89%
14%
-%
6%
(9)%
100%
%
change
29%
8%
(26)%
(16)%
14%
27%
29%
122%
8%
nm
nm
nm
nm
(70)%
nm
24%
(25)%
%
change
10%
(8)%
(37)%
(29)%
(3)%
8%
10%
89%
(8)%
Nm
Nm
Nm
Nm
(75)%
Nm
5%
(36)%
South African transaction-based activities
In ZAR, the increases in revenue were primarily due to our MediKredit and FIHRST acquisitions and increased transaction
volumes at EasyPay and Iraq. We discuss these factors in more detail below.
Revenues for South African transaction-based activities include the transaction fees we earn through our merchant
acquiring system and reflect the elimination of inter-company transactions.
Segment operating income margin decreased to 55% from 56%, mainly as a result of lower margins from our MediKredit
and FIHRST operations and at EasyPay as compared with our pension and welfare operations. This decrease was partially offset
by cost management controls in our pension and welfare operations and increased transaction fees from the utilization of our
UEPS system in Iraq.
Pension and welfare operations:
Effective April 1, 2009, we signed a one-year contract with SASSA which expired on March 31, 2010, and which was
subsequently extended on its existing terms by three months to June 30, 2010.
The SASSA contract described above contained a standard pricing formula for all provinces based on a transaction fee per
beneficiary paid regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum
number of beneficiaries per month. Under our previous provincial contracts, depending on the province, we received either a fee
per grant distributed, or per beneficiary paid, or as a percentage of the total grant amount distributed. In addition, commencing
with the May 2009 pay cycle, SASSA assumed responsibility for the pre-funding of all social welfare grants. Our average
revenue per beneficiary paid therefore remains unchanged during the term of the contract, including the current extension. From
time to time, we are requested to assist with the payment of ad-hoc special grants or benefits (such as disaster relief payments),
which may be at a different rate than the standard welfare distribution price. We also receive a once-off registration fee for
every new beneficiary we enroll on our system.
Transaction processors:
We acquired MediKredit and FIHRST on January 1 and March 31, 2010, respectively, and their operations are included in
our results from those dates. MediKredit’s results include claims processing support fees received from a customer it lost in late
calendar 2009 and which contractually continued to pay fees through the end of April 2010. After intangible asset amortization
MediKredit generated nominal operating income and FIHRST generated a nominal operating loss, although it was cash flow
positive. During fiscal 2011, we expect that MediKredit will be cash flow negative and that FIHRST will continue to be cash
flow positive. These cash flows are not expected to be significant to our operations during fiscal 2011.
The table below presents the total volume and value processed during fiscal 2010 and 2009 by our transaction processors:
Table 19
Transaction
processor
EasyPay ..................
MediKredit .............
FIHRST ..................
Total volume
2010
655,175,671
5,410,984
5,259,808
2009
580,738,580
-
-
Total value $ (‘000)
2009
2010
14,671,863
18,904,176
-
227,881
-
1,858,590
Total value ZAR (‘000)
2009
2010
143,847,549
1,734,015
14,142,572
131,161,910
-
-
Transaction processing related to our Iraqi contract continued to grow sequentially through fiscal 2010 and we expect this
trend to continue into fiscal 2011.
Certain EasyPay intangible assets were fully amortized at the end of fiscal 2009, however, savings related to the reduction
in amortization of EasyPay intangible assets was offset by intangible asset amortization related to the MediKredit and FIHRST
acquisitions.
Continued adoption of our merchant acquiring system:
Refer to discussion under “—Fiscal 2011 compared to fiscal 2010—Results of operations by operating segment—South
African transaction-based activities—Continued adoption of our merchant acquiring system.”
56
Smart card accounts
Operating income margin from providing smart card accounts was constant at 45% for each of the fiscal 2010 and 2009.
In ZAR, revenue from the provision of smart card-based accounts decreased in proportion to the lower number of
beneficiaries serviced through our SASSA contract. A total number of 3,532,620 smart card-based accounts were active at June
30, 2010, compared to 3,875,463 active accounts as at June 30, 2009. The decrease in the number of active accounts resulted
largely from the suspension and removal of invalid or fraudulent grants by SASSA.
Financial services
Revenue from UEPS-based lending increased primarily due to an increase in the number of loans granted. In addition, on
average, the return on these UEPS-based loans was higher. Our current UEPS-based lending portfolio comprises loans made to
elderly pensioners in some of the provinces where we distribute social welfare grants. We insure the UEPS-based lending book
against default and thus no allowance is required.
The operating loss for fiscal 2009 includes a profit of $0.5 million (ZAR 4.1 million) on the sale of our traditional
microlending business and goodwill impairment of $1.8 million (ZAR 16.4 million).
Excluding the effects of the goodwill impairment and profit on the sale of our traditional microlending business, operating
income margin for the financial services segment increased to 72% from 25%.
Hardware, software and related technology sales
Operating results include Net1 UTA for fiscal 2010 and from September 1, 2008, for fiscal 2009. The following table
presents our revenue and operating income during fiscal 2010 and 2009:
Table 20
Revenue
Hardware, software and related technology sales excluding Net1 UTA .....................
Net1 UTA ....................................................................................................................
Operating income before amortization of intangible assets and goodwill impairment ....
Operating income
Hardware, software and related technology sales excluding Net1 UTA .....................
Net1 UTA ....................................................................................................................
Net1 UTA excluding impairment of goodwill and amortization of acquisition
related intangible assets ..........................................................................................
Impairment of goodwill ..........................................................................................
Amortization of acquisition related intangible assets .............................................
Table 21
Revenue
Hardware, software and related technology sales excluding Net1 UTA ....................
Net1 UTA ...................................................................................................................
Year ended June 30,
2010
2009
$ ’000
$ ’000
53,008
40,707
12,301
4,787
(42,524)
6,332
(48,856)
(2,144)
(37,378)
(9,334)
63,417
43,857
19,560
15,990
5,498
8,474
(2,976)
4,508
-
(7,484)
Year ended June 30,
2009
2010
ZAR ’000
ZAR ’000
566,928
403,354
392,068
309,752
174,860
93,602
Operating income before amortization of intangible assets and goodwill impairment ...
36,431
142,946
Operating income
Hardware, software and related technology sales excluding Net1 UTA ....................
Net1 UTA ...................................................................................................................
Net1 UTA excluding impairment of goodwill and amortization of acquisition
related intangible assets ..........................................................................................
Impairment of goodwill ..........................................................................................
Amortization of acquisition related intangible assets .............................................
(323,578)
48,181
(371,759)
(16,314)
(284,420)
(71,025)
49,150
75,755
(26,605)
40,300
-
(66,905)
57
In ZAR, the decrease in revenue was primarily due to lower revenues at Net1 UTA and software development sales in
2009 under our Ghana contract that were not repeated in 2010, which was offset marginally by increased hardware sales to Iraq
in 2010. In addition, our revenues in ZAR were negatively impacted by the depreciation of the USD against the ZAR as sales to
customers in Europe, Ghana and Iraq are primarily denominated in USD. In ZAR, the decrease in operating income was
primarily due to amortization of Net1 UTA intangible assets, impairment of goodwill and lower sales activity.
Revenue and operating income for fiscal 2010 comprised:
•
software development and customization, sales of terminals and smart cards related to our Ghana contract;
•
•
•
•
•
sales of licenses, smart cards and terminals to Net1 UTA clients , mainly in Russia and Uzbekistan;
sales of SIM cards to customers;
sales of cryptographic solutions to customers;
rental of terminals to merchants participating in our merchant acquiring system; and
repairs and maintenance services to customers.
Amortization of Prism intangible assets during fiscal 2010 and 2009, respectively, was approximately $0.6 million (ZAR
4.6 million) and $3.0 million (ZAR 26.9 million) and reduced our operating income. During fiscal 2010, we recognized an
impairment loss of approximately $37.4 million (ZAR 284.4 million) as a result of deteriorating trading conditions of this
segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which will impact future cash flows.
Corporate/ Eliminations
The increase in our losses resulted from increases in corporate head office-related expenditure, including the effects of the
increase in inflation in South Africa and stock-based compensation charges.
Our loss includes expenditure related to compliance with Sarbanes; non-executive directors’ fees; employee and executive
salaries and bonuses; stock-based compensation; legal and audit fees; directors and officer’s insurance premiums;
telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and
elimination entries.
Liquidity and Capital Resources
Our business has historically generated and continues to generate high levels of cash. At June 30, 2011, our cash balances
were $95.3 million, which comprised mainly ZAR-denominated balances of ZAR 493.2 million ($72.1 million), KRW-
denominated balances of KRW 13.6 billion ($12.6 million) and US dollar-denominated balances of $9.9 million and other
currency deposits, primarily euro, of $0.7 million. The decrease in our cash balances from June 30, 2010, is primarily as a result
of the payment of approximately $124.3 million to fund a portion of the KSNET purchase price and the Secondary Taxation on
Companies, or STC, of $14.7 million incurred related to dividends paid from South Africa to the United States in connection
with the KSNET transaction. We currently believe that our cash and credit facilities described below are sufficient to fund our
current operations for at least the next four quarters.
We generally invest the surplus cash held by our South African operations in overnight call accounts that we maintain at
South African banking institutions, and surplus cash held by our non-South African companies in the US and European money
markets. We have invested surplus cash in Korea in short-term investment accounts at Korean banking institutions. In addition,
we are required to invest the interest payable under our Korean debt facilities due in the next six months in an interest reserve
account in Korea.
Historically, we have financed most of our operations, research and development, working capital, capital expenditures
and acquisitions through our internally generated cash. We take the following factors into account when considering whether to
borrow under our financing facilities:
• cost of capital;
• cost of financing;
• opportunity cost of utilizing surplus cash; and
• availability of tax efficient structures to moderate financing costs.
We have short-term credit facilities in South Africa of approximately ZAR 250 million ($36.5 million) which remained
fully undrawn as of June 30, 2011.
58
As of June 30, 2011, we had outstanding indebtedness of 130.5 billion KRW (approximately $120.1 million based on June
30, 2011 exchange rates) under credit facilities with a group of Korean banks (the “Facilities Agreement”). The loans bear
interest at the Korean CD rate in effect from time to time (3.00% as of June 30, 2011) plus a margin of 4.10%. Semi-annual
principal payments of approximately $7.5 million (based on June 30, 2010 exchange rates) are due commencing in October
2011, with final maturity scheduled for October 2015. The loans are secured by substantially all of KSNET’s assets, a pledge by
our subsidiary, Net1 Korea, of its entire equity interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one
of our subsidiaries) of its entire equity interest in Net1 Korea. The Facilities Agreement contains customary covenants that
require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and
a debt service coverage ratio) and restrict their ability to make certain distributions with respect to their capital stock, prepay
other debt, encumber their assets, incur additional indebtedness, make capital expenditures above specified levels, engage in
certain business combinations and engage in other corporate activities. The loans under the Facilities Agreement are without
recourse to, and the covenants and other agreements contained therein do not apply to, us or any of our subsidiaries (other than
Net1 Korea and its subsidiaries, including KSNET).
We have a unique cash flow cycle due to the funding mechanism under our SASSA contact and our pre-funding of certain
merchants. Under our SASSA contract, we receive the grant funds 48 hours prior to the provision of the service and any interest
we earn on these amounts is for the benefit of SASSA. We pre-fund certain merchants for grants paid through our merchant
acquiring system on our behalf before the start of the payment service at pay points. We typically reimburse merchants that are
not pre-funded within 48 hours after they distribute the grants to the social welfare beneficiaries.
In addition, as a transaction processor, and in certain instances as a claims adjudicator, we receive cash from:
• health care plans which we disburse to health care service providers once we have adjudicated claims;
• customers on whose behalf we processes off payroll payments that we will disburse to customer employees, payroll-
related payees and other payees designated by the customer; and
• credit card companies (as well as other types of payment services) which have business relationships with merchants
selling goods and services via the internet in Korea which are our customers and on whose behalf we process the transactions
between various parties and settle the funds from the credit card companies to our merchant customers.
These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of
our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing
activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.
Cash flows from operating activities
Cash flows from operating activities for fiscal 2011 decreased to $66.2 million (ZAR 463.4 million) from $68.7 million
(ZAR 522.1 million) for fiscal 2010. Our net cash from operating activities decreased primarily due to the SASSA price and
volume reductions which were effective July 1, 2010. During fiscal 2011, we paid interest under the Facilities Agreement of
$4.1 million.
Cash flows from operating activities for fiscal 2010 decreased to $68.7 million (ZAR 522.1 million) from $106.8 million
(ZAR 954.5 million) for fiscal 2009, largely due to the factors that contributed to decreases in revenues and operating income in
our hardware, software and related technology sales segments, offset by increases in revenue and operating income in our
transaction-based activities.
During fiscal 2011, we made a first provisional payment of $16.6 million (ZAR 113.7 million), a second provisional
payment of $12.3 million (ZAR 84.0 million) related to our 2011 tax year in South Africa and paid STC of $15.2 million (ZAR
106.5 million) related to cross-border intercompany dividends paid. We made an additional second provisional tax payment of
$1.8 million (ZAR 12.7 million) related to our 2010 tax year in South Africa. We also paid taxes totaling $2.6 million in other
tax jurisdictions, primarily Korea.
During fiscal 2010 we made an additional second provisional tax payment of $4.0 million (ZAR 30.1 million) related to
our 2009 tax year in South Africa. In addition, we made a first provisional payment of $17.8 million (ZAR 133.5 million), a
second provisional payment of $20.3 million (ZAR 155.8 million) related to our 2010 tax year in South Africa and paid STC of
$12.1 million (ZAR 92.2 million) related to cross-border intercompany dividends paid.
59
Taxes paid during fiscal 2011 and 2010 were as follows:
Table 22
First provisional payments .................................
Second provisional payments .............................
Third provisional payments ................................
Taxation paid related to prior years ....................
Taxation refunds received ..................................
Secondary taxation on companies ......................
Total South African taxes paid.....................
Foreign taxes paid, primarily Korea ............
Total tax paid .....................................
Cash flows from investing activities
2011
$
‘000
16,565
12,331
335
1,774
(213)
15,216
46,008
2,622
48,630
Year ended June 30,
2010
$
‘000
2011
ZAR
‘000
17,788
20,309
239
3,996
(241)
12,052
54,143
-
54,143
113,708
84,019
2,296
12,716
(1,577)
106,500
317,662
18,098
335,760
2010
ZAR
‘000
133,522
155,769
1,789
30,119
(1,913)
92,215
411,501
-
411,501
During fiscal 2011, we paid approximately $230.2 million (ZAR 1.6 billion), net of cash received, for 98.73% of KSNET.
Cash used in investing activities for fiscal 2011 includes capital expenditure of $15.1 million (ZAR 105.6 million),
primarily for the acquisition of payment processing terminals in Korea, kiosks to service our EasyPay Kiosk pilot project, the
acquisition of POS devices to service our merchant acquiring system, the replacement of computer and electronic hardware and
the replacement of motor vehicles.
SmartSwitch Namibia commenced repayment of loans provided by its shareholders during fiscal 2011 and cash flows from
investing activities for fiscal 2011, includes principal repayments of $0.5 million. In July 2010, we provided additional loan
funding to VTU Colombia of approximately $0.4 million.
Cash used in investing activities for fiscal 2010 includes capital expenditure of $2.7 million (ZAR 20.7 million), primarily
for the acquisition of POS devices to service our merchant acquiring system, improvements to leasehold property and the
acquisition of computer equipment.
During fiscal 2010, we paid $1.0 million (ZAR 7.3 million), net of cash received, for 100% of the outstanding ordinary
capital of MediKredit and all claims outstanding and $9.4 million (ZAR 69.0 million), net of cash received for the FIHRST
business and software.
Cash used in investing activities for fiscal 2009 includes capital expenditure of $4.8 million (ZAR 42.6 million), which
relates primarily to the purchase of back-end processing machines to maintain and expand current operations, equipment
acquired for our card manufacturing facility, modifications to vehicles acquired to distribute social welfare grants, acquisition of
POS terminals for our merchant acquiring system and computer hardware acquired to upgrade our EasyPay switch and service
potential customers.
During fiscal 2009, we paid $97.9 million (ZAR 767.3 million), net of cash received, for 80.1% of Net1 UTA, which
includes approximately $0.5 million paid to consultants. In addition, we paid $3.4 million (ZAR 34.8 million) in cash to acquire
a further interest in Finbond and $1.4 million (ZAR 12 million) in cash to purchase RMT. We also made additional equity
investments in VinaPay and VTU Colombia for a total of approximately $0.6 million and a loan to VTU Colombia of
approximately $0.2 million, all of which were used to fund operating activities.
Cash flows from financing activities
During fiscal 2011, we incurred $116.4 million of long-term debt to fund a portion of the KSNET purchase price and
paid facility fees of $3.1 million. We also paid approximately $0.6 million for the remaining 19.9% of Net1 UTA during
fiscal 2011 and acquired 125,392 shares of our common stock for $1.0 million.
During fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526 shares of our common stock from Brait S.A.’s
investment affiliates for $13.50 (ZAR 105.98) per share, for an aggregate repurchase price of $124.5 million (ZAR 977.3
million). In addition, we incurred costs of approximately $0.5 million (ZAR 3.9 million) related to the repurchase of these
shares. We also paid $1.3 million on account of shares we repurchased on June 30, 2009, under our 2009 share buy-back
program and received $0.7 (ZAR 5.5 million) from employees exercising stock options and repaying loans.
60
During fiscal 2009, we received and repaid a $110 million short-term loan facility and we paid the $1.1 million related
facility fee. We also acquired 3,621,247 shares of our common stock for $40.7 million, and received $0.3 million (ZAR2.7
million) from stock option exercises.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years ended June 30, 2011, 2010 and 2009 were as follows:
Table 23
Operating Segment
South African transaction-based activities ..........
International transaction-based activities .............
Smart card accounts .............................................
Financial services .................................................
Hardware, software and related technology sales.
Corporate / Eliminations ......................................
Consolidated total........................................
2011
$’000
2,423
12,113
-
400
117
-
15,053
2010
$’000
2,177
-
-
302
251
-
2,730
Year ended June 30,
2011
ZAR
’000
2009
$’000
3,161
-
-
751
858
-
4,770
16,952
84,745
-
2,798
819
-
105,314
2010
ZAR
’000
16,565
-
-
2,298
1,910
-
20,773
2009
ZAR
’000
28,258
-
-
6,714
7,670
-
42,642
We operate in an environment where the payment of social welfare grants requires substantial capital investment to
establish an operational infrastructure when a contract commences. Further capital investment is required when the number of
beneficiaries increases to the point where the maximum capacity of the original infrastructure is exceeded.
Our capital expenditures for fiscal 2011, 2010 and 2009, are discussed under “—Liquidity and Capital Resources—Cash
flows from investing activities.”
All of our capital expenditures for the past three fiscal years were funded through internally generated funds. We had
outstanding capital commitments as of June 30, 2011, of $0.4 million related mainly to computer equipment ordered in order to
maintain and expand activities. We anticipate that capital spending for the first quarter of fiscal 2012 will relate primarily to on-
going replacement of equipment used to administer and distribute social welfare grants, provide a switching service through
EasyPay and expand our operations in Korea. We expect to fund these expenditures through internally generated funds.
Contractual Obligations
The following table sets forth our contractual obligations as of June 30, 2011:
Table 24
Payments due by Period, as of June 30, 2011 (in $ ’000s)
Long-term debt obligations (A) ............
Operating lease obligations ..................
Purchase obligations .............................
Other long-term obligations .................
Total ...............................................
(A) - Includes $118.0 million of loans under the Facilities Agreement discussed under “—Liquidity and capital resources”
$23,205
3,392
1,881
-
$28,478
Total
$151,002
5,979
1,881
1,272
$160,134
1-3
years
$43,201
2,587
-
-
$45,788
3-5
years
$79,990
-
-
-
$79,990
More
than 5
years
$4,606
-
-
1,272
$5,878
Less
than 1
year
and includes interest payable under the Facilities Agreement at the rate applicable as of June 30, 2011.
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to reduce our exposure to currencies other than the South African rand, or ZAR, through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, we use financial instruments to
economically hedge our exposure to exchange rate and interest rate fluctuations arising from our operations. We are also
exposed to equity price and liquidity risks as well as credit risks.
Currency Exchange Risk
We are subject to currency exchange risk because we purchase inventories that we are required to settle in other
currencies, primarily the euro and US dollar. We have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US dollar and the euro, on the other hand. As of
June 30, 2011, and 2010, our outstanding foreign exchange contracts were as follows:
As of June 30, 2011
None.
As of June 30, 2010
Notional amount
EUR
EUR
207,000
31,200
Strike price
ZAR
ZAR
10.1107
9.5976
Translation Risk
Fair market
value price
ZAR
ZAR
Maturity
July 30, 2010
9.4802
9.5080 October 9, 2010
Translation risk relates to the risk that our results of operations will vary significantly as the US dollar is our reporting
currency, but we earn most of our revenues and incur most of our expenses in ZAR and generate a significant amount of
revenue and related and operating expenses in KRW. The US dollar fluctuated significantly over the past three years, including
against the ZAR and KRW. As exchange rates are outside our control, there can be no assurance that future fluctuations will not
adversely affect our results of operations and financial condition.
Interest Rate Risk
As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest
rates, which we manage primarily through our regular financing activities. In addition, outstanding indebtedness under our
Facilities Agreement bears interest at the Korean CD rate plus 4.10%. As interest rates, and specifically the Korean CD rate, are
outside our control, there can be no assurance that future increases in interest rates, specifically the Korean CD rate, will not
adversely affect our results of operations and financial condition. As of June 30, 2011, the Korean CD rate was 3.00%.
The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as
of June 30, 2011, as a result of a change in the Korean CD rate. The effects of a hypothetical 1% increase and a 1% decrease in
the Korean CD rate as of June 30, 2011, is shown. The selected 1% hypothetical change does not reflect what could be
considered the best or worst case scenarios.
Table 25
Annual
expected
interest
charge
($ ’000)
Interest on Facilities Agreement
8,588
As of June 30, 2011
Estimated
annual
expected
interest charge
after change in
Korean CD
rate
($ ’000)
9,798
7,379
Hypothetical
change in
Korean CD
rate
1%
(1)%
We generally maintain limited investment in cash equivalents and have occasionally invested in marketable securities. The
interest earned on our bank balances and short term cash investments is dependent on the prevailing interest rates in the
jurisdictions where our cash reserves are invested.
62
Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties. We maintain
credit risk policies with regard to our counterparties to minimize overall credit risk. These policies include an evaluation of a
potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as our management
deems appropriate.
With respect to credit risk on financial instruments, we maintain a policy of entering into such transactions only with South
African and European financial institutions that have a credit rating of BBB or better, as determined by credit rating agencies
such as Standard & Poor’s, Moody’s and Fitch Ratings.
Equity Price and Liquidity Risk
Equity price risk relates to the risk of loss that we would incur as a result of the volatility in the exchange-traded price of
equity securities that we hold and the risk that we may not be able to liquidate these securities. We have invested in
approximately 22% of the issued share capital of Finbond Group Limited which are exchange-traded equity securities. The fair
value of these securities as of June 30, 2011, represented approximately 1% of our total assets, including these securities. We
expect to hold these securities for an extended period of time and we are not concerned with short-term equity price volatility
with respect to these securities provided that the underlying business, economic and management characteristics of the company
remain sound.
The market price of these securities may fluctuate for a variety of reasons, consequently, the amount we may obtain in a
subsequent sale of these securities may significantly differ from the reported market value.
Liquidity risk relates to the risk of loss that we would incur as a result of the lack of liquidity on the exchange on which
these securities are listed. We may not be able to sell some or all of these securities at one time, or over an extended period of
time without influencing the exchange traded price, or at all.
The following table summarizes our exchange-traded equity securities with equity price risk as of June 30, 2011. The
effects of a hypothetical 10% increase and a 10% decrease in market prices as of June 30, 2011, is also shown. The selected
10% hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far
worse due both to the nature of equity markets and the aforementioned liquidity risk.
Table 26
Exchange-traded equity securities .
8,161
Fair
value
($ ’000)
As of June 30, 2011
Estimated fair
value after
hypothetical
change in price
($ ’000)
8,977
7,345
Hypothetical
Percentage
Increase
(Decrease) in
Shareholders’
Equity
0.25%
(0.25)%
Hypothetical
price change
10%
(10)%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the report of our independent registered public accounting firm,
appear on pages F-1 through F-51 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
63
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the chief executive officer and the chief financial
officer concluded that our disclosure controls and procedures were effective as of June 30, 2011.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision, of the company’s chief
executive officer and chief financial officer, or persons performing similar functions, and effected by the company’s board of
directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with GAAP.
Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the
consolidated financial statements.
Inherent Limitations in Internal Control over Financial Reporting
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into
the process safeguards to reduce, though not eliminate, this risk.
Management’s Report on Internal Control Over Financial Reporting
Management, including our chief executive officer and our chief financial officer, is responsible for establishing and
maintaining adequate internal control over our financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal
control over financial reporting was effective as of June 30, 2011. As permitted by the rules of the SEC, management has
excluded KSNET from its evaluation for the year ended June 30, 2011, the year of acquisition. Deloitte & Touche (South
Africa), our independent registered public accounting firm, has issued an audit report on our internal control over financial
reporting, excluding KSNET. As of June 30, 2011, KSNET’s total assets represented approximately 42% of our consolidated
total assets and approximately 46% of consolidated total current assets. Its total revenues constituted approximately 20% of our
consolidated revenue and its operating income constituted approximately 5% of our consolidated operating income for the year
ended June 30, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended June 30,
2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As
stated above, management has excluded KSNET from its evaluation of the effectiveness of internal control over financial
reporting for the year ended June 30, 2011, the year of acquisition but continues to evaluate KSNET’s internal control over
financial reporting. See Item 1A—“Risk Factors—Failure to maintain effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act, especially over companies that we may acquire, could have a material
adverse effect on our business and stock price. Our management evaluation and auditor attestation regarding the effectiveness of
our internal control over financial reporting as of June 30, 2011, excluded the operations of KSNET. If we are not able to
integrate KSNET’s operations into our internal control over financial reporting, our internal control over financial reporting may
not be effective” for additional information.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the internal controls over financial reporting of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s report on Internal
Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at
KSNET Incorporated (“KSNET”), which was acquired on October 29, 2010. As of June 30, 2011, KSNET’s combined total
assets represented approximately 42% of consolidated total assets, approximately 46% of consolidated total current assets and
the total revenues constituted approximately 20% of consolidated revenue and the operating income constituted approximately
5% of consolidated operating income for the year ended June 30, 2011. Accordingly, our audit did not include the internal
control over financial reporting at KSNET. The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers or persons performing similar functions, and effected by the company's board
of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have
a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended June 30, 2011 of the Company and our report dated
August 25, 2011, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 25, 2011
National Executive: GG Gelink Chief Executive AE Swiegers Chief Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax & Legal Services L Geeringh Consulting L Bam Corporate Finance
JK Mazzocco Human Resources CR Beukman Finance TJ Brown Clients & Markets NT Mtoba Chairman of the
Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
65
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our executive officers is set out in Part I, Item 1 under the caption “Executive Officers and Significant
Employees of the Registrant.” The other information required by this Item is incorporated by reference to the sections of our
definitive proxy statement for our 2011 annual meeting of shareholders entitled “Board of Directors and Corporate Governance”
and “Additional Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2011 annual meeting of shareholders entitled “Executive Compensation,” “Board of Directors and Corporate Governance—
Compensation of Directors” and “—Remuneration Committee Interlocks and Insider Participation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2011 annual meeting of shareholders entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2011 annual meeting of shareholders entitled “Certain Relationships and Related Transactions” and “Board of Directors and
Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the sections of our definitive proxy statement for our
2011 annual meeting of shareholders entitled “Audit and Non-Audit Fees.”
67
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
a) The following documents are filed as part of this report
1. Financial Statements
The following financial statements are included on pages F-1 through F-51.
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2011 and 2010
Consolidated statements of operations for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of changes in equity for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of comprehensive income (loss) for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of cash flows for the years ended June 30, 2011, 2010 and 2009
Notes to the consolidated financial statements
F-2
F-3
F-4
F-5
F-7
F-9
F-10
2. Financial Statement Schedules
Financial statement schedules have been omitted since they are either not required, not applicable, or the information is
otherwise included.
(b) Exhibits
Exhibit
No.
Description of Exhibit
Incorporated by Reference Herein
Included
Herewith Form Exhibit
Filing Date
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Articles of Incorporation
8-K
3.1
December 1, 2008
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc.
Form of common stock certificate
Distribution Agreement, dated July 1, 2002,
between Net 1 UEPS Technologies, Inc. and Net 1
Investment Holdings (Pty) Limited
Patent and Technology Agreement, dated June 19,
2000, by and between Net 1 Holdings S.a.r.1. and
Net 1 UEPS Technologies, Inc.
Technology License Agreement between Net 1
Investment Holdings (Proprietary) Limited and Visa
International Service Association
Product License Agreement between Net 1
Holdings S.a.r.1. and Net 1 Operations S.a.r.1.
Non Exclusive UEPS License Agreement between
Net 1 Investment Holdings (Proprietary) Limited
and SIA Netcards
Assignment of Copyright and License of Patents
and Trade Marks between MetroLink (Proprietary)
Limited and Net 1 Products (Proprietary) Limited
Agreement between Nedcor Bank Limited and Net
1 Products (Proprietary) Limited
Patent and Technology Agreement by and among
Net 1 Investment Holdings (Proprietary) Limited,
Net 1 Applied Technology Holding Limited and
Nedcor Bank Limited
68
8-K
S-1
3.2
4.1
November 5, 2009
June 20, 2005
S-4
10.1
February 3, 2004
S-4
10.2
February 3, 2004
S-1
10.12 May 26, 2005
S-4/A
10.8
April 21, 2004
S-4/A
10.10 April 21, 2004
S-1
10.18 May 26, 2005
S-1/A
10.16
July 19, 2005
S-1
10.19 May 26, 2005
S-1/A
10.19
July 19, 2005
S-1/A
10.20
July 19, 2005
10-K
10.13
August 26, 2010
14A
10-K
A
October 28, 2009
10.40
August 29, 2007
10-Q
10.48
November 6, 2008
8-K
2.1
September 17, 2010
8-K
10.51
November 3, 2010
10-Q
10.52
November 9, 2010
8-K
14
August 27, 2009
10.9
10.10
10.11
10.12*
10.13*
10.14*
10.15*
10.16
10.17
10.18†
10.19
12
14
21
23
31.1
31.2
Patent and Technology Agreement by and among
Net 1 Holdings S.a.r.1., Net 1 Applied Technology
Holdings Limited and Nedcor Bank Limited
Agreement by and among Nedbank Limited, Net 1
UEPS Technologies, Inc., and Net 1 Applied
Technologies South Africa Limited
Banking Facility between Nedbank Limited and Net
1 Applied Technologies South Africa Limited dated
as of April 30, 2010
Amended and Restated Stock Incentive Plan of Net
1 UEPS Technologies, Inc.
Form of Restricted Stock Agreement (employees)
Form of Stock Option Agreement, under Amended
and Restated Stock Incentive Plan
Form of Restricted Stock Agreement (non-
employee directors)
X
Share Purchase Agreement, dated as of September
14, 2010, by and among Net 1 UEPS Technologies,
Inc., Payment Services Asia LLC and H&Q NPS
Van Investment, Ltd.
Senior Facilities Agreement dated October 29,
2010, between Net 1 Applied Technologies Korea,
as borrower, Hana Daetoo Securities Co., Ltd., as
mandated lead arranger, Shinhan Bank and Woori
Bank, as co-arrangers, the financial institutions
listed therein as original lenders and Hana Bank, as
agent and security agent
Service Level Agreement, dated as of August 24,
2010, between the South African Social Security
Agency and Cash Paymaster Services (Pty) Limited
Employment agreement dated September 17, 2010
between KSNET, Inc. and Phil-Hyun Oh
Statement of Ratio of Earnings to Fixed Charges
Amended and Restated Code of Ethics
Subsidiaries of Registrant
Consent of Independent Registered Public
Accounting Firm
Certification of Principal Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended
Certification of Principal Financial Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended
32
Certification pursuant to 18 USC Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
X
X
X
X
X
X
X
X
X
X
X
X
XBRL Taxonomy Extension Presentation Linkbase
101.PRE
† Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 24b-2 of the Exchange Act, and
thus, such portions have been omitted.
* Indicates a management contract or compensatory plan or arrangement.
X
69
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director
Date: August 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Serge C.P. Belamant
Serge C.P. Belamant
/s/ Herman Gideon Kotzé
Herman Gideon Kotzé
/s/ Antony Charles Ball
Antony Charles Ball
/s/ Christopher Stefan Seabrooke
Christopher Stefan Seabrooke
/s/ Alasdair Jonathan Kemsley Pein
Alasdair Jonathan Kemsley Pein
/s/ Paul Edwards
Paul Edwards
/s/ Tom Tinsley
Tom Tinsley
Chief Executive Officer and Chairman of the Board
and Director (Principal Executive Officer)
August 25, 2011
Chief Financial Officer, Treasurer and Secretary and
Director (Principal Financial and Accounting Officer)
August 25, 2011
Director
Director
Director
Director
Director
August 25, 2011
August 25, 2011
August 25, 2011
August 25, 2011
August 25, 2011
70
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
Report of the Independent Registered Public Accounting Firm – Deloitte & Touche (South Africa)
Consolidated balance sheets as of June 30, 2011 and 2010
Consolidated statements of operations for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of changes in equity for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of comprehensive income for the years ended June 30, 2011, 2010 and 2009
Consolidated statements of cash flows for the years ended June 30, 2011, 2010 and 2009
Notes to the consolidated financial statements
F-2
F-3
F-4
F-5
F-8
F-9
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries (the
“Company”) as of June 30, 2011 and 2010 and the related consolidated statements of operations, changes in equity,
comprehensive income and cash flows for each of the three years in the period ended June 30, 2011. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Net 1
UEPS Technologies, Inc. and subsidiaries as of June 30, 2011 and 2010, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2011, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
August 25, 2011, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 25, 2011
National Executive: GG Gelink Chief Executive AE Swiegers Chief Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax & Legal Services L Geeringh Consulting L Bam Corporate Finance
JK Mazzocco Human Resources CR Beukman Finance TJ Brown Clients & Markets NT Mtoba Chairman of the
Board MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
as of June 30, 2011 and 2010
CURRENT ASSETS
ASSETS
Cash and cash equivalents
Pre-funded social welfare grants receivable (Note 4)
Accounts receivable, net (Note 5)
Finance loans receivable, net
Deferred expenditure on smart cards
Inventory (Note 6)
Deferred income taxes (Note 16)
Total current assets before settlement assets
Settlement assets
Total current assets
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
EQUITY-ACCOUNTED INVESTMENTS (Note 7)
GOODWILL (Note 9)
INTANGIBLE ASSETS, net (Note 9)
OTHER LONG-TERM ASSETS, including available for sale securities (Note 7)
TOTAL ASSETS
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Other payables (Note 10)
Current portion of long-term borrowings (Note 12)
Income taxes payable
Total current liabilities before settlement obligations
Settlement obligations
Total current liabilities
DEFERRED INCOME TAXES (Note 16)
LONG-TERM BORROWINGS (Note 12)
OTHER LONG-TERM LIABILITIES, including non-controlling interest loans
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 20)
EQUITY
COMMON STOCK (Note 13)
Authorized shares: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: 2011: 45,152,805;
2010: 45,378,397
PREFERRED STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury: 2011: -; 2010: -
ADDITIONAL PAID-IN CAPITAL
TREASURY SHARES, AT COST: 2011: 13,274,434; 2010: 13,149,042 (Note 13)
ACCUMULATED OTHER COMPREHENSIVE LOSS
RETAINED EARNINGS
TOTAL NET1 EQUITY
NON-CONTROLLING INTEREST
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
2011
2010
(In thousands, except share data)
$
95,263
4,579
82,780
8,141
51
6,725
15,882
213,421
186,668
400,089
35,807
1,860
209,570
119,856
14,463
781,645
11,360
71,265
15,062
6,709
104,396
186,668
291,064
52,785
110,504
1,272
455,625
$
153,742
6,660
41,854
4,221
-
3,622
16,330
226,429
83,661
310,090
7,286
2,598
76,346
68,347
7,423
472,090
3,596
50,855
-
3,476
57,927
83,661
141,588
38,858
-
4,343
184,789
59
59
-
136,430
(174,694)
(33,779)
394,990
323,006
3,014
326,020
781,645
$
-
133,543
(173,671)
(66,396)
392,343
285,878
1,423
287,301
472,090
$
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 2011, 2010 and 2009
REVENUE (Note 14)
Sale of goods
Loan-based interest and fees received
Services rendered
EXPENSE
Cost of goods sold, IT processing, servicing and support
Selling, general and administration
Depreciation and amortization
PROFIT ON SALE OF MICROLENDING BUSINESS
IMPAIRMENT LOSSES (Note 9)
OPERATING INCOME
FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM
INVESTMENT (Note 22)
INTEREST (EXPENSE) INCOME, net
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE (Note 16)
2011
2010
(In thousands, except per share data)
2009
$
$ 343,420
30,130
7,276
306,014
280,364
36,228
4,214
239,922
$ 246,822
47,003
5,659
194,160
109,858
119,692
34,671
-
41,771
37,428
-
(1,018)
36,410
33,525
72,973
80,854
19,348
-
37,378
69,811
-
9,069
78,880
40,822
70,091
64,833
17,082
455
1,836
93,435
26,657
10,828
130,920
42,744
NET INCOME BEFORE EARNINGS (LOSS) FROM EQUITY-
ACCOUNTED INVESTMENTS
EARNINGS (LOSS) FROM EQUITY-ACCOUNTED INVESTMENTS
(Note 7)
NET INCOME
(ADD) LESS: NET (LOSS) INCOME ATTRIBUTABLE TO NON-
CONTROLLING INTEREST
2,885
38,058
88,176
(339)
2,546
93
(874)
38,151
87,302
(101)
(839)
701
NET INCOME ATTRIBUTABLE TO NET1
$
2,647
$
38,990
$
86,601
Net income per share (Note 17)
Basic earnings attributable to Net1 shareholders in $
Diluted earnings attributable to Net1 shareholders in $
0.06
0.06
0.84
0.84
1.53
1.53
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands)
Common stock
Number
of
Treasury
Shares
Treasury
Shares
(306,269)
$(7,950)
Number
of Shares
53,423,552
84,414
3,474
Amount
$52
1
40,134
-
Net 1 UEPS Technologies, Inc. Shareholder
Special convertible
preferred stock
B Class
Preference Shares
Number
of Shares Amount
Number
of Shares
Amount
Retained
Earnings
AOC(L)I
4,882,429
$5 35,975,818
$6
$266,752
$(37,820)
Additional
Paid-In
Capital
$119,283
253
981
20
(3)
4,882,429
6
4
(4,882,429)
(5)
(35,975,818)
(6)
(3,621,247)
(40,687)
5,239
(213)
1,350
Non-
control-
ling
Interests
$-
Total
Net1
Equity
$340,328
254
-
981
20
(3)
(1)
5,239
(213)
(40,687)
Total
$340,328
254
-
981
20
(3)
(1)
5,239
(213)
(40,687)
1,350
1,350
1,838
1,838
86,601
86,601
701
87,302
(1,611)
(1,611)
(1,611)
(19,041)
(19,041)
(19,041)
Balance – July 1, 2008
Options exercised
Restricted stock granted
Stock granted pursuant to
Net1 UTA acquisition
Settlement of loan note
consideration for stock
issued in accordance with
Plan
Loan note consideration
for stock issued in
accordance with Plan
Conversion from special
convertible preferred
stock to common stock
and cession of B class
preference shares and B
class loans to Net 1 as a
result of trigger events
Stock-based
compensation charge
Reversal of stock-based
compensation charge
Treasury shares acquired
Income tax benefits from
stock awards sold by
employees
Net1 UTA non-
controlling interest
acquired
Comprehensive income,
net of taxes:
Net income
Other comprehensive
(loss):
Net unrealized loss
on available for sale
investment
Movement in
foreign currency
translation reserve
Balance – June 30, 2009
58,434,003
$59
(3,927,516)
$(48,637)
$126,914
-
$-
-
$-
$353,353
$(58,472)
$373,217
$2,539
$375,756
F-5
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands)
Number of
Shares
58,434,003
83,338
10,098
Amount
$59
-
Net 1 UEPS Technologies, Inc. Shareholder
Number of
Treasury
Shares
Treasury
Shares
Additional
Paid-In
Capital
Retained
Earnings
AOC(L)I
Total Net1
Equity
Non-
controlling
Interests
Total
(3,927,516)
$(48,637)
$126,914
$353,353
$(58,472)
$373,217
$2,539
$375,756
303
417
5,670
239
(9,221,526)
(125,034)
303
-
417
5,670
(125,034)
239
303
-
417
5,670
(125,034)
239
38,990
38,990
(839)
38,151
(684)
(684)
(7,240)
(7,240)
(277)
(684)
(7,517)
$287,301
Balance – July 1, 2009
Options exercised
Restricted stock granted
Settlement of loan note consideration
for stock issued in accordance with
2004 Stock Incentive Plan
Stock-based compensation charge
Treasury shares acquired (Note 13)
Income tax benefits from stock awards
sold by employees
Comprehensive income (loss), net of
taxes:
Net income (loss)
Other comprehensive (loss):
Net unrealized loss on available
for sale investment
Movement in foreign currency
translation reserve
Balance – June 30, 2010
58,527,439
$59
(13,149,042)
$(173,671)
$133,543
$392,343
$(66,396)
$285,878
$1,423
F-6
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands)
Number of
Shares
Amount
Net 1 UEPS Technologies, Inc. Shareholder
Number of
Treasury
Shares
Treasury
Shares
Additional
Paid-In
Capital
Retained
Earnings
AOC(L)I
Total Net1
Equity
Non-
controlling
Interests
Total
Balance – July 1, 2010
58,527,439
$59
(13,149,042)
$(173,671)
$133,543
$392,343
$(66,396)
$285,878
$1,423
$287,301
Restricted stock granted
156,956
Settlement of loan note consideration
for stock issued in accordance with
2004 Stock Incentive Plan
Stock-based compensation charge
Reversal of stock-based compensation
charge
(257,156)
Treasury shares acquired (Note 13)
Utilization of income tax benefits from
stock awards sold by employees
Acquisition of KSNET (note 3)
Acquisition of 19.90% non-controlling
interest (note 3)
Comprehensive income (loss), net of
taxes:
Net income (loss)
Other comprehensive income (loss):
Net unrealized loss on available
for sale investment
Movement in foreign currency
translation reserve
(125,392)
(1,023)
20
5,212
(3,492)
(68)
1,215
-
20
5,212
(3,492)
(1,023)
(68)
-
925
3,097
(1,809)
-
20
5,212
(3,492)
(1,023)
(68)
3,097
(884)
(290)
2,647
2,647
(101)
2,546
(691)
(691)
33,598
33,598
404
(691)
34,002
Balance – June 30, 2011
58,427,239
$59
(13,274,434)
$(174,694)
$136,430
$394,990
$(33,779)
$323,006
$3,014
$326,020
See accompanying notes to consolidated financial statements.
F-7
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended June 30, 2011, 2010 and 2009
2011
2010
(In thousands)
2009
Net income
$
2,647
$
38,990
$
86,601
Other comprehensive income (loss):
Net unrealized loss on asset available for sale
Movement in foreign currency translation reserve
Total other comprehensive income (loss)
Comprehensive income
(Add) Less comprehensive (loss) income attributable to non-
controlling interest
Comprehensive income attributable to Net1
See accompanying notes to consolidated financial statements.
(691)
33,598
32,907
35,554
(303)
35,857
$
$
(684)
(7,240)
(7,924)
31,066
1,116
29,950
(1,611)
(19,041)
(20,652)
65,949
(701)
66,650
$
F-8
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2011, 2010 and 2009
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Impairment of intangible asset
Impairment of goodwill
Loss (Earnings) from equity-accounted investments
Fair value adjustment
Interest payable
Facility fee amortized
(Profit) Loss on disposal of property, plant and equipment
Profit on disposal of VinaPay (2011) and Moneyline business (2009)
Stock compensation charge, net of forfeitures
Decrease (Increase) in accounts receivable, pre-funded social welfare
grants receivable and finance loans receivable
Decrease in deferred expenditure on smart cards
Decrease (Increase) in inventory
Decrease in accounts payable and other payables
Decrease in taxes payable
Decrease in deferred taxes
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures
Proceeds from disposal of property, plant and equipment
Acquisition of KSNET, net of cash acquired (Note 3)
Acquisition of MediKredit, FIHRST and RMT, net of cash acquired (Note 3)
Acquisition of Net1 UTA, net of cash acquired (Note 3)
Acquisition of available-for-sale securities
Proceeds from disposal of VinaPay
Acquisition of and advance of loans to equity-accounted investments
Repayment of loan by equity-accounted investment
Other investing activities
Net change in settlement assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of common stock
Loan portion related to options
Acquisition of treasury stock (Note 13)
Long-term borrowings obtained (Note 12)
Proceeds from short-term loan facility (Note 11)
Repayment of short-term loan facility (Note 11)
Payment of facility fee (Note 12)
Repayment of short-term borrowings
Proceeds from bank overdraft
Repayment of bank overdraft
Acquisition of remaining 19.9% of Net1 UTA
Net change in settlement obligations
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
F-9
2011
2010
(In thousands)
2009
$
2,546
$
38,151
$
87,302
34,671
41,771
-
339
728
2,487
1,958
(5)
(14)
1,720
(3,568)
-
289
(1,041)
(1,800)
(13,858)
66,223
(15,053)
76
(230,225)
-
-
-
150
(375)
475
35
(78,768)
(323,685)
19,348
-
37,378
(93)
78
301
-
69
-
5,670
4,666
8
3,867
(27,138)
(7,582)
(6,040)
68,683
(2,730)
106
-
(10,319)
-
-
-
-
-
-
(77,243)
(90,186)
17,082
-
1,836
874
(4,402)
425
1,100
85
(455)
5,026
14,639
50
(81)
(8,788)
(3,339)
(4,586)
106,768
(4,770)
159
-
(1,381)
(97,992)
(3,422)
-
(450)
-
-
-
(107,856)
-
20
(1,023)
116,353
-
-
(3,088)
(6,705)
-
(462)
(594)
78,768
183,269
15,714
(58,479)
153,742
95,263
$
$
720
-
(126,304)
-
-
-
-
-
-
(137)
-
77,243
(48,478)
2,937
(67,044)
220,786
153,742
271
-
(39,412)
-
110,000
(110,000)
(1,100)
-
2,843
(2,850)
-
-
(40,248)
(10,353)
(51,689)
272,475
$ 220,786
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
1.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Net 1 UEPS Technologies, Inc. (“Net1” and collectively with its consolidated subsidiaries, the “Company”) was
incorporated in the State of Florida on May 8, 1997. The Company provides payment solutions and transaction processing
services across a wide range of industries and in various geographies. It has developed and markets a smart-card based alternative
payment system for the unbanked and underbanked populations of developing economies. Its universal electronic payment system
(“UEPS”) uses biometrically secure smart cards that operate in real-time but offline, which allows users to enter into transactions
at any time with other card holders in even the most remote areas. The Company also develops and provides secure transaction
technology solutions and services, and offers transaction processing, financial and clinical risk management solutions to various
industries. The Company’s technology is widely used in South Africa today, where it distributes pension and welfare payments to
over 3.2 million recipients in five of South Africa’s nine provinces, processes debit and credit card payment transactions on behalf
of retailers through its EasyPay system, processes value-added services such as bill payments and prepaid electricity for the major
bill issuers and local councils in South Africa and provides mobile telephone top-up transactions for the major South African
mobile carriers. The Company also processes third-party payroll payments for employees through its FIHRST system and
provides funders and providers of healthcare with an on-line real-time management system for healthcare transactions through its
MediKredit service. Through KSNET, the Company offers card processing, payment gateway (“PG”) and banking value-added
services (“VAN”) in Korea.
Basis of presentation
The accompanying consolidated financial statements include subsidiaries over which Net1 exercises control and have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The financial statements of entities which are controlled by Net1, referred to as subsidiaries, are consolidated. Inter-company
accounts and transactions are eliminated upon consolidation.
The Company, if it is the primary beneficiary, consolidates entities which are considered to be variable interest entities
(“VIE”). The primary beneficiary is considered to be the entity that will absorb a majority of the entity's expected losses, receive a
majority of the entity's expected residual returns, or both. No entities were required to be consolidated in terms of these
requirements during the years ended June 30, 2011 and 2010.
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
Office equipment
Vehicles
Furniture and fittings
Plant and equipment
3 to 5 years
2 to 10 years
4 to 8 years
5 to 10 years
5 to 10 years
F-10
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment (continued)
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognized in income.
Leasehold improvement costs
Costs incurred in the adaptation of leased properties to serve the requirements of the Company are capitalized and amortized
over the shorter of the estimated useful life of the asset and the remaining term of the lease.
Sales taxes
Revenue and expenses are presented net of sales, use and value added taxes, as the case may be.
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. During the years ended June 30, 2011, 2010
and 2009, the income tax rate was 28%, but upon distribution an additional tax (“STC”) of 10% was 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 for the year ended June 30, 2011, 2010 and 2009 using a combined rate of 34.55%.
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.
Uncertain tax positions are recognized in the financial statements for positions which are considered more likely than not of
being sustained based on the technical merits of the position on audit by the tax authorities. The measurement of the tax benefit
recognized in the financial statements is based upon the largest amount of tax benefit that, in management’s judgement, is greater
than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.
The Company’s policy is to include interest related to unrecognized tax benefits in interest income, net and penalties in
selling, general and administration in the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values of the identifiable assets
acquired and liabilities assumed. The Company tests for impairment of goodwill on an annual basis and at any other time if events
or circumstances change that would more likely than not reduce the fair value of the reporting unit goodwill below its carrying
amount.
Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the
business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel;
the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; and results of
testing for recoverability of a significant asset group within a reporting unit.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill (continued)
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recorded in the statement of operations. Measurement of the fair value of a reporting unit is based on one or more of the following
fair value measures: the amount at which the unit as a whole could be bought or sold in a current transaction between willing
parties; present value techniques of estimated future cash flows; or valuation techniques based on multiples of earnings or
revenue, or a similar performance measure.
Intangible assets
Intangible assets are shown at cost less accumulated amortization. Intangible assets are amortized over the following useful
lives:
Customer relationships
Software and unpatented technology
FTS patent
Exclusive licenses
Trademarks
Customer databases
1 to 15 years
3 to 5 years
10 years
7 years
3 to 20 years
3 years
Intangible assets are periodically evaluated for recoverability, and those evaluations take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Equity-accounted investments
The Company uses the equity method to account for investments in companies when it has significant influence but not
control over the operations of the equity-accounted company. Under the equity method, the Company initially records the
investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-
accounted company’s net income (loss). In addition, dividends received from the equity-accounted company reduce the carrying
value of the Company’s investment.
Inventory
Inventory is valued at the lower of cost and market value. Cost is determined on a first-in, first-out basis and includes
transport and handling costs.
Translation of foreign currencies
The primary functional currency of the Company is the South African Rand (“ZAR”) and its reporting currency is the US
dollar. The Company also has consolidated entities which have the euro, Russian ruble, Korean won (“KRW”) or Indian rupee as
their functional currency. The current rate method is used to translate the financial statements of the Company to US dollar.
Under the current rate method, assets and liabilities are translated at the exchange rates in effect at the balance sheet date.
Revenues and expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated
other comprehensive income in total equity.
Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are
translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in income for the period.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company recognizes revenue when:
•
there is persuasive evidence of an agreement or arrangement;
• delivery of products has occurred or services have been rendered;
•
• collectability is reasonably assured.
the seller’s price to the buyer is fixed or determinable; and
The Company’s principal revenue streams and their respective accounting treatments are discussed below:
Fees
Pension and welfare and South African participating merchants
The Company provides a state welfare benefit distribution service to governmental agencies 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 statement of operations when distributions have been made to the beneficiaries.
Beneficiaries are able to load their welfare grants at merchants enrolled in the Company’s participating retailer program in
certain provinces. There is no charge to the beneficiary to load the grant onto a smart card at the merchant location, however, a fee
is charged to the merchant for purchases made at the merchant using the smart card. A fee is also charged to the merchant when
the beneficiary makes a cash withdrawal. Fee income received for these services is recognized in the statement of operations
when the transaction occurs.
Card VAN, banking VAN and payment gateway
Card VAN services consist of services relating to authorization of credit card transactions including transmission of
transaction details (“authorization service”), and collection of receipts associated with the credit card transactions (“collection
service”). With its authorization service, the Company connects credit card companies with merchants online when a customer
uses his/her credit card via terminals installed at merchants’ sites and the Company’s central processing server for approval of
credit card transactions. Immediately after approval of credit card transactions, the Company transmits details of the transactions
to credit card companies online for processing payments. Collection service captures the transaction data and gathers receipts as
documented evidence and provides them to credit card companies upon request. The Company earns service fees based on the
number of transactions processed for credit card companies when services are rendered in accordance with the contracts entered
into between credit card companies and the Company. The Company bills for its service charges to credit card companies each
month. Each service could be provided either individually or collectively, based on terms of contracts.
The Company charges commission fees to credit card companies for the authorization service provided based on the number
of approvals transferred. The right to receive a service fee is due once a credit card transaction has been approved and details of
the transaction are transmitted by the Company. Therefore, revenues from the authorization service are recognized when the
credit card transactions are authorized and details of the transactions are transmitted. The Company earns a collection service fee
once it has provided settled funds to the credit card companies. Therefore, revenue from the collection service is recognized when
the Company collects the receipts and provides them to the card companies.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Fees (continued)
Card VAN, banking VAN and payment gateway (continued)
For multiple-element arrangements, the Company has identified two deliverables. The first deliverable is the authorization
service, and the second deliverable is the collection service. The Company evaluates each deliverable in an arrangement to
determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has
standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. If the arrangement
includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the
undelivered item is considered probable and substantially in the Company's control, the delivered element constitutes a separate
unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered
elements and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a
single unit. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price.
In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to
deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and
(iii) best estimate of the selling price (“ESP”).
VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the
Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis. Because the Company has neither VSOE nor TPE for the two deliverables, the
allocation of revenue has been based on the Company’s ESPs. Amounts allocated to the authorization and the collection service
are recognized at the time of service provided the other conditions for revenue recognition have been met.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may
vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered by the Company in
developing the ESPs include prices charged by the Company, historical pricing practices and controls, range of prices for various
customers and the nature of the services. Consideration is also given to market conditions such as competitor pricing strategies
and market perception.
Banking VAN is a division supporting a company’s fund management business (large payment transfers, collections, etc.)
by relaying financial transactions between client companies and financial institutions. Financial transactions between two or more
business enterprises, or between business enterprises and their customers, are conducted through the transaction-processing
network established between the Company and the banks. Revenue from the banking VAN service is recognized when the service
is rendered by the Company.
With its PG service, the Company provides the Internet-based settlement service between an on-line shopping mall and a
credit card company when a customer uses his/her credit card, debit card or on-line payment to pay for goods or services. The
Company receives fees for carrying out settlements for electronic transactions. Revenue from the PG service is recognized when
the service is rendered by the Company.
Other fees
The Company provides an automated payment collection service to third parties, for which it charges monthly fees. These
fees are recognized in the statement of operations as the underlying services are performed.
The Company provides medical-related claims adjudication, reconciliation and settlement services (“medical-related claim
service”) to customers, for which it charges fees. These fees are recognized in the statement of operations as the underlying
services are performed.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Contract variations fees
The Company records additional revenue from variations to contracts for the provision of state welfare benefits, if:
there is persuasive evidence of an agreement; and
•
• collectability is reasonably assured; and
• all material terms and conditions of the agreement have been adhered to.
Hardware sales
Revenue from hardware sales is recognized when risk of loss has transferred to the customer and there are no unfulfilled
Company obligations that affect the customer’s final acceptance of the arrangement. Any cost of warranties and remaining
obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
The Company buys terminals from manufacturers, and subsequently sells them through its agencies. Revenue is recognized
when significant risks and rewards of ownership of terminals have passed to the buyer, usually on delivery of the terminals to the
buyer.
To the extent that sales of hardware are made in an arrangement that includes software that is more than incidental, the
Company considers post-contract maintenance and technical support or other future obligations which could impact the timing
and amount of revenue recognized.
Software
Revenue from licensed software is recognized on a subscription basis over the period that the client is entitled to use the
license. Revenue from the sale of software is recognized if all revenue recognition criteria have been met. Post-contract
maintenance and technical support in respect of software is generally negotiated and sold as a separate service and is recognized
over the period such items are delivered.
Interest income
Interest income earned from micro-lending activities is recognized in the statement of operations as it falls due, using the
effective interest rate method by reference to the constant interest rate stated in each loan agreement. Fees earned for establishing
loans are recognized over the period of the loan as interest income.
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 statement of operations 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 percentage of completion method, save for annual license fees, which are
recognized in the period to which they relate. Up-front and interim payments received are recorded as client deposits until
customer acceptance.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Systems implementation projects (continued)
The Company’s customer arrangements may have multiple deliverables. Generally, the Company’s multiple element
arrangements fall within the scope of specific accounting standards that provide guidance regarding the separation of elements in
multiple-deliverable arrangements and the allocation of consideration among those elements. If not, the Company unbundles
multiple element arrangements into separate units of accounting when the delivered element(s) has stand-alone value and fair
value of the undelivered element(s) exists.
Terminal rental income
The Company leases terminals to merchants participating in its merchant acquiring system. Operating rental income is
recognized monthly on a straight-line basis in accordance with the lease agreement.
Other income
Revenue from service and maintenance activities is charged to customers on a time-and-materials basis and is recognized in
the statement of operations as services are delivered to customers.
Research and development expenditure
Research and development expenditures is charged to net income in the period in which it is incurred. During the years
ended June 30, 2011, 2010 and 2009, the Company incurred research and development expenditures of $5.7 million, $7.6 million
and $8.9 million, respectively.
Computer software development
Product development costs in respect of software intended for sale to licensees are expensed as incurred until technological
feasibility is attained. Technological feasibility is attained when the Company’s software has completed system testing and has
been determined to be viable for its intended use. The time between the attainment of technological feasibility and completion of
software development is generally short with immaterial amounts of development costs incurred during this period.
Costs in respect of the development of software for the Company’s internal use are expensed as incurred, except to the
extent that these costs are incurred during the application development stage. All other costs including those incurred in the
project development and post-implementation stages are expensed as incurred.
Settlement assets and settlement obligations
Settlement assets comprise (1) cash received from the South African government that the Company holds pending
disbursement to beneficiaries of social welfare grants, (2) cash received from health care plans which the Company disburses to
health care service providers once it adjudicates claims and (3) cash received from customers on whose behalf the Company
processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees
designated by the customer.
Settlement obligations comprise (1) amounts that the Company is obligated to disburse to beneficiaries of social welfare
grants, (2) amounts which are due to health care service providers after claims have been adjudicated and reconciled, provided
that the Company shall have previously received such funds from health care plan customers and (3) amounts that the Company is
obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Loan provisions and allowance for doubtful debts
UEPS-based lending
No provision is required for UEPS-based lending. The principal amount of the loan is insured and the amount due to be
recovered from the insurer is recorded as a receivable once the amount is deemed unrecoverable. Default is considered when the
beneficiary dies or can not be found. Once the loan is deemed unrecoverable, service fees related to the unrecoverable insured
loan is not recognized.
Traditional microlending
The Company sold its traditional microlending business during fiscal 2009. Prior to disposition of this business, a specific
provision was established for all traditional microlending loans where it was considered likely that all or a portion of the principal
amount of the loan or interest thereon would not be repaid by the borrower. Default was considered likely after a specified period
of repayment default, which was generally not more than 150 days. The provision was assessed based on a review by
management of the ageing of outstanding amounts, the payment history in relation to those specific accounts and the overall
default history.
Allowance for doubtful debts
A specific provision is established where it is considered likely that all or a portion of the amount due from customers
renting point of sale (“POS”) equipment, receiving support and maintenance or transaction services or purchasing licenses from
the Company will not be recovered. Non-recoverability is assessed based on a review by management of the ageing of
outstanding amounts, the location of the customer and the payment history in relation to those specific amounts.
Stock-based compensation
Stock-based compensation represents the cost related to stock-based awards granted. The Company measures stock-based
compensation cost at the grant date, based on the estimated fair value of the award, and recognizes the cost as an expense on a
straight-line basis (net of estimated forfeitures) over the requisite service period. In respect of awards with only service conditions
that have a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over the requisite service
period for the entire award. The forfeiture rate is estimated using historical trends of the number of awards forfeited prior to
vesting. The expense is recorded in the statement of operations and classified based on the recipients’ respective functions.
The Company records deferred tax assets for awards that result in deductions on the Company’s income tax returns, based
on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it will receive a
deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction
reported on the Company’s income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred
tax asset) or in the statement of operations (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital
exists from previous awards).
Recent accounting pronouncements adopted
The following summary of recent accounting pronouncements reflects only the new authoritative accounting guidance
issued that is relevant and applicable to the Company.
On July 1, 2010, the Company adopted the new Financial Accounting Standards Board (“FASB”) guidance on the
consolidation of variable interest entities. This guidance changed how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and
design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s
economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to such involvement. The adoption of this guidance did
not have an impact on the Company’s consolidated financial statements.
F-17
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements adopted (continued)
On July 1, 2010, the Company adopted the new FASB guidance issued on the accounting for transfers of financial assets.
This guidance requires more information about transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for de-recognizing financial assets, and requires additional disclosures. The
adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
On July 1, 2010, the Company adopted the new FASB guidance on revenue recognition in multiple-deliverable revenue
arrangements. The guidance amended the existing guidance on allocating consideration received between the elements in a
multiple-deliverable arrangement and established a selling price hierarchy for determining the selling price of a deliverable.
The selling price used for each deliverable will be based on VSOE if available, third-party evidence if VSOE is not available,
or estimated selling price if neither VSOE nor third-party evidence is available. The guidance replaced the term “fair value” in
the revenue allocation with “selling price” to clarify that the allocation of revenue is based on entity specific assumptions
rather than the assumptions of a market place participant. The guidance eliminates the residual method of allocation and
requires that arrangement consideration be allocated using the relative selling price method. It also significantly expands the
disclosures related to a vendor’s multiple-deliverable revenue arrangements. The adoption of this guidance did not have an
impact on the Company’s consolidated financial statements for the periods presented.
On July 1, 2010, the Company adopted the new FASB guidance which amended the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software components that function
together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and
accounted for based on other appropriate revenue recognition guidance. This guidance must be adopted in the same period that
the company adopts the amended guidance for arrangements with multiple deliverables described in the preceding paragraph.
The adoption of this guidance did not have an impact on the Company’s consolidated financial statements for the periods
presented.
On July 1, 2010, the Company adopted new FASB guidance on the effect of denominating the exercise price of a share-
based payment award in the currency of the market in which the underlying equity security trades. This guidance clarifies that
an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial
portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance,
or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The
adoption of this guidance did not have an impact on the Company’s consolidated financial statements for the periods presented.
On January 1, 2011, the Company adopted new FASB guidance related to disclosure of supplementary pro forma
information for business combinations. The guidance specifies that if a public entity presents comparative financial statements,
the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during
the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance is effective
prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. The adoption of this guidance has impacted the presentation of the Company’s
pro forma information for the business combination disclosed in note 3.
In December 2010, the FASB issued guidance regarding Step 2 of the goodwill impairment test for reporting units with zero
or negative carrying amounts. The guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts and requires the company to perform Step 2 if it is more likely than not that a goodwill impairment
may exist. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2010.
Early adoption is not permitted. The Company will adopt the authoritative guidance on July 1, 2011 and is currently assessing the
impact on its consolidated financial statements.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements not yet adopted as of June 30, 2011
In May 2011, the FASB issued guidance regarding fair value measurement amendments to achieve common fair value
measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”). The guidance
improves the comparability of fair value measurements presented and disclosed in accordance with GAAP and IFRSs by
changing the wording used to describe many of the requirements in GAAP for measuring fair value and disclosure of information.
The amendments to this guidance provide explanations on how to measure fair value but do not require any additional fair value
measurements and do not establish valuation standards or affect valuation practices outside of financial reporting. The
amendments clarify existing fair value measurements and disclosure requirements to include application of the highest and best
use and valuation premises concepts; measuring fair value of an instrument classified in a reporting entity’s equity; and
disclosures requirements regarding quantitative information about unobservable inputs categorized within Level 3 of the fair
value hierarchy. In addition, clarification is provided for measuring the fair value of financial instruments that are managed in a
portfolio and the application of premiums and discounts in a fair value measurement. The guidance is effective for fiscal years
and interim periods within those years, beginning after December 15, 2010. We do not expect this guidance to have a significant
impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued guidance regarding the presentation of comprehensive income. The guidance improves the
comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other
comprehensive income. The amendments to the guidance requires entities to present the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Entities are no longer permitted to present components of
other comprehensive income as part of the statement of changes in equity. Any adjustments for items that are reclassified from
other comprehensive income to net income are to be presented on the face of the entities' financial statement regardless of the
method of presentation for comprehensive income. The amendments do not change items to be reported in comprehensive income
or when an item of other comprehensive income must be reclassified to net income, nor do the amendments change the option to
present the components of other comprehensive income either net of related tax effects or before related tax effects. This guidance
is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011. The Company
currently presents its comprehensive income in a single continuous statement of comprehensive income and therefore the
adoption of this guidance will not impact its presentation of comprehensive income.
3.
ACQUISITIONS
2011 acquisitions
98.73% of KSNET Inc. (“KSNET”)
On October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately $240 million based on exchange
rates on October 29, 2010), subject to post-closing working capital adjustment which is still being determined between the
Company and the former shareholders of KSNET. The acquisition of KSNET expands the Company’s international footprint as
well as diversifies the Company’s revenue, earnings and product portfolio.
Most of KSNET’s revenue is derived from the provision of payment processing services to approximately 200,000
merchants and to card issuers in Korea through its VAN. KSNET has a diverse product offering and the Company believes it is
the only total payments solutions provider offering card VAN, PG and banking VAN services in Korea, which differentiates
KSNET from other Korean payment solution providers and allows it to cross-sell its products across its customer base.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2011 acquisitions (continued)
98.73% of KSNET Inc. (“KSNET”) (continued)
The following table sets forth the preliminary allocation of the purchase price:
Cash and cash equivalents
Accounts receivable, net
Inventory
Current deferred tax assets
Settlement assets
Long-term receivable
Property, plant and equipment, net
Goodwill (Note 9)
Intangible assets, net (Note 9)
Other long-term assets
Trade payables
Other payables
Income taxes payable
Settlement obligations
Long-term deferred income tax liabilities (Note 16)
Other long-term liabilities
Total net assets of KSNET attributable to shareholders, including goodwill
Less attributable to non-controlling interest
Total purchase price
$10,507
28,748
2,788
911
13,164
288
24,052
120,139
102,829
6,324
(9,643)
(14,093)
(3,363)
(13,164)
(24,459)
(1,199)
243,829
(3,097)
$240,732
The preliminary purchase price allocation is based on management estimates as of June 30, 2011, and may be adjusted up to
one year following the closing of the acquisition. The purchase price allocation has not been finalized, as management has not yet
analyzed in detail the assets acquired and liabilities assumed. The Company expects to finalize the purchase price allocation on or
before September 30, 2011.
The Company incurred transaction-related expenditures of $5.6 million, respectively, during the year ended June 30, 2011,
related to this acquisition and expects to incur some additional expenses during the three months ending September 30, 2011. The
Company is currently unable to quantify the amount of these additional expenditures.
The results of KSNET’s operations are reflected in the Company’s financial statements from November 1, 2010. The
following unaudited pro forma revenue, net income and per share information has been prepared as if the acquisition of KSNET
had occurred on July 1, 2009:
Unaudited
Year ended
June 30,
2011
2010
Revenue .................................................................................. $375,336
3,261
Net income .............................................................................
$342,521
22,109
Earnings per share – basic in United States dollars ................
Earnings per share – diluted in United States dollars .............
0.07
$0.07
0.48
$0.48
F-20
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2011 acquisitions (continued)
98.73% of KSNET Inc. (“KSNET”) (continued)
The unaudited pro forma financial information presented above includes the business combination accounting and other
effects from the acquisition including (1) amortization expense related to acquired intangibles and the related deferred tax; (2) the
loss of interest income, net of taxation, as a result of funding a portion of the purchase price in cash; (3) an increase in interest
expense resulting from the long-term borrowing obtained to fund a portion of the purchase price and (4) an adjustment to exclude
all applicable transaction-related costs recognized in the Company’s consolidated statements of operations for the year ended June
30, 2010. The unaudited pro forma net income and per share information presented above does not include any cost savings or
other synergies that may result from the acquisition.
The unaudited pro forma information as presented above is for informational purposes only and is not indicative of the
results of operations that would have been achieved if the acquisition had occurred on these dates.
Since the closing of the acquisition, KSNET has contributed revenue of $68.4 million and a net loss, including transaction-
related interest and intangible assets amortization related to assets acquired, net of deferred taxes, of $4.1 million.
19.9% of Net1 Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard Systems AG (“Net1 UTA”)
On December 23, 2010, the Company acquired the remaining 19.9% of the issued share capital of Net 1 Universal
Technologies (Austria) AG (“Net1 UTA”) for $0.6 million in cash. The Company now owns 100% of Net1 UTA. The transaction
was accounted for as an equity transaction with a non-controlling interest and accordingly, no gain or loss was recognized in the
Company’s consolidated statement of operations. The carrying amount of the non-controlling interest was adjusted to reflect the
change in ownership interest in Net1 UTA. The difference between the fair value of the consideration paid and the amount by
which the non-controlling interest was adjusted, of $0.9 million, was recognized in equity attributable to Net1.
2010 Acquisitions
MediKredit Integrated Healthcare Solutions (Proprietary) Limited (“MediKredit”)
On January 1, 2010, the Company acquired 100% of MediKredit, a South African private company, for ZAR 74 million
(approximately $10 million) in cash. MediKredit offers transaction processing, financial and clinical risk management solutions to
both health care plans and health care service providers, primarily in South Africa. The Company believes that the acquisition of
MediKredit has increased the depth and diversity of the management team with the addition of experienced executives, and
provides the potential to strengthen its position as the leading independent transaction processor in South Africa and expand its
offering in some of its existing markets like Ghana and Nigeria, where national health insurance schemes have been introduced
and where the UEPS platform and installed card base could offer a complete national solution when combined with the
MediKredit system. In addition, MediKredit provides the Company with a small, strategic entry point for the US healthcare
administration market. The rapidly changing US healthcare and administration industry provides a significant opportunity for the
introduction of MediKredit’s technology. Finally, the Company and MediKredit both operate similar back-end systems, which
require skilled developers and technicians and the addition of MediKredit would significantly broaden the Company’s base of
qualified development employees.
FIHRST Management Services (Proprietary) Limited business and related software (collectively “FIHRST”)
On March 31, 2010, the Company acquired FIHRST, a South African business, for ZAR 70 million (approximately $9
million). FIHRST offers a third-party payroll payments solution to companies in South Africa.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2010 Acquisitions (continued)
FIHRST Management Services (Proprietary) Limited business and related software (collectively “FIHRST”)
(continued)
The FIHRST acquisition provides the Company with access to employees of FIHRST’s customers which the Company
believes will provide it with the opportunity to market its range of transaction processing products and financial services,
including bill payments, insurance products, prepaid utilities and third-party payments to these employees. The Company will
have the potential to promote its wage payment initiative by offering the employees of FIHRST customers its banking solutions
through the Company’s relationship with Grindrod Bank. Finally, the Company and FIHRST operate on different IT platforms,
which will result in additional resources with complementary IT skills. The Company may also realize IT-related cost synergies in
areas such as disaster recovery and computer maintenance and support.
The preliminary purchase price allocation of the MediKredit and FIHRST acquisitions, translated at the foreign exchange
rates applicable on the date of acquisition, are provided in the table below:
Cash and cash equivalents
Accounts receivable, net
Property, plant and equipment
Intangible assets (see Note 9)
Trade and other payables
Deferred tax assets
Deferred tax liabilities (see Note 16)
Goodwill (see Note 9)
Total purchase price
MediKredit
$9,005
2,940
1,290
6,070
(9,931)
2,718
(2,097)
-
$9,995
FIHRST
$77
640
106
7,983
(337)
436
(623)
1,187
$9,469
Total
$9,082
3,580
1,396
14,053
(10,268)
3,154
(2,720)
1,187
$19,464
Pro forma results of operations have not been presented because the effect of the MediKredit and FIHRST acquisitions,
individually and in the aggregate, were not material to the Company’s consolidated results of operations. During the year ended
June 30, 2010, the Company incurred transaction-related expenditures of $0.4 million related to these acquisitions. Such
expenditures were recognized in the Company’s consolidated statements of operations.
2009 Acquisitions
Net1 UTA
On August 27, 2008, the Company acquired 80.1% of the issued share capital of Net1 UTA for a total consideration of
$101.6 million in cash and the issuance of an aggregate of 40,134 shares of Net1 common stock to certain former Net1 UTA
shareholders. The Company financed the cash portion of the purchase price with the proceeds of a short-term bank loan which
was repaid in full on October 16, 2008. For practical purposes the acquisition date was set as August 31, 2008.
The following table sets forth the components of the purchase price for the Net1 UTA acquisition using exchange rates
applicable as of August 31, 2008:
Cash paid to former Net1 UTA shareholders
40,134 shares of Net1 common stock valued at $24.46 per share issued to certain former Net1
UTA shareholders
Costs directly related to the acquisition
Total purchase price
$103,517
982
2,915
$107,414
F-22
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
3.
ACQUISITIONS (continued)
2009 Acquisitions (continued)
Net1 UTA (continued)
The following table sets forth the allocation of the purchase price:
Cash and cash equivalents
Accounts receivable, net
Inventory
Property, plant and equipment
Intangible assets (see Note 9)
Trade and other payables
Other long-term liabilities
Deferred tax assets
Deferred tax liabilities (see Note 16)
Minority interests
Goodwill (see Note 9)
Total purchase price
$6,283
3,218
740
350
68,859
(7,181)
(631)
10,657
(17,214)
(1,838)
44,171
$107,414
RMT Systems (Pty) Limited (“RMT”)
During the fourth quarter of fiscal 2009, the Company acquired all the stock of RMT, a South African private company, for
a total consideration of $1.4 million in cash. RMT Systems sells prepaid electricity in the greater Cape Town area in South Africa.
The Company has integrated this offering into its EasyPay switching offering. The balance sheet, statement of operations and
cash flows of RMT are not significant to the Company.
4.
PRE-FUNDED SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants
participating in the merchant acquiring system. The July 2011 payment service commenced during the last four days of June 2011
and was offered at merchant locations only.
5.
ACCOUNTS RECEIVABLE, net
Accounts receivable, trade, net .....................................................................................
Accounts receivable, trade, gross..............................................................................
Allowance for doubtful accounts receivable, end of year .........................................
Allowance for doubtful accounts receivable, beginning of year re-measured at year
end rates ................................................................................................................
Allowance reversed to statement of operations, re-measured at year end rates ....
Allowance acquired in acquisitions, re-measured at year end rates ......................
Allowance charged to statement of operations, re-measured at year end rates .....
Amount utilized, re-measured at year end rates ....................................................
Prepaid establishment costs related to Grindrod opportunity .......................................
Other receivables ..........................................................................................................
Total accounts receivable, net ...................................................................................
2011
$42,197
42,925
728
902
(47)
190
364
(681)
175
40,408
$82,780
2010
$31,593
32,400
807
407
-
75
640
(315)
385
9,876
$41,854
F-23
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
5.
ACCOUNTS RECEIVABLE, net (continued)
Receivables from customers renting POS equipment from the Company are included in accounts receivable, trade, and are
stated net of an allowance for certain amounts that the Company’s management has identified may be unrecoverable. Accounts
receivable, trade, also includes amounts due by customers from the sale of hardware, software licenses and SIM cards and
provision of transaction processing services. The allowances for credit losses acquired in the KSNET transactions are presented in
the tables above, stated at exchange rates prevailing at June 30, 2011.
The Company has a co-operation agreement with Grindrod Bank Limited (“Grindrod”) for the establishment of a retail
banking division within Grindrod that will focus on deploying its wage payment solution in South Africa.
Cash payments to agents in Korea are amortized over the contract period with the agent. As of June 30, 2011, other
receivables includes approximately $16.8 million related to these prepayments.
6.
INVENTORY
The Company’s inventory comprised the following categories as of June 30, 2011 and 2010.
Raw materials ........................................................................................
Finished goods.......................................................................................
2011
2010
$24
6,701
$6,725
$75
3,547
$3,622
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS
Fair value of financial instruments
Initial recognition and measurement
Financial instruments are recognized when the Company becomes a party to the transaction. Initial measurements are at cost,
which includes transaction costs subsequent to initial recognition. These instruments are measured as set out below:
Risk management
The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in
order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company
is also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other
currencies, primarily the euro and US dollar. The Company has used forward contracts in order to limit its exposure in these
transactions to fluctuations in exchange rates between the South African rand, on the one hand, and the US dollar and the euro, on
the other hand.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
Currency exchange risk (continued)
The Company’s outstanding foreign exchange contracts are as follows:
As of June 30, 2011
None.
As of June 30, 2010
Notional amount
EUR
EUR
207,000
31,200
Strike price
ZAR
ZAR
10.1107
9.5976
Translation risk
Fair market
value price
ZAR
ZAR
Maturity
July 30, 2010
9.4802
9.5080 October 9, 2010
Translation risk relates to the risk that the Company’s results of operations will vary significantly as the US dollar is its
reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR exchange rate
has fluctuated significantly over the past two years. As exchange rates are outside the Company’s control, there can be no
assurance that future fluctuations will not adversely affect the Company’s results of operations and financial condition.
Interest rate risk
As a result of its normal borrowing and leasing activities, the Company’s operating results are exposed to fluctuations in
interest rates, which it manages primarily through regular financing activities. The Company generally maintains limited
investment in cash equivalents and has occasionally invested in marketable securities.
Credit risk
Credit risk relates to the risk of loss that the Company would incur as a result of non-performance by counterparties. The
Company maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterparty’s financial condition, credit rating, and other credit criteria and risk mitigation tools as the
Company’s management deems appropriate.
With respect to credit risk on financial instruments, the Company maintains a policy of entering into such transactions only
with South African and European financial institutions that have a credit rating of BBB or better, as determined by credit rating
agencies such as Standard & Poor’s, Moody’s and Fitch Ratings.
Microlending credit risk
The Company was exposed to credit risk in its microlending activities, which provides unsecured short-term loans to
qualifying customers. The Company manages 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.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair value of financial instruments (continued)
Risk management (continued)
Equity Price and Liquidity Risk
Equity price risk relates to the risk of loss that the Company would incur as a result of the volatility in the exchange-traded
price of equity securities that it holds and the risk that it may not be able to liquidate these securities. On March 1, 2009, the
Company acquired approximately 22% of the issued share capital of Finbond Group Limited (“Finbond”), which are exchange-
traded equity securities. The fair value of these securities as of June 30, 2011, represented approximately 1% of the Company’s
total assets, including these securities. The Company expects to hold these securities for an extended period of time and it is not
concerned with short-term equity price volatility with respect to these securities provided that the underlying business, economic
and management characteristics of the company remain sound. The market price of these securities may fluctuate for a variety of
reasons, consequently, the amount the Company may obtain in a subsequent sale of these securities may significantly differ from
the reported market value.
Liquidity risk relates to the risk of loss that the Company would incur as a result of the lack of liquidity on the exchange on
which these securities are listed. The Company may not be able to sell some or all of these securities at one time, or over an
extended period of time without influencing the exchange traded price, or at all.
Financial instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-
performance risk including the Company’s own credit risk.
Fair value measurements and inputs are categorized into a fair value hierarchy which prioritizes the inputs into three levels
based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is
reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in
its entirety.
These levels are:
• Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
• Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
• Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following section describes the valuation methodologies the Company uses to measure financial assets and liabilities at
fair value.
F-26
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial instruments (continued)
Investments in common stock
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to
determine fair value. This pricing methodology would apply to Level 1 investments. If quoted prices in active markets for
identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and
liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would
be included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect
management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3 investments.
The Company's Level 3 asset represents an investment of 84,632,525 shares of common stock of Finbond. The Company’s
ownership interest in Finbond as of June 30, 2011, is approximately 22%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also has no participation on Finbond’s board of
directors whether through contractual agreement or otherwise. Consequently, the Company has concluded that it does not have
significant influence over Finbond and therefore equity accounting is not appropriate.
Finbond’s shares are traded on the JSE Limited (“JSE”) and the Company has designated such shares as available for sale
investments. The Company has concluded that the market for Finbond shares is not active and consequently has employed
alternative valuation techniques in order to determine the fair value of such stock. Currently, the operations of Finbond include
primarily mortgage brokering services, property investment and microlending. In determining the fair value of Finbond, the
Company has considered amongst other things Finbond’s historical financial information (including its most recent public
accounts), press releases issued by Finbond and its published net asset value. The Company believes that the best indicator of fair
value of Finbond is its published net asset value and has used this value to determine the fair value.
Derivative transactions - Foreign exchange contracts
As part of the Company’s risk management strategy, the Company enters into derivative transactions to mitigate exposures
to foreign currencies using foreign exchange contracts. These foreign exchange contracts are over-the-counter customized
derivative transactions. Substantially all of the Company’s derivative exposures are with counterparties that have long-term credit
ratings of BBB or better. The Company uses quoted prices in active markets for similar assets and liabilities to determine fair
value. The Company has no derivatives that require fair value measurement under level 1 or 3 of the fair value hierarchy.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30,
2011 according to the fair value hierarchy:
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Investment in common stock
(available for sale assets included in
OTHER LONG-TERM ASSETS) ..
Total assets at fair value ..............
-
-
$275
$275
$8,161
$8,161
$8,436
$8,436
F-27
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial instruments (continued)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30,
2010 according to the fair value hierarchy:
Quoted
Price in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
-
-
-
-
-
-
$17
$17
$7,299
$7,299
$7,299
$7,299
-
-
$17
$17
Assets
Investment in common stock
(available for sale assets included in
OTHER LONG-TERM ASSETS) ..
Total assets at fair value ..............
Liabilities
Foreign exchange contracts ............
Total liabilities at fair value ........
Trade and other receivables
Trade and other receivables originated by the Company are stated at cost less allowance 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.
Assets and liabilities measured at fair value on a nonrecurring basis
The Company measures its equity-accounted investments at fair value on a nonrecurring basis. The Company has no
liabilities that are measured at fair value on a nonrecurring basis. These equity-accounted investments are recognized at fair value
when they are deemed to be other-than-temporarily impaired.
The Company reviews the carrying values of its investments when events and circumstances warrant and considers all
available evidence in evaluating when declines in fair value are other-than-temporary. The fair values of the Company’s
investments are determined using the best information available, and may include quoted market prices, market comparables, and
discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and the
excess is determined to be other-than-temporary. The Company has not recorded any impairment charges during the reporting
periods presented herein.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial instruments (continued)
Assets and liabilities measured at fair value on a nonrecurring basis (continued)
The Company owns 50% of the ordinary shares in, and loans extended to, each of SmartSwitch Namibia (Proprietary)
Limited (“SmartSwitch Namibia”) and SmartSwitch Botswana (Proprietary) Limited (“SmartSwitch Botswana”). The Company
has determined that each of these entities is a VIE, as the loan to the entity represents a variable interest but that in each case, the
Company is not the primary beneficiary. Therefore, the Company has not consolidated these entities and has accounted for these
investments using the equity method. The interest earned by the Company on the loans to each of the entities has been eliminated.
The Company also owns a 37.50% interest in the issued and outstanding ordinary share capital of VTU De Colombia S.A. (“VTU
Colombia”). In February 2010, the Company’s investment in VTU Colombia was diluted from 50% to 37.50% due to the
admission of a new independent shareholder. In addition, VTU Colombia admitted another new independent shareholder in April
2011 which has resulting in a dilution of the Company’s investment to approximately 20%. The funds received from these new
shareholders by VTU Colombia were used to fund its continuing operations.
The Company sold its 30% interest in the issued and outstanding ordinary share capital of Vietnam Payment Technologies
Joint Stock Company (“VinaPay”) in April 2011. The Company received gross proceeds of approximately $0.15 million and
recognized a profit on sale of this investment of approximately $0.02 million.
During the year ended June 30, 2011, SmartSwitch Namibia commenced repaying its outstanding loans, including
outstanding interest. The repayments received have been allocated to the equity-accounted investments presented in our
consolidated balance sheet as of June 30, 2011, and reduce this balance. The cash inflow from principal repayments have been
allocated to cash flows from investing activities and the cash inflow from the interest repayments have been included in cash flow
from operating activities in our consolidated statement of cash flows for the year ended June 30, 2011.
During the year ended June 30, 2011, SmartSwitch Botswana capitalized all shareholder loan funding provided and
shareholders agreed to waive all interest on these loans. The net effect of the reversal of the interest and related foreign exchange
effects are included in the Company’s consolidated statements of operations for the year ended June 30, 2011.
In July 2010, the Company provided additional loan funding of $375,000 for a specific growth initiative at VTU Colombia.
As of June 30, 2011, the Company’s share in VTU Colombia’s accumulated losses continued to exceed its investment. VTU
Colombia’s has recently admitted a new shareholder, and the funds received from this shareholder will be used for continuing
operations and the Company has no obligation to provide any additional funding at this stage.
The Company has sold hardware, software and/or licenses to SmartSwitch Namibia and SmartSwitch Botswana and defers
recognition of 50% of the net income after tax related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third-party. The deferral of the net income after tax is shown in the Elimination column
in the table below.
The functional currency of the Company’s equity-accounted investments is not the US dollar and thus the investments are
translated at the period end US dollar/foreign currency exchange rate with an entry against accumulated other comprehensive
loss. The functional currency of SmartSwitch Namibia is the Namibian dollar, the functional currency of SmartSwitch Botswana
is the Botswana pula, the functional currency of VTU Colombia is the Colombian peso and the functional currency of VinaPay is
the Vietnamese dong.
F-29
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial instruments (continued)
Assets and liabilities measured at fair value on a nonrecurring basis
Summarized below is the Company’s interest in equity-accounted investments as of June 30, 2011 and 2010:
Earnings
(Loss)
$(3,905)
-
Total
Loans
Equity
$3,549
-
Elimination
$442
-
-
(292)
-
-
-
-
1,015
$2,512
375
(475)
-
(1,015)
Balance as of June 30, 2010 ..............
Loans provided ..............................
Loan repaid ....................................
Interest repaid ................................
Loans converted to equity ..............
(Loss) Earnings from equity-
accounted investments ......................
SmartSwitch Namibia(1) ..............
SmartSwitch Botswana(1) ............
VTU Colombia(1) .........................
VinaPay(1) ....................................
Sale of VinaPay ................................
Proceeds – sale of VinaPay .........
Profit on sale of VinaPay ............
Foreign currency adjustment(2) ..........
Balance as of June 30, 2011 ..............
(1) – includes the recognition of realized net income.
(2) – the foreign currency adjustment represents the effects of the combined net currency fluctuations between the functional currency of
(268)
187
347
(729)
(73)
443
-
-
(98)
$(3,828)
-
-
-
-
-
(579)
-
-
66
$4,051
(339)
257
(74)
(449)
(73)
136
150
(14)
129
$1,860
-
-
-
-
-
-
-
-
233
$1,630
(71)
70
(421)
280
-
-
-
-
(72)
$7
$2,598
375
(475)
(292)
-
the equity-accounted investments and the US dollar.
Equity
$3,467
Loans
Earnings
(Loss)
$(3,451)
Elimination
$99
Total
$2,468
Balance as of June 30, 2009 ..............
(Loss) Earnings from equity-
accounted investments ......................
SmartSwitch Namibia(1) ..............
SmartSwitch Botswana(1) ............
VTU Colombia(1) .........................
VinaPay(1) ....................................
Foreign currency adjustment(2) ..........
Balance as of June 30, 2010 ..............
(1) – includes the recognition of realized net income.
(2) – the foreign currency adjustment represents the effects of the combined net currency fluctuations between the functional currency of
(271)
40
(194)
24
(141)
(183)
$(3,905)
93
160
50
24
(141)
(78)
$2,598
-
-
-
-
-
44
$2,512
-
-
-
-
-
82
$3,549
364
120
244
-
-
(21)
$442
$2,583
the equity-accounted investments and the US dollar.
F-30
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
8.
PROPERTY, PLANT AND EQUIPMENT, net
Cost:
Land ....................................................................................
Building and structures .......................................................
Computer equipment ..........................................................
Furniture and office equipment ...........................................
Motor vehicles ....................................................................
Plant and equipment ...........................................................
Accumulated depreciation:
Land ....................................................................................
Building and structures .......................................................
Computer equipment ..........................................................
Furniture and office equipment ...........................................
Motor vehicles ....................................................................
Plant and equipment ...........................................................
Carrying amount:
Land ....................................................................................
Building and structures .......................................................
Computer equipment ..........................................................
Furniture and office equipment ...........................................
Motor vehicles ....................................................................
Plant and equipment ...........................................................
9.
GOODWILL AND INTANGIBLE ASSETS, net
Goodwill
2011
2010
$910
499
64,411
8,297
8,824
2,873
85,814
-
29
33,417
6,378
7,745
2,438
50,007
910
470
30,994
1,919
1,079
435
$35,807
$-
-
25,528
6,822
7,541
2,666
42,557
-
-
21,482
5,013
6,632
2,144
35,271
-
-
4,046
1,809
909
522
$7,286
Summarized below is the movement in the carrying value of goodwill for the years ended June 30, 2011 and 2010:
Balance as of July 1, 2009 ......................................................................................................
Acquisitions(1) .....................................................................................................................
Impairment of goodwill ......................................................................................................
Foreign currency adjustment (2) ..........................................................................................
Balance as of June 30, 2010 ...................................................................................................
Acquisition of KSNET (3) ...................................................................................................
Foreign currency adjustment (2) ..........................................................................................
Balance as of June 30, 2011 ...................................................................................................
Carrying
value
$116,197
1,187
(37,378)
(3,660)
76,346
120,139
13,085
$209,570
(1) – represents goodwill arising from the acquisition of FIHRST and translated at the foreign exchange rates applicable on
the date the transactions became effective. This goodwill has been allocated to the South African transaction-based activities
operating segment (see Note 3).
(2) – the foreign currency adjustment represents the effects of the fluctuations between the South African rand and the euro,
and the US dollar on the carrying value.
(3) – represents goodwill arising from the acquisition of KSNET and translated at the foreign exchange rate applicable on
the date the transactions became effective. This goodwill has been allocated to the international transaction-based activities
operating segment (see Note 3).
Goodwill associated with the acquisitions of KSNET and FIHRST represents the excess of cost over the fair value of
acquired net assets. The KSNET and FIHRST goodwill is not deductible for tax purposes. See note 3 for the allocation of the
purchase price to the fair value of acquired net assets.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Goodwill (continued)
The Company assesses the carrying value of goodwill for impairment annually, or more frequently, whenever events occur
and circumstances change indicating potential impairment. The Company performs its annual impairment test as at June 30 of
each year. The results of our impairment tests during the year ended June 30, 2011, indicated that the fair value of the Company’s
reporting units exceeded their carrying values and therefore the Company’s reporting units were not at risk of potential
impairment. During the fourth quarter of 2010 the Company determined that the carrying value of goodwill of the hardware,
software and related technology sales segment reporting unit exceeded the fair value and, as a result, recorded an impairment loss
of $37.4 million.
In order to determine the amount of goodwill impairment, the estimated fair value of the hardware, software and related
technology sales segment was allocated to the individual fair value of the assets and liabilities of the segment as if the segment
had been acquired in a business combination, which resulted in the implied fair value of the goodwill. The allocation of the fair
value required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where
the fair values were not readily available or observable.
A further deterioration in the hardware, software and related technology sales segment, or in any other of the Company’s
businesses, may lead to additional impairments in future periods.
During the year ended June 30, 2009, the Company recognized an impairment loss of approximately $1.8 million on goodwill
allocated to the financial services segment as a result of the deteriorating trading conditions of this segment, the Company’s
management’s strategic decision not to grow this business and the offer received for the traditional microlending business in
January 2009. On March 1, 2009, the Company sold all traditional microfinance loans receivables and goodwill and received
shares in Finbond as consideration.
Goodwill has been allocated to the Company’s reportable segments as follows:
South African transaction-based activities ................
International transaction-based activities .................
Smart card accounts ..................................................
Financial services ......................................................
Hardware, software and related technology sales .....
Total .......................................................................
2011
$42,005
124,895
-
-
42,670
$209,570
2010
$37,568
-
-
-
38,778
$76,346
Intangible assets, net
Impairment loss
The Company assesses the carrying value of intangible assets for impairment whenever events occur or circumstances change
indicating that the carrying amount of the intangible asset may not be recoverable. During the year ended June 30, 2011, one of
Net1 UTA’s largest customers advised the Company of its intention to transition to an alternative payment platform which will
negatively impact the Company’s revenue, net income and cash flow in the medium term. As a consequence of this development,
as well as deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows, the
Company reviewed customer relationships acquired as part of the Net1 UTA acquisition for impairment. As a result of this
review, the Company recognized an impairment loss of approximately $41.8 million during its third quarter of fiscal 2011 related
to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008. In addition, the
Company reversed the deferred tax liability of $10.4 million associated with this intangible asset.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net (continued)
Impairment loss (continued)
The expected undiscounted future cash flows related to the Net1 UTA customer relationships was compared to the carrying
value of the asset and management determined that the carrying value exceeded the undiscounted future cash flows. Accordingly,
management performed an asset impairment analysis to determine the impairment loss. This analysis requires a comparison of the
carrying value of the customer relationships with its fair value. The fair value of the customer relationships was determined using
an income approach valuation technique. The calculation of the fair value required the Company to make a number of
assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or
observable.
The impairment loss has been allocated to the Company’s hardware, software and related technology sales operating
segment.
Intangible assets acquired
Summarized below is the fair value of intangible assets acquired, translated at the exchange rate applicable as of the relevant
acquisition dates, and the weighted-average amortization period:
Finite-lived intangible asset:
KSNET customer relationships ........................................................
FIHRST customer relationships .......................................................
Net1 UTA customer relationships (1) ..............................................
KSNET software and unpatented technology ..................................
FIHRST software and unpatented technology .................................
MediKredit software and unpatented technology.............................
KSNET trademarks ..........................................................................
MediKredit customer database .........................................................
(1) Impaired during the year ended June 30, 2011
Fair value
as of
acquisition
date
Weighted-
Average
Amortization
period (in
years)
$74,663
1,804
68,859
24,380
6,179
5,249
3,786
$821
10
10
7
5
3
3
8
3
On acquisition, the Company recognized a deferred tax liability of approximately $24.5 million related to the acquisition of
the KSNET intangible assets during the year ended June 30, 2011. The Company recognized a deferred tax asset of approximately
$0.4 million related to the acquisition of the FIHRST software and a deferred tax liability of approximately $2.7 million related to
the MediKredit and the remaining FIHRST intangible assets during the year ended June 30, 2010.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets, net (continued)
Summarized below is the carrying value and accumulated amortization of intangible assets as of June 30, 2011 and 2010:
As of June 30, 2011
As of June 30, 2010 (2)
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
$100,155
$(15,283)
$84,872
$77,452
$(22,519)
$54,933
Finite-lived intangible assets:
Customer relationships(1) ....
Software and unpatented
technology(1) .......................
FTS patent ............................
Exclusive licenses ................
Trademarks ..........................
Customer database ...............
37,697
5,598
4,506
8,130
888
Total finite-lived intangible assets .. $156,974
(1) 2011 balances include the customer relationships, software and unpatented technology and trademarks acquired as part of
the KSNET acquisition in October 2010.
(2) The Net1 UTA customer relationships that have been impaired are excluded from the June 30, 2011, balances but
included in the June 30, 2010, balances.
28,698
-
-
5,842
444
$(37,118) $119,856
(1,343)
(4,880)
(3,941)
(1,411)
(132)
$(34,226)
11,047
5,007
4,506
3,766
795
$102,573
9,704
127
565
2,355
663
$68,347
(8,999)
(5,598)
(4,506)
(2,288)
(444)
Amortization expense charged for the years to June 30, 2011, 2010 and 2009 was $22.5 million, $15.2 million, and $13.4
million, respectively.
Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on June 30,
2011, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of
acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.
2011 ........................................................
2012 ........................................................
2013 ........................................................
2014 ........................................................
2015 ........................................................
$19,568
17,918
15,155
15,155
$11,776
10. OTHER PAYABLES
Participating merchants settlement obligation ..........................
Payroll-related payables ............................................................
Accruals ....................................................................................
Value-added tax payable ...........................................................
Other .........................................................................................
Provisions .................................................................................
2011
2010
$30,316
1,842
7,976
3,186
16,238
11,707
$71,265
$19,200
1,446
7,378
2,160
8,772
11,899
$50,855
F-34
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
11.
SHORT-TERM FACILITIES
As of June 30, 2011, the Company had a short-term facility in South African rand of approximately $36.5 million, translated
at exchange rates applicable as of June 30, 2011, with Nedbank Limited (“Nedbank”). As of June 30, 2011, the overdraft rate on
this facility was 7.85%. Certain of the Company’s South African subsidiaries have provided a cross deed of suretyship whereby
each of these companies has bound itself as surety and co-principal debtor with each other for the fulfillment of each other's
obligations under the facility. These South African subsidiaries have agreed that any debit and credit bank account balances with
Nedbank may be set off against each other. Certain South African subsidiaries have ceded trade receivables with an aggregate
value of approximately $20.0 million, translated at exchange rates applicable as of June 30, 2011, as security for the facility as
well as the Company’s investment in Cash Paymaster Services (Proprietary) Limited, a wholly owned South African subsidiary.
As of June 30, 2011, the Company had utilized none of its South African short-term facility.
Management believes that the Company’s current short-term facilities are sufficient in order to meet its future obligations as
they arise.
12. LONG-TERM BORROWINGS
The Company financed a portion of the KSNET acquisition price and related transaction expenses with the proceeds of a
KRW 130.5 billion (approximately $115.9 million based on October 29, 2010 exchange rates) five-year senior secured loan
facility provided by a consortium of banks under a facilities agreement (the “Facilities Agreement”). The Facilities Agreement
provides for three separate facilities: a Facility A loan to the Company’s wholly owned subsidiary, Net1 Applied Technologies
Korea (“Net1 Korea”), of up to KRW 130.5 billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0
billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility B loan, if drawn, must be used to repay the
Facility A2 loan and may be borrowed only if Net1 Korea and KSNET complete a merger transaction with each other. Interest on
the loans is payable quarterly and is based on the Korean CD rate in effect from time to time plus a margin of 4.10% for Facility
A loans and 3.90% for the Facility B loan. The CD rate was 3.0% on June 30, 2011. Total interest expense for the year ended
June 30, 2011, was $7.5 million, and includes amortization of facility fees of $2.0 million. Interest of approximately $1.5 million,
translated at exchange rates applicable as of June 30, 2011, has been accrued as of June 30, 2011.
The Facility A1 loan matures on the fifth anniversary of the initial drawdown with no required principal prepayments.
Principal on the Facility A2 loan and Facility B loan is repayable in scheduled installments, beginning twelve months after initial
drawdown and thereafter, semi-annually with final maturity scheduled for 54 months after initial drawdown. The first and second
scheduled installments of approximately $15.0 million, translated at exchange rates applicable as of June 30, 2011, are due in
equal installments of $7.5 million each, on October 29, 2011 and April 29, 2012, respectively, and have been classified as current
in the Company’s consolidated balance sheet. As of June 30, 2011, the carrying amount of the long-term borrowings
approximated its fair value
The loans are secured by substantially all of KSNET’s assets, a pledge by Net1 Korea of its entire equity interest in KSNET
and a pledge by the immediate parent of Net1 Korea (also one of the Company’s subsidiaries) of its entire equity interest in Net1
Korea. The Facilities Agreement contains customary covenants that require Net1 Korea and its consolidated subsidiaries to
maintain certain specified financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict their ability to
make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional
indebtedness, make capital expenditures above specified levels, engage in certain business combinations and engage in other
corporate activities. The loans under the Facilities Agreement are without recourse to, and the covenants and other agreements
contained therein do not apply to, the Company or any of the Company’s subsidiaries (other than Net1 Korea and its subsidiaries,
including KSNET).
13. COMMON STOCK
The Company’s balance sheet as of June 30, 2011 and 2010, respectively, reflects one class of equity, namely common
stock. From fiscal 2004 to fiscal 2008 the Company’s balance sheet reflected two classes of equity - common stock and linked
units. The linked units were created in June 2004 in connection with the acquisition of Net 1 Applied Technology Holdings
Limited (“Aplitec”). Effective October 2008, the linked units (which included a right to Net1 special convertible preferred stock
as well as B Class preference shares and B Class loans of a Net1 subsidiary) were all converted to common stock as a result of the
listing of Net1’s common stock on the JSE and the linked units no longer exist.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
13. COMMON STOCK (continued)
Common stock
Holders of shares of Net1’s common stock are entitled to receive dividends and other distributions when declared by Net1’s
board of directors out of 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 Net1 must be able to meet its debts as they
become due in the usual course of its business.
Upon voluntary or involuntary liquidation, dissolution or winding up of Net1, holders of common stock share ratably in the
assets remaining after payments to creditors and provision for the preference of any preferred stock according to its terms. There
are no pre-emptive or other subscription rights, conversion rights or redemption or scheduled installment payment provisions
relating to shares of common stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is entitled to one vote per share for the election of directors and for all other matters to be
voted on by shareholders. Holders of common stock may not cumulate their votes in the election of directors, and are entitled to
share equally and ratably in the dividends that may be declared by the board of directors, but only after payment of dividends
required to be paid on outstanding shares of preferred stock according to its terms. The shares of Net1 common stock are not
subject to redemption.
Common stock repurchases
In February 2010 and in May 2010, the Company’s Board of Directors authorized the repurchase of up to $50 million of the
Company's common stock, for a total of $100 million. The authorization does not have an expiration date.
The share repurchase authorization will be used at management’s discretion, subject to limitations imposed by SEC Rule
10b-18 and other legal requirements and subject to price and other internal limitations established by the Board. Repurchases will
be funded from the Company’s available cash. Share repurchases may be made through open market purchases, privately
negotiated transactions, or both. There can be no assurance that the Company will purchase any shares or any particular number
of shares.
The authorization may be suspended, terminated or modified at any time for any reason, including market conditions, the
cost of repurchasing shares, liquidity and other factors that management deems appropriate. The Company repurchased 125,392
shares during the year ended June 30, 2011, for approximately $1.0 million. The Company did not repurchase any of its shares
during the year ended June 30, 2010 under this authorization.
On July 28, 2009, the Company repurchased an aggregate of 9,221,526 shares of its common stock from two shareholders,
who originally acquired their shares in connection with the Aplitec transaction. The purchase price was $13.50 (ZAR 105.98) per
share and was paid from the Company’s cash reserves in ZAR for an aggregate purchase price of $124.5 million (ZAR 977.3
million).
In November 2008, the Company’s board approved the repurchase of up to $50 million of common stock. The Company
repurchased 3,621,247 shares during the year ended June 30, 2009, for approximately $40.7 million.
14. REVENUE
Sale of goods – comprising mainly hardware and software sales .............
Loan-based interest and fees received .......................................................
Services rendered – comprising mainly fees and commissions and contract
variation fees ......................................................................................
2011
2010
2009
$30,130
7,276
$36,228
4,214
$47,003
5,659
306,014
$343,420
239,922
$280,364
194,160
$246,822
During the years ended June 30, 2011, 2010 and 2009, the Company did not recognize any revenue using the percentage of
completion method.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION
Amended and Restated Stock Incentive Plan
The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) has been approved by its shareholders. No
evergreen provisions are included in the Plan. This means that the maximum number of shares issuable under the Plan is fixed
and cannot be increased without shareholder approval, the plan expires by its terms upon a specified date, and no new stock
options are awarded automatically upon exercise of an outstanding stock option. Shareholder approval is required for the
repricing of awards or the implementation of any award exchange program. The Plan permits Net1 to grant to its employees,
directors and consultants incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
performance-based awards and other awards based on its common stock. The Remuneration Committee of the Company’s Board
of Directors (“Remuneration Committee”) administers the Plan.
The total number of shares of common stock issuable under the Plan is 8,552,580. The maximum number of shares for
which awards, other than performance-based awards, may be granted in any combination during a calendar year to any participant
is 569,120. The maximum limits on performance-based awards that any participant may be granted during a calendar year are
569,120 shares subject to stock option awards and $20 million with respect to awards other than stock options. Shares that are
subject to awards which terminate or lapse without the payment of consideration may be granted again under the Plan. Shares
delivered to the Company as part or full payment for the exercise of an option or to satisfy withholding obligations upon the
exercise of an option may be granted again under the Plan in the Remuneration Committee’s discretion. No awards may be
granted under the Plan after June 7, 2019, but awards granted on or before such date may extend to later dates.
Options
General Terms of Awards
Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of
grant, with vesting conditioned upon the recipient’s continuous service through the applicable vesting date and expire 10 years
after the date of grant. The options generally become exercisable in accordance with a vesting schedule ratably over a period of
five years from the date of grant. The Company issues new shares to satisfy stock option award exercises but may also use
treasury shares.
Valuation Assumptions
The fair value of each option is estimated on the date of grant using the Cox Ross Rubinstein binomial model that uses the
assumptions noted in the following table. The estimated expected volatility is calculated based on the volatilities of similar listed
companies within the payment processing industry. The Company has estimated no forfeitures for options award in 2011. The
Company has estimated an annual forfeiture rate of 7.50% for options granted in 2009 based on historic employee behavior under
similar awards granted pursuant to the Plan. No stock options were granted during the year ended June 30, 2010. The table below
presents the range of assumptions used to value options granted during the years ended June 30, 2011 and 2009:
Expected volatility
Expected dividends
Expected life (in years)
Risk-free rate
Restricted Stock
General Terms of Awards
2011
35%
0%
3
2.0%
2009
30 – 45%
0%
2 – 6
2.0 – 4.5%
Shares of restricted stock are considered to be non-vested equity shares. Restricted stock generally vests ratably over a three
year period, with vesting conditioned upon the recipient’s continuous service through the applicable vesting date and under
certain circumstances, the achievement of certain performance targets, as described below.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
General Terms of Awards (continued)
Restricted stock awarded to non-employee directors of the Company vests ratably over a three year period. In addition, for
awards in 2009, until 11 months after the restricted stock become vested and nonforfeitable, the shares may not be sold, assigned,
transferred, pledged, hypothecated, exchanged, or disposed of in any way (whether by operation of law or otherwise). If a
recipient ceases to be a member of the Board of Directors for any reason, all shares of his restricted stock that are not then vested
and nonforfeitable will be immediately forfeited and transferred to the Company for no consideration.
The Company issues new shares to satisfy restricted stock awards.
Valuation Assumptions
The fair value of restricted stock is based on the closing price of the Company’s stock quoted on The Nasdaq Global Select
Market on the date of grant.
Performance Conditions - Restricted Stock Granted in August 2007
In August 2007, the Remuneration Committee approved an award of 591,500 shares of restricted stock to executive officers
and other employees of the Company.
The awards provided for vesting of one-third of the award shares on each of September 1, 2009, 2010 and 2011, conditioned
upon each recipient’s continuous service through the applicable vesting date and the Company achieving the financial
performance target for that vesting date. Specifically, the financial performance targets were a 20% increase, compounded
annually, in fundamental diluted earnings per share (expressed in South African rand) (“2007 Fundamental EPS”) above
Fundamental EPS for the fiscal year ended June 30, 2007. For award shares vesting prior to September 1, 2009, the annual
required increase in the case of Dr. Belamant and Mr. Kotze was 25% rather than 20%. On November 5, 2009, the Company’s
board of directors, on the recommendation of the Remuneration Committee, determined that the annual required target for Dr.
Belamant and Mr. Kotze be 20%, effective immediately, to be consistent with the terms of the restricted stock awards granted to
other employees. There were no other amendments to the terms of the restricted stock awards. For the purpose of the award, 2007
Fundamental EPS was calculated by adjusting GAAP diluted earnings per share (as reflected in the Company’s audited
consolidated financial statements) to exclude the effects related to the amortization of intangible assets, stock-based compensation
charges, one-time, large, unusual expenses as determined at the discretion of the Remuneration Committee, and assuming a
constant tax rate of 30%. If Fundamental EPS for the specified fiscal year did not equal or exceed the 2007 Fundamental EPS
target for such year, no award shares would become vested or nonforfeitable on the corresponding vesting date but would be
available to become vested and nonforfeitable as of a subsequent vesting date if the 2007 Fundamental EPS target for a
subsequent fiscal year were met; provided that the recipient’s service continued through such subsequent vesting date. Any
outstanding award shares that had not become vested and nonforfeitable as of September 1, 2011, would be forfeited by the
recipient on September 1, 2011, and transferred to the Company for no consideration.
The first two tranches of this award vested on September 1, 2009 and 2010, for employees that continued to provide the
requisite service as the financial performance targets were met. The third tranche will not vest because the financial performance
target was not met. Refer also “—Stock option and restricted stock activity—restricted stock” below.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION (continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
Performance Conditions - Restricted Stock Granted in October and November 2010
In October 2010, the Remuneration Committee approved an award of 60,000 shares of restricted stock to an employee of the
Company.
Under the terms of the award, the shares would vest on June 30, 2014, conditioned upon the employee’s continuous service
through June 30, 2014, and on the employee receiving an incremental incentive bonus, as defined in the employee’s employment
agreement for each of the periods ended June 30, 2011, 2012, 2013 and 2014. Any outstanding award shares that had not become
vested and nonforfeitable as of June 30, 2014, would be forfeited by the recipient on June 30, 2014, and transferred to the
Company for no consideration.
The October 2010 restricted stock award did not vest because the financial performance target was not met for June 30,
2011. Refer also “—Stock option and restricted stock activity—restricted stock” below.
In November 2010, the Remuneration Committee approved an award of 83,000 shares of restricted stock to two of the
Company’s executive officers.
The awards provide for vesting of one-third of the award shares on each of November 10, 2011, 2012 and 2013, conditioned
upon each recipient’s continuous service through the applicable vesting date and the Company achieving the financial
performance target for that vesting date. Specifically, the financial performance targets is Fundamental EPS, as defined below, of
$1.44, $1.60 and $1.90 for the years ended June 30, 2011, 2012 and 2013, respectively. For the purpose of the restricted stock
granted in November 2010, Fundamental EPS is calculated as Company’s diluted earnings per share as reflected in the
Company’s consolidated financial statements, measured in U.S. dollars and determined in accordance with GAAP, adjusted to
exclude the effects related to the amortization of intangible assets and acquisition-related costs, stock-based compensation
charges, foreign exchange gains and losses arising from foreign currency hedging transactions, and other items that the
Committee may determine in its discretion to be appropriate (for example, accounting changes and one-time or unusual items),
and assumes a constant tax rate equal to the Company’s effective tax rate for the year ended June 30, 2010. If Fundamental EPS
for the specified fiscal year does not equal or exceed the Fundamental EPS target for such year, no award shares will become
vested or nonforfeitable on the corresponding vesting date but are available to become vested and nonforfeitable as of a
subsequent vesting date if the Fundamental EPS target for a subsequent fiscal year is met; provided that the recipient’s service
continues through such subsequent vesting date. Any outstanding award shares that have not become vested and nonforfeitable as
of November 10, 2013, will be forfeited by the recipient on November 10, 2013, and transferred to the Company for no
consideration.
Stock Appreciation Rights
The Remuneration Committee also may grant stock appreciation rights, either singly or in tandem with underlying stock
options. Stock appreciation rights entitle the holder upon exercise to receive an amount in any combination of cash or shares of
common stock (as determined by the Remuneration Committee) equal in value to the excess of the fair market value of the shares
covered by the right over the grant price. No stock appreciation rights have been granted.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June 30, 2011, 2010 and 2009:
Outstanding – July 1, 2008 ........
Options granted under Plan ..
Exercised ..............................
Forfeitures ............................
Outstanding – June 30, 2009 ......
Exercised ..............................
Outstanding – June 30, 2010 ......
Options granted under Plan ..
Outstanding – June 30, 2011 ......
Number of
shares
953,378
1,120,000
(84,414)
(91,970)
1,896,994
(83,338)
1,813,656
307,000
2,120,656
Weighted
Average
Remaining
Contractual
Term
(in years)
7.40
10.00
-
-
8.30
-
7.41
10.00
6.82
Weighted
average
exercise
price
$18.20
18.81
3.00
22.51
19.03
3.00
19.76
10.59
$18.44
Exercisable .................................
1,253,656
$20.70
5.90
Weighted
Average
Grant
Date Fair
Value
($’000)
Aggregate
Intrinsic
Value
($’000)
-
5,786
-
-
-
-
-
801
5,813
-
1,731
-
1,576
1,667
585
-
243
243
During each of the years ended June 30, 2011, 2010 and 2009, approximately 380,000, 374,000 and 264,000, stock options
became exercisable, respectively.
During the years ended June 30, 2011, 2010 and 2009, respectively, the Company received approximately $0.0 million, $0.7
million and $0.3 million from stock option exercises and approximately $0, $0 and $0.003 million from repayment of stock
option-related loans.
Restricted stock
The following table summarizes restricted stock activity for the years ended June 30, 2011, 2010 and 2009:
Number of
Shares of
Restricted
Stock
Weighted
Average
Grant Date
Fair Value
($’000)
Non-vested – July 1, 2008 ........................................
Granted – August 2008 ......................................
Vested ................................................................
Non-vested – June 30, 2009 .....................................
Granted – August 2009 ......................................
Vested ................................................................
Non-vested – June 30, 2010 .....................................
Granted – August 2010 ......................................
Granted – October 2010 .....................................
Granted – November 2010 .................................
Vested ................................................................
Awards not vesting .............................................
Non-vested – June 30, 2011
594,782
3,474
(1,094)
597,162
10,098
(199,432)
407,828
13,956
60,000
83,000
(203,956)
(257,156)
103,672
-
85
19
-
185
3,800
-
185
740
879
2,267
-
F-40
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION (continued)
Stock option and restricted stock activity (continued)
Restricted stock (continued)
The fair value of restricted stock vested during the year ended June 30, 2011, 2010 and 2009, was $2.3 million, $3.8 million
and $0.02 million, respectively.
The third tranche of 197,156 shares of restricted stock granted in August 2007 to executive officers and other employees of
the Company and 60,000 shares granted to an employee of the Company in October 2010 will not vest because the agreed
performance target will not be achieved. The Company has recorded a reversal of the compensation charge related to August
2007 and October 2010 restricted stock of $3.4 million and $0.09 million, respectively, during the year ended June 30, 2011.
These 257,156 shares of restricted stock will be returned to the Company and, in accordance with the Plan, are available for future
issuances by the Remuneration Committee.
Stock-based compensation charge and unrecognized compensation cost
The Company has recorded a net stock compensation charge of $1.7 million, $5.7 million and $5.0 million for the year
ended June 30, 2011, 2010 and 2009, respectively, which comprised:
Allocated to
cost of goods
IT
sold,
processing,
servicing
and support
Total
charge
(reversal)
to
Allocated
selling,
general
and
administration
Year ended June 30, 2011
Stock-based compensation charge ..............................................
Reversal of stock compensation charge related to August 2007
and October 2010 restricted stock that did not vest ....................
Total – year ended June 30, 2011 .........................................
$5,212
(3,492)
$1,720
Year ended June 30, 2010
Stock-based compensation charge ..............................................
Total – year ended June 30, 2010 .........................................
$5,670
$5,670
Year ended June 30, 2009
Stock-based compensation charge ..............................................
Reversal of stock compensation charge related to options
forfeited .........................................................................................
Total – year ended June 30, 2009 .........................................
$5,239
(213)
$5,026
$193
-
$193
$202
$202
$240
(109)
$131
$5,019
(3,492)
$1,527
$5,468
$5,468
$4,999
(104)
$4,895
The stock compensation charge and reversals have been allocated to cost of goods sold, IT processing, servicing and support
and selling, general and administration based on the allocation of the cash compensation paid to the employees.
As of June 30, 2011, the total unrecognized compensation cost related to stock options was approximately $1.4 million,
which the Company expects to recognize over approximately three years. As of June 30, 2011, the total unrecognized
compensation cost related to restricted stock awards was approximately $0.9 million, which the Company expects to recognize
over approximately two years.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
15.
STOCK-BASED COMPENSATION (continued)
Tax consequences
There are no tax consequences related to options and restricted stock granted to employees of Company subsidiaries
incorporated in South Africa, Austria and Russia. The Company has recorded a deferred tax asset of approximately $0.8 million
and $0.7 million, respectively, for the years ended June 30, 2011 and 2010, related to the stock-based compensation charge
recognized related to employees of Net1 as it is able to deduct the difference between the market value on date of exercise by the
option recipient and the exercise price from income subject to taxation in the United States.
16.
INCOME TAXES
Income tax provision
The table below presents the components of income before income taxes as of June 30, 2011, 2010 and 2009:
2011
2010
2009
South Africa ....................................................................
United States ...................................................................
Other ...............................................................................
Income before income taxes ........................................
$108,349
(15,053)
(56,886)
$36,410
$136,197
(6,909)
(50,408)
$78,880
$143,680
(31,048)
18,288
$130,920
Presented below is the provision for income taxes by location of the taxing jurisdiction for each of the years ended June 30:
2011
2010
2009
Current income tax
South Africa .................................................................
United States ................................................................
Other ............................................................................
Deferred taxation (benefit) charge ..................................
South Africa .................................................................
United States ................................................................
Other ............................................................................
Change in tax rate............................................................
Foreign tax credits generated – United States .................
Income tax provision ...................................................
$117,141
38,882
77,085
1,174
(4,862)
(776)
2,306
(6,392)
-
(78,754)
$33,525
$109,669
47,225
62,443
1
(2,770)
(441)
(1,236)
(1,093)
-
(66,077)
$40,822
$83,756
50,092
33,009
655
(1,460)
(916)
928
(1,472)
(3,003)
(36,549)
$42,744
A reconciliation of income taxes, calculated at the fully-distributed South African income tax rate to the Company’s
effective tax rate, for the years ended June 30, 2011, 2010 and 2009 is as follows:
2011
2010
2009
Income tax rate reconciliation
Income taxes at fully-distributed South African tax rates .....
Permanent items ....................................................................
Foreign tax credits ................................................................
Taxation on deemed dividends in the United States .............
Movement in valuation allowance ........................................
Prior year adjustments ..........................................................
Change in tax rate .................................................................
Income tax provision ..........................................................
34.55%
12.39%
(209.00)%
217.52%
34.01%
2.61%
-%
92.08%
34.55%
21.69%
(82.70)%
85.60%
(5.02)%
(2.37)%
-%
51.75%
34.55%
1.60%
(40.09)%
41.58%
(0.41)%
(2.28)%
(2.29)%
32.66%
F-42
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
16.
INCOME TAXES (continued)
Income tax provision (continued)
There were no changes to the enacted tax rate in the year ended June 30, 2011 and 2010. On July 22, 2008 a change in the
corporate rate of taxation for South African companies was promulgated reducing the enacted tax rate to 34.55% for the year
ended June 30, 2009. STC is expected to be replaced by a dividend withholding tax during calendar 2011 as announced by the
South African Minister of Finance during calendar 2009.
The permanent items during the years ended June 30, 2011 relates principally to interest expense and transaction-related
expenditure which is not deductible for tax purposes. The permanent items during the years ended June 30, 2010 relates
principally to a goodwill impairment which is not deductible for tax purposes.
The movement in valuation allowance includes a valuation allowance created for foreign tax credits and the Net1 UTA
valuation allowances created related to its license ruling, tax deductible goodwill, and net operating loss carryforwards.
Net1 included actual and deemed dividends received from New Aplitec in its year ended June 30, 2011, 2010 and 2009,
taxation computation. Net1 applied net operating losses against this income. Net1 generated foreign tax credits as a result of the
inclusion of the dividends in its taxable income. Net1 has applied certain of these foreign tax credits against its current income tax
provision for the year ended June 30, 2011, 2010 and 2009.
Deferred tax assets and liabilities
Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for
financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that
gave rise to the Company’s deferred tax assets and liabilities as at June 30, and their classification, were as follows:
Total deferred tax assets
2011
2010
Net operating loss carryforwards ................................................................
Provisions and accruals ...............................................................................
FTS patent ...................................................................................................
Intangible assets ..........................................................................................
Foreign tax credits .......................................................................................
Other ...........................................................................................................
Total deferred tax assets before valuation allowance .........................
Valuation allowances ...........................................................................
Total deferred tax assets, net of valuation allowance ..................
$10,696
2,715
1,831
22,338
22,566
4,785
64,931
(45,866)
$19,065
$7,376
2,340
1,764
20,728
16,278
2,297
50,783
(26,412)
$24,371
Total deferred tax liabilities:
2011
2010
Intangible assets .........................................................................................
STC liability, net of STC credits ................................................................
Other ..........................................................................................................
Total deferred tax liabilities..................................................................
$29,307
24,380
2,281
55,968
Reported as
Current deferred tax assets .........................................................................
Long term deferred tax liabilities ...............................................................
Net deferred income tax liabilities ...............................................................
15,882
52,785
$36,903
$17,614
28,998
287
46,899
16,330
38,858
$22,528
F-43
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
16.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Increase in total deferred tax assets – net operating loss carryforwards
Included in total deferred tax assets – net operating loss carryforwards are net operating losses generated by MediKredit of
$4.4 million. MediKredit net operating losses increased by $0.6 million during the year ended June 30, 2011, and a valuation
allowance has been created against this amount. Net operating loss carryforwards also includes $4.5 million related to Net1 UTA,
which includes $2.5 million related to the tax deductible goodwill discussion below under “Decrease in total deferred tax assets –
intangible assets – Goodwill deferred tax asset”. A valuation allowance has been created for the full amount of the Net1 UTA net
operating losses.
Increase in total deferred tax assets – intangible assets
The increase in deferred tax assets – intangible assets as of June 30, 2011, is due to the weakening of the US dollar against
the euro. The underlying euro balances were lower as of June 30, 2011, compared with June 30, 2010.
License ruling
Included in total deferred tax assets – intangible assets as of June 30, 2011, is an intangible asset related to license rights in
Net1 UTA. These license rights are termed software for Austrian tax purposes and were valued for Austrian tax purposes based
on previous license payments at €50.76 million in June 2006. The Company expects to amortize the license rights in its tax
returns over a period of 15 years. Any unused amounts are not carried forward to the subsequent year of assessment. During the
years ended June 30, 2011 and 2010, Net1 UTA utilized approximately $0.2 million and $0.8 million, respectively, of these
license rights against its taxable income and in 2011and 2010, respectively, expensed $1.2 million and $0.8 million of the
unutilized deferred tax asset. In addition, during the years ended June 30, 2011 and 2010, respectively, the Company provided an
additional valuation allowance of $2.7 million and $0.5 million against this deferred tax asset. As of June 30, 2011, the gross
carrying value of this deferred tax asset is approximately $12.2 million which has been fully provided for.
Goodwill deferred tax asset
Net1 Applied Technologies Austria GmbH (“Net1Austria”) generated tax deductible goodwill related to the acquisition of
Net1 UTA in August 2008 and under Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as defined
under Austrian tax law, over a period of 15 years. Unused amounts are carried forward to subsequent years of assessment and are
included in net operating loss carryforwards. During the year ended June 30, 2011, the Company provided an additional valuation
allowance for the goodwill deferred tax asset of approximately $1.7 million. As of June 30, 2011, the gross value of this goodwill
deferred tax asset was approximately $9.9 million which has been fully provided for. As of June 30, 2010, the gross value of this
goodwill deferred tax asset was approximately $9.1 million and the net amount was $2.1 million. The Company did not utilize the
goodwill deferred tax asset during the year ended June 30, 2011, and the movement in the net balance from $2.1 million to $0 is
due to the valuation allowance provided and the reclassification of 1/15th, or $0.8 million, of the asset from goodwill deferred tax
asset to net operating loss carryforward.
The Company did not utilize any of the net operating loss carryforwards during the years ended June 30, 2011 and 2010,
respectively. During the year ended June 30, 2011, the Company provided a valuation allowance for the goodwill deferred tax
asset net operating loss carryforwards of approximately $2.5 million. As of June 30, 2011, the gross value of the net operating
loss carryforwards was approximately $2.5 million and the net value was $0. As of June 30, 2010, the gross and net value of the
net operating loss carryforwards was approximately $1.4 million.
Increase in total deferred tax liabilities – intangible assets
Deferred tax liabilities – intangible assets have increased during the year ended June 30, 2011, primarily as a result of the
acquisition of KSNET intangible assets during the year. This increase in intangible asset related deferred tax liabilities has been
partially offset by the reversal of deferred tax liabilities of $10.4 million resulting from the impairment of Net1 UTA intangible
assets during the year ended June 30, 2011 as discussed in note 9.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
16.
INCOME TAXES (continued)
Deferred tax assets and liabilities (continued)
Decrease in total deferred tax liabilities – STC liability, net of STC credits
Deferred tax liabilities – STC liability, net of STC credits have decreased during the year ended June 30, 2011, primarily as
a result of payments of STC during the year resulting from the distribution of dividends by New Aplitec exceeding the STC
liability recognized during the year resulting from net income generated by the Company’s South African subsidiaries.
Valuation allowance
At June 30, 2011, the Company had deferred tax assets of $19.1 million (2010: $24.4 million), net of the valuation
allowance. Management believes, based on the weight of available positive and negative evidence it is more likely than not that
the Company will realize the benefits of these deductible differences, net of the valuation allowance. However, the amount of the
deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.
At June 30, 2011, the Company had a valuation allowance of $45.9 million (2010: $31.9 million) to reduce its deferred tax
assets to estimated realizable value. The valuation allowances at June 30, 2011 and 2010, relate to intangible assets including tax
deductible goodwill (2011: $22.1 million, 2010: $15.8 million); foreign tax credits (2011: $14.3 million, 2010: $12.6 million); net
operating loss carryforwards (2011: $8.1 million, 2010: $3.2 million) and the FTS patent (2011: $1.1 million, 2010: $0.4 million).
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2011, Net1 had net operating loss carryforwards that will expire, if unused, as follows:
Year of expiration
US net
operating loss
carry
forwards
2024 .................................................................................................................
$4,438
During the years ended June 30, 2011 and 2010, Net1 generated additional foreign tax credits related to the cash dividends
received. Net1 has unused net foreign tax credits of $8.2 million as of June 30, 2011 (June 30, 2010: 9.2 million), which its
management believes will be utilized in future periods. The unused foreign tax credits generated expire after ten years in 2021,
2020 and 2019.
South Africa and Austria
Net operating losses incurred in South Africa generally expire if a company does not trade during the year. In South Africa,
the subsidiary companies that incurred the losses are currently trading and will continue to trade for the foreseeable future. Net
operating losses incurred in Austria generally do not expire.
Uncertain tax positions
As of June 30, 2011 and 2010, respectively the Company has unrecognized tax benefits of $2.7 million and $1.5 million, all
of which would impact the Company’s effective tax rate. The Company files income tax returns mainly in South Africa, Korea,
Austria, the Russian Federation and in the US federal jurisdiction. As of June 30, 2011, the Company’s South African subsidiaries
are no longer subject to income tax examination by the South African Revenue Service for periods before June 30, 2007. The
Company is subject to income tax in other jurisdictions outside South Africa, none of which are individually material to its
financial position, statement of cash flows, or results of operations. The Company does not expect the change related to
unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
16.
INCOME TAXES (continued)
Uncertain tax positions (continued)
The Company increased its unrecognized tax benefits by $1.2 million during the year ended June 30, 2011. The following is
a reconciliation of the total amounts of unrecognized tax benefits for the year ended June 30, 2011 and 2010:
Unrecognized tax benefits - opening balance ..................................................
Gross increases - tax positions in current period .............................................
Lapse of statute limitations ..............................................................................
Foreign currency adjustment ...........................................................................
Unrecognized tax benefits - closing balance ...................................................
2011
$1,459
1,233
-
(28)
$2,664
2010
$1,060
368
-
32
$1,460
As of June 30, 2011 and 2010, the Company had accrued interest related to uncertain tax positions of approximately $0.2
million and $0.1 million, respectively, on its balance sheet.
17.
EARNINGS PER SHARE
The entire consolidated net income of the Company was attributable to the shareholders of the Company comprising both
the holders of Net1 common stock and the holders of linked units prior to the Company’s listing on the JSE in October 2008. As
discussed in note 13, all of the remaining linked unit holders converted their linked units to common stock as a result of listing of
all of the Company’s common stock on the JSE and the linked units had the same rights and entitlements as those attached to
common stock. As a result of the conversion of all the linked units, the entire consolidated net income of the Company is
attributable to the holders of Net1 common stock.
Basic earnings per share include restricted stock awards that meet the definition of a “participating security”. Restricted
stock awards are eligible to receive non-forfeitable dividend equivalents at the same rate as common stock. Basic earnings per
share have been calculated using the two-class method and basic earnings per share for the years ended June 30, 2011, 2010 and
2009, reflects only undistributed earnings.
Diluted earnings per share has been calculated to give effect to the number of additional common stock that would have
been outstanding if the potential dilutive instruments had been issued in each period. The calculation of diluted earnings per share
includes the dilutive effect of a portion of the restricted stock awards granted to employees in August 2007, October 2010 and
November 2010 as these restricted stock awards are considered contingently issuable shares for the purposes of the diluted
earnings per share calculation and the vesting conditions in respect of a portion of the awards had been satisfied. The vesting
conditions are discussed in note 15 – Stock-based compensation.
The following tables detail the weighted average number of outstanding shares used for the calculation of earnings per share
as of June 30, 2011, 2010 and 2009:
Weighted average number of outstanding shares of common stock– basic ..................
Weighted average effect of dilutive securities: employee stock options .......................
Weighted average number of outstanding shares of common stock – diluted ..............
2011
‘000
45,175
56
45,231
2010
‘000
46,245
190
46,435
2009
‘000
56,552
187
56,739
F-46
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
18.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information:
The following table presents the supplemental cash flow disclosures for the years ended June 30, 2011, 2010 and 2009:
Cash received from interest .............................................................................
Cash paid for interest ......................................................................................
Cash paid for income taxes .............................................................................
2011
$8,764
$5,660
$48,630
2010
$10,294
$747
$54,143
2009
$20,375
$7,982
$52,520
Financing activities
Treasury shares, at cost included in the Company’s consolidated balance sheet as of June 30, 2009, includes 93,372 shares of
the Company’s common stock acquired for approximately $1.3 million which were paid for on July 1, 2009. The liability for this
payment was included in accounts payable on the Company’s consolidated balance sheet as of June 30, 2009.
19. OPERATING SEGMENTS
The Company discloses segment information as reflected in the management information systems reports that its chief
operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or reports material revenues.
The Company allocated its international transaction-based activities to a new operating segment, namely international
transaction-based activities. This operating segment comprises the transaction processing activities of KSNET, Net1 Virtual Card,
and NUETS transaction processing activities in Iraq. Segment results for the years ended June 30, 2010 and 2009, have not been
restated due to the insignificance of the transaction processing activities of Net1 Virtual Card, and NUETS transaction processing
activities in Iraq. However, for comparative purposes in future periods, the Company’s reported results for the year ended June 30,
2011, include all legacy international transaction-processing activities from July 1, 2010 and include KSNET from November 1,
2010.
The Company currently has five reportable segments: South African transaction-based activities, international transaction-
based activities, smart card accounts, financial services and hardware, software and related technology sales. Each segment, other
than international transaction-based activities and the hardware, software and related technology sales segment, operates mainly
within South Africa. The Company’s reportable segments offer different products and services and require different resources and
marketing strategies and share the Company’s assets.
The South African transaction-based activities segment currently consists mainly of a state pension and welfare benefit
distribution service provided to the South African government and transaction processing for retailers, utilities, medical-related
claim service customers and banks. Fee income is earned based on the number of beneficiaries included in the government pay-file
as well as from merchants and card holders using the Company’s merchant retail application. In addition, utility providers and
banks are charged a fee for transaction processing services performed on their behalf at retailers. This segment has individually
significant customers that each provides more than 10% of the total revenue of the Company. For the year ended June 30, 2011,
there was one such customer, providing 47% of total revenue (2010: one such customers, providing 66% of total revenue; 2009:
two such customers, providing 31% and 15% of total revenue).
The international transaction-based activities segment currently consists mainly of KSNET which generates revenue from
the provision of payment processing services to merchants and card issuers through its VAN. This segment generates fee revenue
from the provision of payment processing services and to a lesser extent from the sale of goods, primarily point of sale terminals,
to customers in Korea. The segment also generates transaction fee revenue from transaction processing of UEPS-enabled
smartcards through NUETS initiative in Iraq.
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. The financial services segment provides short-term loans as a principal and life
insurance products on an agency basis and generates initiation and services fees.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19. OPERATING SEGMENTS (continued)
The Company sold its traditional microlending business included in this segment on March 1, 2009. In addition, the
Company recorded a goodwill impairment of $1.8 million which was allocated to the financial services segment during the year
ended June 30, 2009. From March 1, 2009, the financial services segment comprised only the Company’s UEPS-based
microlending business.
The hardware, software and related technology sales segment markets, sells and implements the UEPS as well as develops
and provides Prism secure transaction technology, solutions and services. The segment also includes the operations of Net1 UTA,
which comprise mainly hardware sales and licenses of the DUET system. The segment undertakes smart card system
implementation projects, delivering hardware, software and business solutions in the form of customized systems. Sales of
hardware, SIM cards, cryptography services, SIM card licenses and other software licenses are recorded within this segment. This
segment also generates rental income from hardware provided to merchants enrolled in the Company’s merchant retail application.
The impairment losses incurred during the years ended June 30, 2011 and 2010, of approximately $41.8 million and $37.4 million,
respectively, discussed in note 9 are included in the results of this operating segment.
Corporate/eliminations includes 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 GAAP:
2011
Revenues to external customers
South African transaction-based activities ....................... $188,590
69,947
International transaction-based activities .........................
33,315
Smart card accounts .........................................................
Financial services .............................................................
7,313
44,255
Hardware, software and related technology sales ............
343,420
Total .............................................................................
Inter-company Revenues
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Total .............................................................................
4,015
-
-
-
2,281
6,296
Operating income
June 30,
2010
$191,362
-
31,971
4,023
53,008
280,364
3,837
-
-
-
1,892
5,729
2009
$148,399
-
29,576
5,430
63,417
246,822
3,499
-
-
-
2,557
6,056
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
74,642
1,707
15,140
5,658
(49,930)
(9,789)
$37,428
106,036
83,509
14,532
2,881
(42,524)
(11,114)
$69,811
13,442
(34)
5,498
(8,980)
$93,435
F-48
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19. OPERATING SEGMENTS (continued)
2011
June 30,
2010
2009
Interest earned
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
Interest expense
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
Depreciation and amortization
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
Income taxation expense
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
Net income
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
Expenditures for long-lived assets
South African transaction-based activities .......................
International transaction-based activities .........................
Smart card accounts .........................................................
Financial services .............................................................
Hardware, software and related technology sales ............
Corporate/ Eliminations ...................................................
Total .............................................................................
$-
-
-
-
-
7,654
7,654
652
526
-
15
59
7,420
8,672
8,994
16,584
-
539
7,846
708
34,671
21,379
(1,124)
4,238
1,579
(3,551)
11,004
33,525
52,613
2,700
10,904
4,061
(46,316)
(21,315)
2,647
2,423
12,113
-
400
117
-
$15,053
F-49
$-
-
-
-
-
10,116
10,116
981
-
-
1
5
60
1,047
6,714
-
-
510
10,978
1,146
19,348
29,713
-
4,068
806
684
5,551
40,822
75,536
-
10,465
2,073
(43,405)
(5,679)
38,990
2,177
-
-
302
251
-
$2,730
$-
-
-
-
-
20,290
20,290
7,368
-
-
-
197
1,897
9,462
4,461
-
-
434
11,020
1,167
17,082
21,966
-
3,764
702
1,547
14,765
42,744
54,179
-
9,678
(711)
3,905
19,550
86,601
3,161
-
-
751
858
-
$4,770
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
19. OPERATING SEGMENTS (continued)
The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets
per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company
does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an
arbitrary allocation and segment asset allocation is therefore not presented.
It is impractical to disclose revenues from external customers for each product and service or each group of similar products
and services.
Geographic Information
Revenues based on the geographic location from which the sale originated for the years ended June 30, are presented in the
table below:
South Africa .........................................................................
Korea ...................................................................................
Europe .................................................................................
Rest of world .......................................................................
Total .................................................................................
$264,485
68,392
10,465
78
$343,420
$267,478
-
12,301
585
$280,364
$220,408
-
19,560
6,854
$246,822
2011
2010
2009
20. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company leases certain premises. At June 30, 2011, the future minimum payments under operating leases consist of:
Due within 1 year ............................................
Due within 2 years ...........................................
Due within 3 years ...........................................
Due within 4 years ...........................................
Due within 5 years ...........................................
$3,392
1,497
1,090
-
$-
Operating lease payments related to the premises and equipment were $7.0 million, $5.2 million and $4.1 million,
respectively, for the years ended June 2011, 2010 and 2009, respectively.
Capital commitments
As of June 30, 2011 and 2010, the Company had outstanding capital commitments of approximately $0.4 million and $0.02
million, respectively.
Purchase obligations
As of June 30, 2011 and 2010, the Company had purchase obligations totaling $1.9 million and $3.1 million, respectively.
Contingencies
The Company is subject to a variety of insignificant claims and suits that arise from time to time in the ordinary course of
business.
Management currently believes that the resolution of these matters, individually or in the aggregate, will not have a material
adverse impact on the Company’s financial position, results of operations and cash flows.
F-50
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the consolidated financial statements
for the years ended June 30, 2011, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise stated)
21. RELATED PARTY TRANSACTIONS
During the year end June 30, 2010, the Company engaged the services of PBel (Pty) Ltd (“PBEL”) to perform software
development services, primarily software utilized on mobile phones and by cash-accepting kiosks. All software developed is the
Company’s property. PBEL is jointly owned by Dr. Belamant and his son. The PBEL transaction was approved by the Company’s
Audit Committee and thus Dr. Belamant did not participate in the Board’s decision to engage PBEL. During the year ended June
30, 2011 and 2010, the Company paid PBEL approximately $0.9 million and $0.2 million, respectively, for software development
services.
22. FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM INVESTMENT
The Company entered into an asset swap arrangement (in the form of a $110 million 32-day call account instrument) in
order to facilitate a short-term loan facility, however this asset swap arrangement was not linked to the loan facility and did not
require redemption on the same date as the repayment of the loan facility. The Company earned interest at a rate of one month US
dollar London Interbank Offered Rate (“LIBOR”) plus 0.25% on this instrument. The Company gave a call notice to the obligor
on September 10, 2008, and the capital of $110 million (or ZAR 1,100.7 million) and interest on this instrument was repaid on
October 16, 2008. The Company has realized a foreign exchange gain of approximately $26.7 million for the year ended June 30,
2009. No hedge accounting was applied.
23. UNAUDITED QUARTERLY RESULTS
The following tables contain selected unaudited consolidated statements of (loss) income for each quarter of fiscal 2011 and
2010:
Three months ended
Jun 30,
2011
Mar 31,
2011
Dec 31,
2010
(In thousands except per share data)
Sep 30,
2010
Total
YTD
$92,758 $89,011 $64,283 $343,420
Revenue ....................................................................................... $97,368
Operating income (loss) ..............................................................
37,428
(22,125)
26,593
Net income (loss) attributable to Net1 .........................................
$2,647
$6,832 $(21,562)
Earnings (Loss) per share ...........................................................
Basic earnings (loss) per share, in $ ..........................................
Diluted earnings (loss) per share, in $ .......................................
21,974
$9,948
10,986
$7,429
(0.47)
(0.47)
0.22
0.22
0.06
0.06
0.16
0.16
0.15
0.15
Three months ended
Jun 30,
2010
Mar 31,
2010
Dec 31,
2009
(In thousands except per share data)
Sep 30,
2009
Total
YTD
Revenue .......................................................................................
26,368
Operating (loss) income ..............................................................
Net (loss) income attributable to Net1 ......................................... $(17,007) $18,772 $19,284 $17,941
(Loss) Earnings per share ...........................................................
Basic (loss) earnings per share, in $ ..........................................
Diluted (loss) earnings per share, in $ .......................................
$72,291 $73,864 $65,514 $280,364
69,811
$38,990
$68,695
(12,835)
(0.37)
(0.37)
0.41
0.41
0.43
0.42
0.84
0.84
0.37
0.37
29,419
26,859
24.
SUBSEQUENT EVENTS
In August 2011, the Company received a further extension of its contract with SASSA on the same terms and conditions as
its existing agreement. The contract now expires on March 31, 2012.
*********************
F-51