Net 1 UEPS Technologies, Inc. - Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________________ To _________________

Commission file number: 000-31203

NET 1 UEPS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Florida 98-0171860
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

President Place, 4th Floor, Cnr. Jan Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South Africa
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: 27-11-343-2000

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]     NO [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]     NO [   ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

[   ] 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]

As of May 8, 2012 (the latest practicable date), 45,552,304 shares of the registrant’s common stock, par value $0.001 per share, net of treasury shares, were outstanding.


Form 10-Q

NET 1 UEPS TECHNOLOGIES, INC.

Table of Contents

    Page No.
PART I. FINANCIAL INFORMATION
  Item 1. Financial Statements
  Condensed Consolidated Balance Sheets at March 31, 2012 and June 30, 2011 2
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2012 and 2011 3
Unaudited Condensed Consolidated Statement of Changes in Equity for the Nine months ended March 31, 2012 4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2012 and 2011 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended March 31, 2012 and 2011 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 44
  Item 4. Controls and Procedures 44
PART II. OTHER INFORMATION
  Item 1. Legal Proceedings 45
  Item 1A. Risk Factors 45
  Item 6. Exhibits 47
  Signatures   47
  EXHIBIT 10.21    
  EXHIBIT 10.22    
  EXHIBIT 10.23    
  EXHIBIT 10.24    
  EXHIBIT 31.1    
  EXHIBIT 31.2    
  EXHIBIT 32    

1


Part I. Financial Information

Item 1. Financial Statements

NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets

    Unaudited     (A)  
    March 31,     June 30,  
    2012     2011  
    (In thousands, except share data)  
ASSETS            
CURRENT ASSETS            
               Cash and cash equivalents $  88,250   $  95,263  
               Pre-funded social welfare grants receivable (note 3)   2,741     4,579  
               Accounts receivable, net of allowances of – March: $841; June: $728   98,159     82,780  
               Finance loans receivable   8,720     8,141  
               Deferred expenditure on smart cards   115     51  
               Inventory (note 4)   6,157     6,725  
               Deferred income taxes   7,590     15,882  
                    Total current assets before settlement assets   211,732     213,421  
                       Settlement assets (note 5)   39,408     186,668  
Total current assets   251,140     400,089  
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED            
DEPRECIATION OF – March: $77,519; June: $50,007   44,167     35,807  
EQUITY-ACCOUNTED INVESTMENTS (note 6)   1,552     1,860  
GOODWILL (note 7)   190,149     209,570  
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF – March: $48,722; June: $37,118 (note 7)   101,172     119,856  
OTHER LONG-TERM ASSETS, including reinsurance assets (note 8)   42,148     14,463  
TOTAL ASSETS   630,328     781,645  
LIABILITIES            
CURRENT LIABILITIES            
               Accounts payable   11,817     11,360  
               Other payables   62,145     71,265  
               Current portion of long-term borrowings (note 10)   14,316     15,062  
               Income taxes payable   8,975     6,709  
                    Total current liabilities before settlement obligations   97,253     104,396  
                       Settlement obligations (note 5)   39,408     186,668  
                           Total current liabilities   136,661     291,064  
DEFERRED INCOME TAXES   24,425     52,785  
LONG-TERM BORROWINGS (note 10)   88,610     110,504  
OTHER LONG-TERM LIABILITIES, including insurance policy liabilities (note 8)   27,024     1,272  
TOTAL LIABILITIES   276,720     455,625  
COMMITMENTS AND CONTINGENCIES            
EQUITY            
NET1 EQUITY:            
       COMMON STOCK 
               Authorized: 200,000,000 with $0.001 par value; 
               Issued and outstanding shares, net of treasury - March: 45,552,304; 
               June: 45,152,805
  59     59  
        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   138,289     136,430  
       TREASURY SHARES, AT COST: March: 13,455,090; June: 13,274,434   (175,823 )   (174,694 )
       ACCUMULATED OTHER COMPREHENSIVE LOSS   (59,832 )   (33,779 )
       RETAINED EARNINGS   447,618     394,990  
               TOTAL NET1 EQUITY   350,311     323,006  
NON-CONTROLLING INTEREST   3,297     3,014  
TOTAL EQUITY   353,608     326,020  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $  630,328   $  781,645  

     (A) – Derived from audited financial statements 
     See Notes to Unaudited Condensed Consolidated Financial Statements

2


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
    (In thousands, except per share data)     (In thousands, except per share data)  
                         
REVENUE $  90,664   $ 92,758   $  282,648   $  246,052  
                         
EXPENSE                        
                         
     Cost of goods sold, IT processing, servicing and support   32,493     29,302     99,605     76,551  
                         
     Selling, general and administration   36,368     32,618     92,297     91,707  
                         
     Depreciation and amortization   9,325     11,192     27,194     25,188  
                         
     Impairment of intangibles   -     41,771     -     41,771  
                         
OPERATING INCOME (LOSS)   12,478     (22,125 )   63,552     10,835  
                         
INTEREST INCOME   2,164     1,516     5,981     5,950  
                         
INTEREST EXPENSE   2,244     2,471     7,215     6,149  
                         
INCOME (LOSS) BEFORE INCOME TAXES   12,398     (23,080 )   62,318     10,636  
                         
INCOME TAX EXPENSE (BENEFIT) (note 16)   4,611     (1,603 )   9,785     14,440  
                         
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE (LOSS) EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   7,787     (21,477 )   52,533     (3,804 )
                         
(LOSS) EARNINGS FROM EQUITY- ACCOUNTED INVESTMENTS (note 6)   (4 )   (127 )   100     (509 )
                         
NET INCOME (LOSS)   7,783     (21,604 )   52,633     (4,313 )
                         
LESS (ADD) NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST   17     (42 )   5     (128 )
                         
NET INCOME (LOSS) ATTRIBUTABLE TO NET1 $  7,766   $ (21,562 ) $  52,628   $  (4,185 )
                         
Net income (loss) per share, in United States dollars (note 14)                
     Basic earnings attributable to Net1 shareholders $ 0.17     ($0.47 ) $ 1.17     ($0.09 )
     Diluted earnings attributable to Net1 shareholders $ 0.17     ($0.47 ) $ 1.17     ($0.09 )

     See Notes to Unaudited Condensed Consolidated Financial Statements

3


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity (dollar amounts in thousands)

    Net 1 UEPS Technologies, Inc. Shareholder              
                Number                       Accumulated                    
    Number           of           Additional           other     Total     Non-        
    of           Treasury     Treasury     Paid-In     Retained     comprehensive     Net1     controlling        
    Shares     Amount     Shares     Shares     Capital     Earnings     (loss) income     Equity     Interest     Total  
                                                             
Balance – July 1, 2011   58,427,239   $ 59     (13,274,434 ) $ (174,694 ) $ 136,430   $ 394,990   $ (33,779 ) $ 323,006   $ 3,014   $ 326,020  
Restricted stock granted   580,155                                                        
Stock-based compensation charge                           1,882                 1,882           1,882  
Treasury shares acquired (note 11)               (180,656 )   (1,129 )                     (1,129 )         (1,129 )
Utilization of APIC pool related to vested restricted stock                   (23 )           (23 )       (23 )
Liquidation of SmartSwitch Nigeria (note 13)                                   280     280  
Sale of 10% of SmartLife (note 2)                                                   188     188  
                                                             
KSNET purchase accounting adjustment                                   (63 )   (63 )
                                                             
Comprehensive income (loss), net of taxes:                                        
     Net income                                 52,628           52,628     5     52,633  
     Other comprehensive loss:                                                            
     Movement in foreign currency 
     translation reserve
                          (26,053 )   (26,053 )   (127 )   (26,180 )
                                                             
Balance – March 31, 2012   59,007,394   $ 59     (13,455,090 ) $ (175,823 ) $ 138,289   $ 447,618   $ (59,832 ) $ 350,311   $ 3,297   $ 353,608  

     See Notes to Unaudited Condensed Consolidated Financial Statements

4


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
    (In thousands)           (In thousands)        
                         
Net income (loss) $  7,783   $  (21,604 ) $  52,633   $  (4,313 )
                         

Movement in foreign currency translation reserve

  14,002     1,499     (26,180 )   30,201  
                         
Total other comprehensive income (loss), net of taxes   14,002     1,499     (26,180 )   30,201  
                         

Comprehensive income (loss)

  21,785     (20,105 )   26,453     25,888  

Less: (Less) Add comprehensive (gain) loss attributable to non-controlling interest

  (17 )   24     122     (287 )

Comprehensive income (loss) attributable to Net1

$  21,768   $  (20,129 ) $  26,575   $  25,601  

     Certain amounts for the three and nine months ended March 31, 2011, have been reclassified to reflect the appropriate attribution of net income (loss) and other movements between Net1 and its non-controlling interest.

     See Notes to Unaudited Condensed Consolidated Financial Statements

5


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
    (In thousands)           (In thousands)        
Cash flows from operating activities                        
Net income (loss) $  7,783   $  (21,604 ) $  52,633   $  (4,313 )
Depreciation and amortization   9,325     11,192     27,194     25,188  
Impairment loss   -     41,771     -     41,771  
Loss (Earnings) from equity-accounted investments   4     127     (100 )   509  
Fair value adjustments   (1,211 )   417     (1,983 )   655  
Interest payable   694     1,406     4,469     1,546  
Profit on disposal of property, plant and equipment   (23 )   (2 )   (57 )   (10 )
Net loss on sale of 10% of SmartLife (note 2)   -     -     81     -  
Profit on liquidation of subsidiary (note 13)   -     -     (3,994 )   -  
Realized loss on sale of SmartLife investments   -     -     25     -  
Stock-based compensation charge   843     1,597     1,882     4,593  
Facility fee amortized   316     113     515     1,841  
Decrease (Increase) in accounts and finance loans                        
receivable, and pre-funded grants receivable   474     3,896     (15,321 )   2,648  
Increase in deferred expenditure on smart cards   (56 )   -     (70 )   -  
Increase in inventory   (862 )   (229 )   (261 )   (163 )
Increase (Decrease) in accounts and other payables   583     (6,060 )   (1,765 )   (2,283 )
Increase (Decrease) in taxes payable   5,626     7,140     (5,336 )   5,910  
Decrease in deferred taxes   (1,532 )   (11,500 )   (14,928 )   (24,438 )
       Net cash provided by operating activities   21,964     28,264     42,984     53,454  
Cash flows from investing activities                        
Capital expenditures   (13,879 )   (4,679 )   (23,465 )   (9,458 )
Proceeds from disposal of property, plant and equipment   117     10     385     28  
Acquisition of SmartLife, net of cash acquired   -     -     (1,673 )   -  
Acquisition of prepaid business   -     -     (4,481 )   -  
Settlement from former shareholders of KSNET                        
(Acquisition of KSNET, net of cash acquired)   -     -     4,945     (230,225 )
Advance of loans to equity-accounted investment   -     -     -     (375 )
Repayment of loan by equity-accounted investment   30     33     93     440  
Acquisition of available for sale securities   (948 )   -     (948 )   -  
Purchase of investments related to SmartLife   -     -     (2,320 )   -  
Proceeds from maturity of investments related to SmartLife   -     -     2,321     -  
Net change in settlement assets   95,165     7,397     128,961     (39,788 )
     Net cash generated from (used in) investing activities   80,485     2,761     103,818     (279,378 )
Cash flows from financing activities                        
Loan portion related to options   -     -     -     20  
Long-term borrowings obtained   -     -     -     116,353  
Repayment of long-term borrowings   (4,842 )   -     (12,027 )   -  
Payment of facility fee   -     -     -     (3,088 )
Proceeds on sale of 10% of SmartLife   -     -     107     -  
Acquisition of remaining 19.9% of Net1 UTA   -     -     -     (594 )
Acquisition of treasury stock   -     -     (1,129 )   -  
Repayment of short-term borrowings   -     (7,124 )   -     (6,705 )
Net change in settlement obligations   (95,165 )   (7,397 )   (128,961 )   39,788  
     Net cash (used in) generated from financing activities   (100,007 )   (14,521 )   (142,010 )   145,774  
Effect of exchange rate changes on cash   4,944     1,003     (11,805 )   15,298  
Net increase (decrease) in cash and cash equivalents   7,386     17,507     (7,013 )   (64,852 )
Cash and cash equivalents – beginning of period   80,864     71,383     95,263     153,742  
Cash and cash equivalents – end of period $  88,250   $  88,890   $  88,250   $  88,890  

     See Notes to Unaudited Condensed Consolidated Financial Statements

6


NET 1 UEPS TECHNOLOGIES, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the three and nine months ended March 31, 2012 and 2011
(All amounts in tables stated in thousands or thousands of United States Dollars, unless otherwise stated)

1.      Basis of Presentation and Summary of Significant Accounting Policies

          Unaudited Interim Financial Information

          The accompanying unaudited condensed consolidated financial statements include all majority-owned subsidiaries over which the Company exercises control and have been prepared in accordance with US generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q and include all of the information and disclosures required for interim financial reporting. The results of operations for the three and nine months ended March 31, 2012 and 2011, are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.

          These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011. In addition, please refer to note 1 to the unaudited condensed consolidated financial statements included in the Company’s Form 10-Q for the quarter ended September 30, 2011, for a summary of accounting policies relating to the Company’s life insurance business acquired during that quarter. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.

          References to the “Company” refer to Net1 and its consolidated subsidiaries, unless the context otherwise requires. References to Net1 are references solely to Net 1 UEPS Technologies, Inc.

          Recent accounting pronouncements adopted

          No new accounting pronouncements were adopted by the Company during the three months ended March 31, 2012.

          Recent accounting pronouncements not yet adopted as of March 31, 2012

          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.

          In September 2011, the FASB issued guidance regarding Testing Goodwill for Impairment. The guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this guidance, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its goodwill impairment testing process.

7


2.      Acquisitions

          KSNET

          During the three months ended December 31, 2011, the Company received $4.9 million, in cash, in final settlement of any and all claims and contractual adjustments between the Company and the former shareholders of KSNET. This amount has been applied against the goodwill recognized on the acquisition of KSNET and has reduced the goodwill balance. As required by the Company’s Korean debt agreement, the Company has used the settlement proceeds to prepay a portion of its outstanding debt thereunder. The prepayment was made on January 30, 2012. The KSNET purchase price allocation is described in note 3 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2011.

          Acquisition of prepaid airtime and electricity business in October 2011

          On October 3, 2011, the Company acquired the South African prepaid airtime and electricity businesses of Eason & Son, Ltd (“Eason”), an Irish private limited company, for approximately $4.5 million in cash. The principal assets acquired comprise prepaid airtime and electricity businesses customer list, accounts receivable books, inventory and a perpetual license to utilize Eason’s internally developed transaction-based system software (“EBOS”).

          The business has been integrated with EasyPay and allocated to the Company’s South African transaction-based activities operating segment. The Company believes that the acquisition will enable it to expand its prepaid customer base and over time integrate all of its prepaid offerings onto the EBOS system.

          The preliminary purchase price allocation, translated at the foreign exchange rates applicable on the date of acquisition, is provided in the table below:

Accounts receivable, net $ 1,226  
Inventory   297  
Customer relationships (amortized over 0.75 years)   870  
Software and unpatented technology (amortized over three years)   2,332  
Deferred tax liability   (244 )
     Total purchase price $ 4,481  

          The preliminary purchase price allocation is based on management estimates as of March 31, 2012, 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 June 30, 2012.

          Pro forma results of operations have not been presented because the effect of the acquisition, individually and in the aggregate with other acquisitions during fiscal 2012, was not material. During the three and nine months ended March 31, 2012, the Company did not incur any acquisition-related expenditure. Since the closing of the acquisition, the acquisition has contributed revenue of $10.1 million and a net loss of $0.4 million. During the three months ended March 31, 2012 the acquisition contributed revenue of $4.8 million and a net profit of $0.1 million.

          SmartLife

          On July 1, 2011, the Company acquired SmartLife (formerly known as Saambou Life Assurers Limited), a South African long-term insurance company, for ZAR 13 million (approximately $1.8 million) in cash. Prior to its acquisition by the Company, SmartLife had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not written any new insurance business for a number of years and had reinsured all of its risk exposure under its life insurance products. SmartLife has been allocated to the Company’s financial services operating segment.

          The acquisition of SmartLife provides the Company with an opportunity to offer relevant insurance products directly to its existing customer and employee base in South Africa. The Company intends to offer this customer base a full spectrum of products applicable to this market segment, including credit life, group life, funeral and education insurance policies.

8


2.      Acquisitions (continued)

          SmartLife (continued)

          The preliminary purchase price allocation, translated at the foreign exchange rates applicable on the date of acquisition, is provided in the table below:

Cash and cash equivalents $ 168  
Accounts receivable, net   150  
Financial investments (allocated to other long-term assets)   3,059  
Reinsurance assets (allocated to other long-term assets)   28,492  
Other payables   (189 )
Policy holder liabilities (allocated to other long-term liabilities)   (29,838 )
     Total purchase price $ 1,842  

          The preliminary purchase price allocation is based on management estimates as of March 31, 2012, 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 June 30, 2012.

          Pro forma results of operations have not been presented because the effect of the SmartLife acquisition, individually and in the aggregate with other acquisitions during fiscal 2012, was not material. During the three and nine months ended March 31, 2012, the Company did not incur any acquisition-related expenditure. Since the closing of the acquisition, SmartLife has contributed revenue of $0.5 million and net loss of $0.3 million. During the three months ended March 31, 2012 Smartlife contributed revenue of $0.3 million and a net loss of $0.1 million.

          In November 2011, the Company sold 10% of SmartLife to a strategic partner for $0.1 million and recognized a loss on sale of $0.07 million.

3.      Pre-funded social welfare grants receivable

          Pre-funded social welfare grants receivable represents amounts pre-funded by the Company to certain merchants participating in the merchant acquiring system. The April 2012 payment service commenced during the last six days of March 2012 and was offered at merchant locations only.

4.      Inventory

          The Company’s inventory comprised the following categories as of March 31, 2012 and June 30, 2011.

      March 31,     June 30,  
      2012     2011  
               
  Raw materials $ 32   $ 24  
  Finished goods   6,125     6,701  
    $ 6,157   $ 6,725  

5.      Settlement assets and settlement obligations

          Settlement assets comprise (1) cash received from the South African government that the Company holds pending disbursement to beneficiaries of social welfare grants, (2) cash received from health care plans which the Company disburses to health care service providers once it adjudicates claims and (3) cash received from customers on whose behalf the Company processes payroll payments that the Company will disburse to customer employees, payroll-related payees and other payees designated by the customer.

          Settlement obligations comprise (1) amounts that the Company is obligated to disburse to beneficiaries of social welfare grants, (2) amounts which are due to health care service providers after claims have been adjudicated and reconciled, provided that the Company shall have previously received such funds from health care plan customers and (3) amounts that the Company is obligated to pay to customer employees, payroll-related payees and other payees designated by the customer.

          The balances at each reporting date may vary widely depending on the timing of the receipts and payments of these assets and obligations

9


6.      Fair value of financial instruments and equity-accounted investments

          Fair value of financial instruments

               Risk management

          The Company seeks to reduce its exposure to currencies other than the South African rand through a policy of matching, to the extent possible, assets and liabilities denominated in those currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to equity price and liquidity risks as well as credit risks.

                    Currency exchange risk

          The Company is subject to currency exchange risk because it purchases inventories that it is required to settle in other currencies, primarily the euro and US dollar. The Company uses foreign exchange 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.

          The Company’s outstanding foreign exchange contracts are as follows:

          As of March 31, 2012

Notional amount Strike price Fair market
value price
Maturity
USD        821,620 ZAR          8.4450 ZAR            7.6943 April 13, 2012

          As of June 30, 2011

          None.

                    Translation risk

          Translation risk relates to the risk that the Company’s results of operations will vary significantly as the US dollar is its reporting currency, but it earns most of its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly over the past 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. The Company, through its recently acquired insurance business, maintains investments in fixed maturity investments which are exposed to fluctuations in interest rates.

                    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.

                    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. 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.

10


6.      Fair value of financial instruments and equity-accounted investments (continued)

          Financial instruments

          The following section describes the valuation methodologies the Company uses to measure its significant financial assets and liabilities at fair value.

          In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to Level 1 investments. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2 investments. In circumstances in which inputs are generally unobservable, values typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. Investments valued using such techniques are included in Level 3 investments.

               Asset measured at fair value using significant unobservable inputs – investment in Finbond Group Limited (“Finbond”)

          The Company's Level 3 asset represents an investment of 156,778,712 shares of common stock of Finbond. In March 2012, Finbond completed a rights issue and the Company acquired an additional 72,156,187 shares for approximately $1 million. The Company’s ownership interest in Finbond as of March 31, 2012, is approximately 27%. 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 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.

          The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 according to the fair value hierarchy:

    Quoted                       
    Price in                       
    Active     Significant              
    Markets for     Other     Significant        
    Identical     Observable     Unobservable        
    Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
Assets                        
 Related to insurance business (included in 
        other long-term assets):
               
     Cash and cash equivalents $ 2,793   $ -   $ -   $ 2,793  
     Mutual funds: interest-bearing instruments   1     -     -     1  
 Investment in Finbond (available for sale assets included in
        other long-term assets)
  -     -     8,199     8,199  
 Other   -     449     -     449  
         Total assets at fair value $ 2,794   $ 449   $ 8,199   $ 11,442  

11


6.      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, 2011 according to the fair value hierarchy:

    Quoted                    
    Price in                    
    Active     Significant              
    Markets for     Other     Significant        
    Identical     Observable     Unobservable        
    Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
Assets                        
     Investment in Finbond (available for sale 
     assets included in other long-term assets)
  -     -   $ 8,161   $ 8,161  
   Other   -   $ 275     -     275  
       Total assets at fair value   -   $ 275   $ 8,161   $ 8,436  

               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.

          During the three and nine months ended March 31, 2012, SmartSwitch Namibia repaid outstanding loans, including outstanding interest. The repayments received have been allocated to the equity-accounted investments presented in the Company’s condensed consolidated balance sheet as of March 31, 2012, and reduced 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 the Company’s condensed consolidated statement of cash flows for the three and nine months ended March 31, 2012.

          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 the purchaser 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 restated 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 and the functional currency of SmartSwitch Botswana is the Botswana pula.

12


6.      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)

          Summarized below is the Company’s interest in equity-accounted investments as of June 30, 2011 and March 31, 2012:

                Earnings                
    Equity     Loans     (Loss)     Elimination       Total  
Balance as of June 30, 2011 $ 4,051   $ 1,630   $ (3,828 ) $ 7     $ 1,860  
Loan repaid   -     (100 )   -     -       (100 )
Interest repaid   -     -     -     (105 )     (105 )
Earnings (loss) from equity- accounted investments   -     -     55     45       100  
     SmartSwitch Namibia(1)   -     -     128     24       152  
     SmartSwitch Botswana(1)   -     -     (73 )   21       (52 )
Foreign currency adjustment(2)   (358 )   (80 )   175     60       (203 )
Balance as of March 31, 2012 $ 3,693   $ 1,450   $ (3,598 ) $ 7     $ 1,552  

          (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 the equity-accounted investments and the US dollar.

          Summarized below is the Company’s equity-accounted (loss) earnings for the three months ended March 31, 2012:

    Loss     Elimination       Total  
                     
Earnings (Loss) from equity- accounted investments $ (10 ) $ 6     $ (4 )
   SmartSwitch Namibia   15     6       21  
   SmartSwitch Botswana $ (25 ) $ -     $ (25 )

          There were no significant sales to these investees that require elimination during the three and nine months ended March 31, 2012 and 2011.

7.      Goodwill and intangible assets

          Goodwill

          Summarized below is the movement in the carrying value of goodwill for the nine months ended March 31, 2012:

    Carrying  
    value  
       
Balance as of June 30, 2011 $ 209,570  
     Reduction in goodwill related to net settlement (note 2)   (4,945 )
     Foreign currency adjustment (1)   (14,476 )
             Balance as of March 31, 2012 $ 190,149  

           (1) – the foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar and the KRW against the US dollar.

          Goodwill has been allocated to the Company’s reportable segments as follows:

    As of     As of  
    March 31,     June 30,  
    2012     2011  
             
SA transaction-based activities $ 37,376   $ 42,005  
International transaction-based activities   114,170     124,895  
Smart card accounts   -     -  
Financial services   -     -  
Hardware, software and related technology sales   38,603     42,670  
   Total $ 190,149   $ 209,570  

13


7.      Goodwill and intangible assets (continued)

          Intangible assets

               Carrying value and amortization of intangible assets

          Summarized below is the carrying value and accumulated amortization of the intangible assets as of March 31, 2012 and June 30, 2011:

    As of March 31, 2012     As of June 30, 2011  
    Gross           Net     Gross           Net  
    carrying     Accumulated     carrying     carrying     Accumulated     carrying  
    value     amortization     value     value     amortization     value  
Finite-lived intangible assets:
       Customer relationships(1) $ 94,730   $ (21,171 ) $ 73,559   $ 100,155   $ (15,283 ) $ 84,872  
       Software and unpatented                                    
       technology(1)   37,414     (14,963 )   22,451     37,697     (8,999 )   28,698  
       FTS patent   4,981     (4, 981 )   -     5,598     (5,598 )   -  
       Exclusive licenses   4,506     (4,506 )   -     4,506     (4,506 )   -  
       Trademarks   7,472     (2,508 )   4,964     8,130     (2,288 )   5,842  
       Customer database   791     (593 )   198     888     (444 )   444  
Total finite-lived intangible assets $ 149,894   $ (48,722 ) $ 101,172   $ 156,974   $ (37,118 ) $ 119,856  

          (1)   Includes the customer relationships and software and unpatented technology acquired as part of the Eason acquisition in October 2011.

          Aggregate amortization expense on the finite-lived intangible assets for the three and nine months ended March 31, 2012, was approximately $5.0 million and $14.1 million, respectively (three and nine months ended March 31, 2011, was approximately $7.3 million and $17.3 million, respectively).

          Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on March 31, 2012, 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.

2012 $ 17,529  
2013   15,071  
2014   14,488  
2015   11,081  
2016 $ 8,732  

8.      Reinsurance assets and policy holder liabilities under insurance and investment contracts

         Reinsurance assets and policy holder liabilities under insurance contracts

          Summarized below is the movement in reinsurance assets and policy holder liabilities under insurance contracts during the nine months ended March 31, 2012:

    March 31, 2012  
    Reinsurance     Insurance  
    assets (1)     contracts (2)  
Balances acquired on July 1, 2011 $ 28,492   $ (28,492 )
Insurance premiums   -     -  
Claims and policyholders’ benefits under insurance contracts   -     -  
Foreign currency adjustment (3)   (3,346 )   3,346  
     Balance as of March 31, 2012 $ 25,146   $ (25,146 )

  (1)

Included in other long-term assets;

  (2)

Included in other long-term liabilities;

  (3)

The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.

14


8.      Reinsurance assets and policy holder liabilities under insurance and investment contracts (continued)

          Reinsurance assets and policy holder liabilities under insurance contracts (continued)

          The Company has agreements with reinsurance companies in order to limit its losses from large insurance contracts, however, if the reinsurer is unable to meet its obligations, the Company retains the liability.

          The value of insurance contract liabilities is based on best estimates assumptions of future experience plus prescribed margins, as required in the markets in which these products are offered, namely South Africa. The process of deriving the best estimates assumptions plus prescribed margins includes assumptions related to future mortality and morbidity (an appropriate base table of standard mortality is chosen depending on the type of contract and class of business), withdrawals (based on recent withdrawal investigations and expected future trends), investment returns (based on government treasury rates adjusted by an applicable margin), and expense inflation (based on a 10 year real return on CPI-linked government bonds from the risk-free rate and adding an allowance for salary inflation and book shrinkage of 1% per annum).

          Assets and policy holder liabilities under investment contracts

          Summarized below is the movement in assets and policy holder liabilities under investment contracts during the nine months ended March 31, 2012:

    March 31, 2012  
          Investment  
    Assets (1)     contracts (2)  
Balances acquired on July 1, 2011 $ 1,346   $ (1,346 )
Insurance premiums   -     -  
Claims and policyholders’ benefits under insurance contracts   -     -  
Foreign currency adjustment (3)   (158 )   158  
     Balance as of March 31, 2012 $ 1,188   $ (1,188 )

  (1)

Included in other long-term assets;

  (2)

Included in other long-term liabilities;

  (3)

The foreign currency adjustment represents the effects of the fluctuations between the ZAR against the US dollar.

          The Company does not offer any investment products with guarantees related to capital or returns.

9.      Short-term credit facilities

          The Company has a ZAR 250 million ($32.5 million, translated at exchange rates applicable as of March 31, 2012) short-term South African credit facility. As of March 31, 2012, the overdraft rate on this facility was 7.85% . Certain South African subsidiaries have ceded trade receivables with an aggregate value of approximately $16.5 million, translated at exchange rates applicable as of March 31, 2012, 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 March 31, 2012 and June 30, 2011, the Company had utilized none of its South African short-term facility.

          Management believes that this facility is sufficient in order to meet the Company’s future obligations as they arise.

10.    Long-term borrowings

          The Company’s KRW 130.5 billion ($114.5 million, translated at exchange rates applicable as of March 31, 2012) Korean senior secured loan facility is described in note 12 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2011. The current carrying value as of March 31, 2012, is $102.9 million. The interest rate in effect on March 31, 2012 was 7.64% . Interest expense during the three and nine months ended March 31, 2012, was $2.1 million and $6.7 million, respectively. Total interest expense for the three and nine months ended March 31, 2011, was $2.0 million and $3.4 million, respectively.

          The second and third scheduled principal repayment are each $7.2 million, respectively, translated at exchange rates applicable as of March 31, 2012, and have been classified as current in the Company’s condensed consolidated balance sheet. The second repayment is due on April 29, 2012 and the third repayment is due on October 29, 2012. During the three months ended March 31, 2012, the Company made an unscheduled $4.8 million principal payment with the proceeds of the net settlement received from the former shareholders of KSNET.

15


11.    Capital structure

          Common stock repurchases

          The Company repurchased 180,656 shares during the nine months ended March 31, 2012, for approximately $1.1 million. The Company did not repurchase any of its shares during the three months ended March 31, 2012 or the three and nine months ended March 31, 2011.

12.   Stock-based compensation

          Stock option and restricted stock activity

               Options

          The following table summarizes stock option activity for the three and nine months ended March 31, 2012 and 2011:

                Weighted              
                Average           Weighted  
          Weighted     Remaining           Average  
          average     Contractual     Aggregate     Grant  
    Number     exercise     Term     Intrinsic     Date Fair  
    of shares     price     (in years)     Value     Value  
                               
Outstanding – July 1, 2011   2,120,656   $ 18.44     6.82   $ 243        
       Granted under Plan in                              
       August 2011   165,000     6.59     10.00         $ 297  
       Granted under Plan in October 2011   202,000     7.98     10.00       $ 442  
Outstanding – March 31, 2012   2,487,656   $ 16.81     6.55   $ 876        
                               
Outstanding – July 1, 2010   1,813,656   $ 19.76     7.41   $ 585        
       Granted under Plan in November 2010   307,000     10.59     10.00       $ 801  
Outstanding – March 31, 2011   2,120,656   $ 18.44     7.08   $ 239        

          During the nine months ended March 31, 2012, 102,333 stock options became exercisable. No stock options became exercisable during the three months ended March 31, 2012 or the three and nine months ended March 31, 2011. As of March 31, 2012, 1,355,989 stock options were exercisable.

          No stock options were exercised during the three and nine months ended March 31, 2012 or during the three months ended March 31, 2011. During the nine months ended March 31, 2011, the Company received approximately $0.02 million from repayment of stock option-related loans. The Company issues new shares to satisfy stock option exercises.

               Restricted stock

          The following table summarizes restricted stock activity for the nine months ended March 31, 2012 and 2011:

    Number of Shares     Weighted Average  
    of Restricted Stock     Grant Date Fair Value  
Non-vested – July 1, 2011   103,672     -  
       Granted – August 2011   30,155   $ 199  
       Granted – February 2012   550,000   $ 6,111  
       Vested – August 2011   (6,157 )   -  
       Vested – November 2011   (27,667 )   -  
Non-vested – March 31, 2012   650,003     -  
             
Non-vested – July 1, 2010   407,828     -  
       Granted – August 2010   13,956   $ 185  
       Granted – October 2010   60,000   $ 740  
       Granted – November 2010   83,000   $ 879  
       Vested – September 2010   (201,704 )   -  
       Vested – February 2011   (1,094 )   -  
Non-vested – March 31, 2011   361,986     -  

16


12.    Stock-based compensation (continued)

          Stock option and restricted stock activity (continued)

               Restricted stock (continued)

          The fair value of restricted stock vesting during the three and nine months ended March 31, 2012, was $0.0 million and $0.3 million, respectively. The fair value of restricted stock vested during the nine months ended March 31, 2011, was $0.01 million and $2.3 million, respectively.

          Stock-based compensation charge and unrecognized compensation cost

          The Company has recorded a stock compensation charge of $0.8 million and $1.6 million for the three months ended March 31, 2012 and 2011, respectively, which comprised:

          Allocated to cost        
          of goods sold, IT        
          processing,     Allocated to  
    Total     servicing and     selling, general and  
    charge     support     administration  
Three months ended March 31, 2012                  
   Stock-based compensation charge $ 844   $ -   $ 844  
             Total – three months ended March 31, 2012 $ 844   $ -   $ 844  
                   
Three months ended March 31, 2011                  
   Stock-based compensation charge $ 1,595   $ 50   $ 1,545  
             Total – three months ended March 31, 2011 $ 1,595   $ 50   $ 1,545  

          The Company has recorded a stock compensation charge of $1.9 million and $4.6 million for the nine months ended March 31, 2012 and 2011, respectively, which comprised:

          Allocated to cost        
          of goods sold, IT        
          processing,     Allocated to  
    Total     servicing and     selling, general and  
    charge     support     administration  
Nine months ended March 31, 2012                  
   Stock-based compensation charge $ 1,882   $ -   $ 1,882  
             Total – Nine months ended March 31, 2012 $ 1,882   $ -   $ 1,882  
                   
Nine months ended March 31, 2011                  
   Stock-based compensation charge $ 4,592   $ 152   $ 4,440  
             Total – Nine months ended March 31, 2011 $ 4,592   $ 152   $ 4,440  

          The stock-based compensation charges 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 March 31, 2012, the total unrecognized compensation cost related to stock options was approximately $1.0 million, which the Company expects to recognize over approximately three years. As of March 31, 2012, the total unrecognized compensation cost related to restricted stock awards was approximately $6.6 million, which the Company expects to recognize over approximately three years.

          As of March 31, 2012, the Company has recorded a deferred tax asset of approximately $0.3 million related to the stock-based compensation charge recognized related to employees of Net1 as it is able to deduct the grant date fair value for taxation purposes in the United States.

17


13.    Profit on liquidation of SmartSwitch Nigeria

          The Company has ceased operations in the Federation of Nigeria due to an inability to implement its technology on a profitable basis. During the three months ended September 30, 2011, the Company, together with the other shareholders, agreed to liquidate SmartSwitch Nigeria, the company through which operating activities in Nigeria were performed. SmartSwitch Nigeria was capitalized primarily with shareholder loans. The Company eliminated its portion of the loan funding on consolidation, and included the loans due to the non-controlling interest in long-term borrowings on its June 30, 2011, consolidated balance sheet. The shareholders of SmartSwitch Nigeria have agreed to waive all outstanding capital and interest repayments related to the loan funding initially provided as part of the liquidation processes. The non-cash profit on liquidation of SmartSwitch Nigeria of $4.0 million includes the write back of all assets and liabilities, including non-controlling interest loans, of SmartSwitch Nigeria, except for expected liabilities related to the liquidation of SmartSwitch Nigeria. The profit has been allocated to corporate/eliminations.

14.    Earnings per share

          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 three and nine months ended March 31, 2012 and 2011, reflects only undistributed earnings.

          Diluted earnings per share have been calculated to give effect to the number of additional shares of 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 for the three and nine months ended March 31, 2012 and 2011, includes the dilutive effect of a portion of the restricted stock awards granted to employees as these restricted stock awards are considered contingently issuable shares. For the purposes of the diluted earnings per share calculation and as of March 31, 2012 and 2011, the vesting conditions in respect of a portion of the awards had not been satisfied.

          The following table details the weighted average number of outstanding shares used for the calculation of earnings per share for the three and nine months ended March 31, 2012 and 2011.

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
    ‘000     ‘000     ‘000     ‘000  
Weighted average number of outstanding shares of
     common stock – basic
  45,268     45,452     45,084     45,423  
Weighted average effect of dilutive securities: employee 
     share-based awards
  107     107     56     66  
Weighted average number of outstanding shares of 
     common stock – diluted
  45,375     45,559     45,140     45,489  

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15.    Operating segments

          A description of the Company’s operating segments is contained in note 19 to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2011.

          The Company has reallocated its EP Kiosk business unit to the South African transaction-based activities segment from the hardware, software and related technology segment, as the unit is no longer in pilot phase and now forms part of EasyPay. Following XeoHealth’s first contract signing, the Company has allocated its revenue and costs to the international transaction-based activities segment, which were previously included in the South African transaction-based activities segment. Revenue and administration costs related to the Company’s comprehensive financial services offerings are all included in the financial services segment. The effect of these reallocations has not significantly impacted the Company’s reported results. Restated amounts for the three months ended March 31, 2011, also include the effects of reallocating the Company’s initiatives in Iraq, Nigeria and Net1 VCC. The impact of these reallocations on the Company’s revenue, operating income (loss) and net income (loss) for the three months ended March 31, 2011, is presented in the table below:

    Three months ended March 31, 2011        
          As              
          previously              
    Restated     reported     Difference        
                         
Revenues from external customers                        
     SA transaction-based activities $ 47,313   $ 47,313   $ -        
     International transaction-based activities   24,627     24,627     -        
     Smart card accounts   8,288     8,288     -        
     Financial services   2,171     2,168     3        
     Hardware, software and related technology sales   10,359     10,362     (3 )      
         Total   92,758     92,758     -        
Operating income (loss)                        
     SA transaction-based activities   18,566     18,309     257        
     International transaction-based activities   274     780     (506 )      
     Smart card accounts   3,767     3,767     -        
     Financial services   1,540     1,701     (161 )      
     Hardware, software and related technology sales   (44,086 )   (44,584 )   498        
     Corporate/Eliminations   (2,186 )   (2,098 )   (88 )      
         Total   (22,125 )   (22,125 )   -        
Net income (loss)                        
     SA transaction-based activities   13,380     13,054     326        
     International transaction-based activities   394     899     (505 )      
     Smart card accounts   2,712     2,712     -        
     Financial services   1,099     1,214     (115 )      
     Hardware, software and related technology sales   (33,080 )   (36,561 )   3,481        
     Corporate/Eliminations   (6,067 )   (2,880 )   (3,187 )      
         Total $ (21,562 ) $ (21,562 ) $ -        

          The impact of these reallocations on the Company’s revenue, operating income (loss) and net income (loss) for the nine months ended March 31, 2011, is presented in the table below:

    Nine months ended March 31, 2011        
          As              
          previously              
    Restated     reported     Difference        
                         
Revenues from external customers                        
     SA transaction-based activities $ 138,939   $ 138,793   $ 146        
     International transaction-based activities   42,482     41,577     905        
     Smart card accounts   24,692     24,692     -        
     Financial services   5,072     5,039     33        
     Hardware, software and related technology sales   34,867     35,951     (1,084 )      
         Total $ 246,052   $ 246,052   $ -        

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15.      Operating segments (continued)

    Nine months ended March 31, 2011        
          As              
          previously              
    Restated     reported     Difference        
                         
Operating income (loss)                        
     SA transaction-based activities $ 54,892   $ 54,632   $ 260        
     International transaction-based activities   (295 )   1,107     (1,402 )      
     Smart card accounts   11,221     11,221     -        
     Financial services   3,365     3,861     (496 )      
     Hardware, software and related technology sales   (46,474 )   (47,563 )   1,089        
     Corporate/Eliminations   (11,874 )   (12,423 )   549        
         Total   10,835     10,835     -        
Net income (loss)                        
     SA transaction-based activities   39,597     38,892     705        
     International transaction-based activities   (779 )   902     (1,681 )      
     Smart card accounts   8,081     8,081     -        
     Financial services   2,411     2,768     (357 )      
     Hardware, software and related technology sales   (35,085 )   (39,057 )   3,972        
     Corporate/Eliminations   (18,410 )   (15,771 )   (2,639 )      
         Total $ (4,185 ) $ (4,185 ) $ -        

          The following tables summarize segment information which is prepared in accordance with GAAP:

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
                         
Revenues from external customers                        
     SA transaction-based activities $ 46,423   $ 47,313   $ 142,773   $ 138,939  
     International transaction-based activities   28,188     24,627     87,278     42,482  
     Smart card accounts   7,558     8,288     23,074     24,692  
     Financial services   2,289     2,171     6,344     5,072  
     Hardware, software and related technology sales   6,206     10,359     23,179     34,867  
         Total   90,664     92,758     282,648     246,052  
Inter-company revenues                        
     SA transaction-based activities   993     985     2,970     2,923  
     International transaction-based activities   -     -     -     -  
     Smart card accounts   390     -     671     -  
     Financial services   -     -     -     -  
     Hardware, software and related technology sales   362     517     1,145     1,509  
         Total   1,745     1,502     4,786     4,432  
Operating income (loss)                        
     SA transaction-based activities   8,694     18,566     44,643     54,892  
     International transaction-based activities   195     274     1,120     (295 )
     Smart card accounts   3,435     3,767     10,487     11,221  
     Financial services   1,248     1,540     3,685     3,365  
     Hardware, software and related technology sales   (1,301 )   (44,086 )   1,545     (46,474 )
     Corporate/Eliminations   207     (2,186 )   2,072     (11,874 )
         Total   12,478     (22,125 )   63,552     10,835  
Interest earned                        
     SA transaction-based activities   -     -     -     -  
     International transaction-based activities   -     -     -     -  
     Smart card accounts   -     -     -     -  
     Financial services   -     -     -     -  
     Hardware, software and related technology sales   -     -     -     -  
     Corporate/Eliminations   2,164     1,516     5,981     5,950  
         Total $ 2,164   $ 1,516   $ 5,981   $ 5,950  

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15.    Operating segments (continued)

    Three months ended     Nine months ended  
    March 31,     March 31,  
    2012     2011     2012     2011  
                         
Interest expense                        
   SA transaction-based activities $ 125   $ 178   $ 313   $ 526  
   International transaction-based activities   -     156     44     335  
   Smart card accounts   -     -     -     -  
   Financial services   -     15     2     15  
   Hardware, software and related technology sales   3     15     26     43  
   Corporate/Eliminations   2,116     2,107     6,830     5,230  
       Total   2,244     2,471     7,215     6,149  
                         
Depreciation and amortization                        
   SA transaction-based activities   2,172     2,237     6,423     6,711  
   International transaction-based activities   6,746     6,047     19,665     9,946  
   Smart card accounts   -     -     -     -  
   Financial services   78     131     269     402  
   Hardware, software and related technology sales   153     2,568     474     7,550  
   Corporate/Eliminations   176     209     363     579  
       Total   9,325     11,192     27,194     25,188  
                         
Income taxation expense (benefit)                        
   SA transaction-based activities   2,526     5,007     12,540     14,766  
   International transaction-based activities   (88 )   (55 )   538     369  
   Smart card accounts   962     1,055     2,937     3,142  
   Financial services   349     427     1,025     937  
   Hardware, software and related technology sales   (339 )   (10,925 )   317     (11,311 )
   Corporate/Eliminations   1,201     2,888     (7,572 )   6,537  
       Total   4,611     (1,603 )   9,785     14,440  
                         
Net income (loss)                        
   SA transaction-based activities   6,044     13,380     31,791     39,597  
   International transaction-based activities   405     394     958     (779 )
   Smart card accounts   2,473     2,712     7,550     8,081  
   Financial services   898     1,099     2,638     2,411  
   Hardware, software and related technology sales   (963 )   (33,080 )   1,201     (35,085 )
   Corporate/Eliminations   (1,091 )   (6,067 )   8,490     (18,410 )
       Total   7,766     (21,562 )   52,628     (4,185 )
                         
Expenditures for long-lived assets                        
   SA transaction-based activities   10,185     649     11,969     1,933  
   International transaction-based activities   3,587     3,848     11,042     7,086  
   Smart card accounts   -     -     -     -  
   Financial services   97     124     314     340  
   Hardware, software and related technology sales   10     58     140     99  
   Corporate/Eliminations   -     -     -     -  
       Total $ 13,879   $ 4,679   $ 23,465   $ 9,458  

          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.

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16.    Income tax

          Change in South African tax law

          On December 20, 2011, there was a change in South African tax law to impose a 15% dividends withholding tax (a tax levied and withheld by a company on distributions to its shareholders) to replace the 10% Secondary Taxation on Companies (a tax levied directly on a company on dividend distributions) (“STC”). The change becomes effective on April 1, 2012. The withholding tax rate applicable to the Company is reduced to 5% under the U.S. / South Africa double taxation treaty. As a result, the Company has recorded a net deferred taxation benefit of approximately $18.3 million in income taxation expense in its condensed consolidated statements of operations during the nine months ended March 31, 2012. There were no changes to the enacted tax rate during the three and nine months ended March 31, 2011.

          Currently, the Company intends to permanently reinvest its undistributed South African earnings in South Africa. Accordingly, the Company has not recognized a deferred tax liability related to any future distributions of these undistributed earnings. The Company will be required to record a taxation charge related to any change in its distribution of undistributed earnings if it decides not to permanently reinvest its undistributed earnings. This may result in an increase in the Company’s effective tax rate in future periods.

          Foreign tax credits and change in valuation allowance

           As a result of the change in South African tax law and the Company’s intention to permanently reinvest its undistributed earnings in South Africa, the Company does not believe it will be able to recover foreign tax credits previously recognized of $8.2 million. The Company has recorded this charge of $8.2 million in its income taxation expense in its condensed consolidated statements of operations for the nine months ended March 31, 2012.

          Income tax in interim periods

          For the purposes of interim financial reporting, the Company determines the appropriate income tax provision by first applying the effective tax rate expected to be applicable for the full fiscal year to ordinary income. This amount is then adjusted for the tax effect of significant unusual or extraordinary items, for instance, changes in tax law, valuation allowances and non-deductible transaction-related expenses, that are reported separately, and have an impact on the tax charge. The cumulative effect of any change in the enacted tax rate, if and when applicable, on the opening balance of deferred tax assets and liabilities is also included in the tax charge as a discrete event in the interim period in which the enactment date occurs.

          For the three and nine months ended March 31, 2012, the tax charge was calculated using the expected effective tax rate for the year. The Company’s effective tax rate for the three and nine months ended March 31, 2012, was 37.19% and 15.7%, respectively, as a result of a change in tax law in South Africa, non-taxable profit on liquidation of SmartSwitch Nigeria, fewer non-deductible expenses, offset by increased interest expense related to the Company’s long-term Korean borrowings and the creation of a valuation allowance The Company’s effective tax rate for the three and nine months ended March 31, 2011, was 7% and 135.8%, respectively, as a result of non-deductible expenses, including transaction-related expenses and interest expense related to the acquisition of KSNET.

          Uncertain tax positions

          The Company increased its unrecognized tax benefits by $0.04 million and $0.1 million, respectively, during the three and nine months ended March 31, 2012. As of March 31, 2012, the Company had accrued interest related to uncertain tax positions of approximately $0.3 million on its balance sheet.

          The Company does not expect changes related to its unrecognized tax benefits will have a significant impact on its results of operations or financial position in the next 12 months.

          The Company files income tax returns mainly in South Africa, Korea, Austria, the Russian Federation and in the US federal jurisdiction. As of March 31, 2012, the Company is no longer subject to income tax examination by the South African Revenue Service for years before March 31, 2009. In 2011, the Korea National Tax Service had effectively completed the examination of the Company’s returns in Korea related to years 2006 through 2010. The Company is subject to income tax in other jurisdictions outside South Africa and Korea, none of which are individually material to its financial position, statement of cash flows, or results of operations.

22


17.    Subsequent events

          On April 19, 2012, the Company issued an option to purchase 8,955,000 shares of its common stock to a BEE consortium pursuant to the previously-announced BEE transaction that it entered into on January 25, 2012. The grant date fair value of the option was $11.7 million and the Company expects to expense this amount in full during the three months ended June 30, 2012.

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2011 and the unaudited condensed consolidated financial statements and the accompanying notes included in this Form 10-Q.

Forward-looking statements

     Some of the statements in this Form 10-Q constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. Such factors include, among other things, those listed under Item 1A.—“Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended June 30, 2011 and Item IA—“Risk Factors” and elsewhere in this Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology.

     Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

     You should read this Form 10-Q and the documents that we reference herein and the documents we have filed as exhibits hereto and which we have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Recent Developments

     South Africa

          New SASSA contract

     On January 17, 2012, SASSA awarded us a tender to provide payment services for social grants in all of South Africa’s nine provinces for a period of five years. On February 3, 2012, we entered into a new contract, together with a related service level agreement, with SASSA pursuant to which we pay, on behalf of SASSA, social grants to all persons nationally who are entitled to receive such grants, for a firm price of ZAR16.44 per beneficiary paid, or ZAR 14.42 net of VAT. On March 31, 2012, our then-existing contract with SASSA to provide social grant distribution in five provinces expired. We are now operating under the new contract.

     We commenced the implementation of our new contract during the third quarter of fiscal 2012. The implementation will be conducted in two phases. The first phase involved issuing approximately 2.5 million MasterCard-branded debit cards to beneficiaries that we did not serve under our previous contract in order to establish the payment process to pay all social grants in the country. We successfully commenced the national grant payment process for approximately 9.2 million beneficiaries on April 2, 2012.

     The second phase will require us to re-enroll all social grant beneficiaries in South Africa. This enrollment process will require us to capture the personal and biometric information of each beneficiary and issue each grant recipient with our latest MasterCard-branded EMV/UEPS combination smart cards. These smart cards can be used across all elements of the South African National Payment System, including at ATMs and POS’s, in addition to our current UEPS merchant acquiring system and mobile pay points. We expect to commence the second phase of the enrollment process in June 2012 and plan to be substantially complete by March 2013.

     Following the conclusion of the new service level agreement, we paid certain of our executives and key employees special bonuses of $5.4 million (ZAR 41.8 million) in recognition of their contributions to the compilation of the successful SASSA tender, the development of the new technologies and the support provided for the implementation of the tender award. In order to complete the first phase of the implementation on time, we hired approximately 2,200 of the estimated 2,600 temporary employees required to assist with the first phase of the beneficiary enrollment process. Once we have completed the second phase, we expect our permanent employee base to increase from pre-new contract levels by approximately 900 people.

24


     During the third quarter of fiscal 2012 we incurred direct implementation expenses of approximately $1.3 million (ZAR10 million) including staff, travel (excluding the bonuses discussed above), premises hire for enrollment, stationery, delivery and advertising costs. We are unable to quantify the value of time spent by our executives and pension and welfare operations managers and staff that service the five provinces in which we operated under the previous contract and that have assisted in the implementation of the national award. During the third quarter, we also incurred approximately $7.0 million in capital expenditures, primarily to acquire payment vehicles required for the national implementation. We anticipate cumulative capital expenditures related to the ramp of our national contract to remain in the $45 to $50 million range, of which roughly two-thirds should be incurred by the end of the first quarter of fiscal 2013.

     See Item 1A—“Risk Factors” in this Form 10-Q for more information about and the risks associated with our SASSA contract.

          Issue of option pursuant to Broad Based Black Economic Empowerment transaction

     On April 19, 2012, we issued an option to purchase 8,955,000 shares of our common stock to a BEE consortium pursuant to the previously-announced BEE transaction that we entered into on January 25, 2012. While we believe that this transaction will improve our BEE rating, and therefore provide us with additional business opportunities in South Africa, additional steps may become necessary to achieve these goals.

     For a discussion of additional risks associated with compliance with the South African Broad Based Black Economic Empowerment Act, please see the risk factor entitled “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.” in Item 1A of our Form 10-K for the year ended June 30, 2011.

          South African transaction processors

     The revenue of our social grant payment activities for the third quarter is recorded in terms of our previous contract which terminated on March 31, 2012. FIHRST continues to expand its market share in the third-party payroll payment processing space through its existing customers embracing additional services and an increase in new customers. MediKredit signed agreements with new providers, including public hospitals, private hospitals and specialist doctors, and has commenced adjudication and processing activities for these providers.

     Outside South Africa

          KSNET

     The KSNET management team has commenced a number of strategic initiatives in the Republic of Korea to maintain and expand our current market share and to grow into adjacent markets. 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. These initiatives are beginning to yield positive results as we expanded our product offering and customer base, however, the competitive value added network environment in Korea has resulted in a nominal anticipated loss of operation margin. We expect this competitive environment to continue for the foreseeable future, and expect further nominal margin loss in the short to medium-term. However, management expects that its efforts to penetrate the small and medium sized merchant base as well as the introduction of additional services that leverage the existing infrastructure may be able improve the unit’s margin profile over time.

          XeoHealth

     During the second quarter of fiscal 2012, we commenced processing 4010 and 5010 data, including capitation information and creating state reporting claims files for Community Behavioral Health, or CBH, a not-for-profit corporation contracted by the City of Philadelphia to provide behavioral health services for Philadelphia Medicaid recipients. XeoHealth licenses its XeoRulesTM SaaS offering to CBH including implementation services. XeoHealth has recognized implementation revenue during the implementation phase and recurring transaction-based revenue from December 2011 from this contract.

     Additionally, XeoHealth has been subcontracted by Cognosante LLC, a U.S. provider of health IT services to state and federal agencies and regional health organizations, to assist with the provision of recovery audit contractor, or RAC, services to the North Dakota Department of Human Services, Medical Services Division. XeoHealth will earn a fee based on a percentage of the final recoveries identified by our XeoRules claims auditing service for the past five years, as well as the desk review recovery referrals identified through our XeoRules engine until June 30, 2013. In addition to the North Dakota RAC, XeoHealth has also been subcontracted by Cognosante to provide both the automated audit as well the analysis services as required by the RAC for the State of Missouri Medicaid.

25


     XeoHealth will be compensated based on a percentage of the final recoveries identified by our XeoRules claims re-adjudicating service for the audit period of three years, as well as the desk review recovery referrals identified through our XeoRules engine. We expect XeoHealth to commence providing RAC services by September 2012.

     XeoRules is XeoHealth’s internally developed 5010 and ICD-10 enabled real-time claims adjudication engine. XeoRules significantly reduces the time and radically improves the efficiency and accuracy of healthcare claims adjudication and data processing. We continue to enjoy significant interest from various participants in the U.S. healthcare industry in our solution for the current and newly updated Health Insurance Portability and Accountability Act-mandated electronic data interchange transactions.

          Mobile 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 card not present transactions. During the first quarter of fiscal 2012, we engaged the services of a specialist advisory firm to assist us with the general management of our VCPay initiatives in the USA, the identification of the various strategic channels for VCPay deployment and the commercialization of VCPay in our targeted industry verticals.

     The Banamex VCPay initiative in Mexico is currently in the system integration testing phase, with hardware having been deployed and prepared for launch in the second quarter of fiscal 2013. We believe that this first implementation of our VCPay™ technology in Latin America, spearheaded by one of the largest financial institutions in the region, as a catalyst to increase the footprint of VCPay services in the region.

          The African Continent and Iraq

     During fiscal 2012, NUETS recorded revenue from transaction fees under its contract with the government of Iraq. 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 countries on the African continent during the year. In addition, NUETS has developed a limited investment / software as a service business model and we expect to deploy the UEPS technology in selected African markets using this approach during the second half of fiscal 2012.

Critical Accounting Policies

     Our unaudited condensed consolidated financial statements have been prepared in accordance with US GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires 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.

     Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially may result in materially different results under different assumptions and conditions. Management has identified the following critical accounting policies that are described in more detail in our Annual Report on Form 10-K for the year ended June 30, 2011:

     Recent accounting pronouncements adopted

     No new accounting pronouncements were adopted by us during the three months ended March 31, 2012.

     Recent accounting pronouncements not yet adopted as of March 31, 2012

     Refer to note 1 to the unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of March 31, 2012, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

26


Currency Exchange Rate Information

     Actual exchange rates

     The actual exchange rates for and at the end of the periods presented were as follows:

Table 1   Three months ended     Nine months ended     Year ended  
    March 31,     March 31,     June 30,  
    2012     2011     2012     2011(1)   2011(2)  
ZAR : $ average exchange rate   7.7822     7.0160     7.6771     7.1017     7.0286  
Highest ZAR : $ rate during period   8.2333     7.3457     8.6005     7.7809     7.7809  
Lowest ZAR : $ rate during period   7.4001     6.4925     6.6096     6.4925     6.4925  
Rate at end of period   7.6930     6.8456     7.6930     6.8456     6.8449  
                               
KRW : $ average exchange rate   1,133     1,122     1,121     1,129     1,113  
Highest KRW : $ rate during period   1,165     1,140     1,202     1,169     1,169  
Lowest KRW : $ rate during period   1,090     1,089     1,029     1,089     1,059  
Rate at end of period   1,135     1,106     1,135     1,106     1,079  

(1)

– KRW : $ average, highest and lowest exchange rates are from November 1, 2010 to March 31, 2011;

(2)

– KRW : $ average, highest and lowest exchange rates are from November 1, 2010 to June 30, 2011.

27


     Translation exchange rates

     We are required to translate our results of operations from ZAR and KRW to US dollars on a monthly basis. Thus, the average rates used to translate this data for the three and nine months ended March 31, 2012 and 2011, 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   Three months     Nine months ended     Year ended  
    ended March 31,     March 31,     June 30,  
    2012     2011     2012     2011     2011  
Income and expense items: $1 = ZAR .   7.8521     6.9853     7.8245     7.0891     6.9962  
Income and expense items: $1 = KRW   1,126     1,122     1,119     1,118     1,121  
                               
Balance sheet items: $1 = ZAR   7.6930     6.8456     7.6930     6.8456     6.8449  
Balance sheet items: $1 = KRW   1,135     1,106     1,135     1,106     1,079  

Results of operations

     The discussion of our consolidated overall results of operations is based on amounts as reflected in our unaudited condensed consolidated financial statements which are prepared in accordance with US GAAP. We analyze our results of operations both in US dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the US dollar and ZAR on our reported results and because we use the US dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business.

     Three and nine months ended March 31, 2011, results do not include Eason and SmartLife but do include KSNET from November 1, 2010. In addition, the following discussion gives effect to the reallocation of certain activities among our business segments as described in note 15 to the unaudited condensed consolidated financial statements.

28


     We analyze our business and operations in terms of five inter-related but independent operating segments: (1) South African transaction-based activities, (2) international transaction-based activities, (3) smart card accounts, (4) financial services, and (5) hardware, software and related technology sales. In addition, corporate and corporate office activities that are impracticable to ascribe directly to any of the other operating segments, as well as any inter-segment eliminations, are included in corporate/eliminations.

     Third quarter of fiscal 2012 compared to third quarter of fiscal 2011

     The following factors had an influence on our results of operations during the third quarter of fiscal 2012 as compared with the same period in the prior year:

     Consolidated overall results of operations

     This discussion is based on the amounts which were prepared in accordance with US GAAP.

     The following tables show the changes in the items comprising our statements of operations, both in US dollars and in ZAR:

    In United States Dollars  
Table 3   (US GAAP)  
    Three months ended March 31,  
    2012     2011     $ %  
    ’000     ’000     change  
Revenue   90,664     92,758     (2% )
Cost of goods sold, IT processing, servicing and support   32,493     29,302     11%  
Selling, general and administration   36,368     32,618     12%  
Depreciation and amortization   9,325     11,192     (17% )
Impairment of intangible assets   -     41,771     nm  
Operating income (loss)   12,478     (22,125 )   nm  
Interest income   2,164     1,516     43%  
Interest expense   2,244     2,471     (9% )
Income (Loss) before income taxes   12,398     (23,080 )   nm  
Income tax expense (benefit)   4,611     (1,603 )   nm  
Net income (loss) before loss from equity-accounted investments   7,787     (21,477 )   nm  
Loss from equity-accounted investments   (4 )   (127 )   (97% )
Net income (loss)   7,783     (21,604 )   nm  
Less (Add) net income (loss) attributable to non-controlling interest   17     (42 )   nm  
Net income (loss) attributable to us   7,766     (21,562 )   nm  

29



    In South African Rand  
Table 4   (US GAAP)  
    Three months ended March 31,  
    2012     2011     ZAR  
    ZAR     ZAR     %  
    ’000     ’000     change  
Revenue   711,902     647,942     10%  
Cost of goods sold, IT processing, servicing and support   255,139     204,683     25%  
Selling, general and administration   285,566     227,846     25%  
Depreciation and amortization   73,220     78,179     (6% )
Impairment of intangible assets   0     291,783     nm  
Operating income (loss)   97,977     (154,549 )   nm  
Interest income   16,992     10,590     60%  
Interest expense   17,620     17,261     2%  
Income (Loss) before income taxes   97,349     (161,220 )   nm  
Income tax expense (benefit)   36,206     (11,197 )   nm  
Net income (loss) before loss from equity-accounted investments   61,143     (150,023 )   nm  
Loss from equity-accounted investments   (31 )   (887 )   (97% )
Net income (loss)   61,112     (150,910 )   nm  
Less (Add) net income (loss) attributable to non-controlling interest   133     (293 )   nm  
Net income (loss) attributable to us   60,979     (150,617 )   nm  

     Analyzed in ZAR, the increase in revenue was primarily due to higher prepaid airtime sales resulting from the Eason acquisition, higher KSNET revenues, an increase in the number of UEPS-based loans made, and higher utilization of our UEPS system in Iraq. The revenue contribution from our pension and welfare operation was relatively flat as we commenced the April 2012 payment cycle in late March 2012 and generated revenue at the new lower contract rate.

     Analyzed in ZAR, the increase in cost of goods sold, IT processing, servicing and support was primarily due to higher prepaid airtime sales resulting from the Eason acquisition, increased expenditure by KSNET and expenses related to the implementation of our new SASSA contract.

     Our selling, general and administration expense increased as a result of contract implementation costs of $1.3 million and cash bonuses of $5.4 million paid related to our recent SASSA tender award as well as increases in goods and services purchased from third parties. During the third quarter of fiscal 2011, selling, general and administration expense included transaction-related costs of $0.5 million (ZAR 3.7 million), primarily for the KSNET acquisition.

     Our operating income margin for the third quarter of fiscal 2012 and 2011, before the impairment loss discussed below, was 14% and 21%, respectively. We discuss the components of the operating income margin under “—Results of operations by operating segment.” The decrease is primarily attributable to implementation costs and cash bonuses paid related to our recent SASSA tender award and a lower operating margin from our South African transaction-based activities (primarily as a result of the inclusion of Eason).

     In ZAR, depreciation and amortization decreased primarily as a result of the full impairment of Net1 UTA intangibles in 2011, offset by higher KSNET depreciation and acquisition-related intangible asset amortization. The intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented in the tables below:

    Three months ended  
Table 5   March 31,  
    2012   2011  
    $’000   $’000  
Amortization included in depreciation and amortization expense:   5,042       7,007  
     South African transaction-based activities   1,758       1,428  
     International transaction-based activities   3,192       3,124  
     Hardware, software and related technology sales (1)   92       2,455  

  (1)

Three months ended March 31, 2011, includes Net1 UTA customer relationship amortization of $2.3 million.

30



    Three months ended  
Table 6   March 31,  
    2012       2011  
    ZAR ’000       ZAR ’000  
Amortization included in depreciation and amortization expense:   39,594       48,946  
     South African transaction-based activities   13,813       9,973  
     International transaction-based activities   25,064       21,822  
     Hardware, software and related technology sales (1)   717       17,151  

     (1) Three months ended March 31, 2011, includes Net1 UTA customer relationship amortization of ZAR 16.0 million.

     During 2011, customer relationships acquired as part of the Net1 UTA acquisition 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 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.

     Interest on surplus cash increased to $2.2 million (ZAR 17.0 million) from $1.5 million (ZAR 10.6 million). The increase resulted primarily from higher average daily ZAR cash balances.

     In US dollars, interest expense decreased to $2.2 million (ZAR 17.6 million) from $2.5 million (ZAR 17.3 million) due to a lower average long-term debt balance.

     As a result of the change in South African tax law in the second quarter of fiscal 2012, we no longer accrue for STC on undistributed earnings because STC has been replaced with a dividends withholding tax. Our fully distributed tax rate for the third quarter of fiscal 2012 was 28%. Our effective tax rate is higher than our fully distributed rate due to non-deductible expenses, including stock-based compensation charges and interest expense related to our Korean loan term debt and in fiscal 2011, acquisition-related expenses.

     Total 2012 tax expense was $4.6 million (ZAR 36.2 million) compared to total tax benefit of $1.6 million (ZAR 11.2 million) in 2011 and our effective tax rate increased to 37% from 7% (47% excluding the impact of the deferred tax liability adjustment). Our 2011 tax benefit resulted from the reversal of deferred tax liabilities associated with the Net1 UTA intangible assets impaired. The reduction in our effective tax rate in fiscal 2012 was primarily due to the tax law change and fewer non-deductible expenses, including stock-based compensation charges and acquisition-related expenses.

31


     Results of operations by operating segment

     The composition of revenue and the contributions of our business activities to operating income (loss) are illustrated below.

Table 7   In United States Dollars (US GAAP)  
    Three months ended March 31,  
    2012       % of     2011       % of     %  
Operating Segment   $’000       total     $’000       total     change  
Consolidated revenue:                                  
SA transaction-based activities   46,423       51%     47,313       51%     (2% )
International transaction-based activities   28,188       31%     24,627       27%     14%  
Smart card accounts   7,558       8%     8,288       9%     (9% )
Financial services   2,289       3%     2,171       2%     5%  
Hardware, software and related technology sales   6,206       7%     10,359       11%     (40% )
     Total consolidated revenue   90,664       100%     92,758       100%     (2% )
Consolidated operating income (loss):                                  
SA transaction-based activities   8,694       70%     18,566       (84% )   (53% )
     Operating income before amortization   10,452             19,994             (48% )
     Amortization of intangible assets   (1,758 )           (1,428 )           23%  
International transaction-based activities   195       2%     274       (1% )   (29% )
     Operating income before amortization   3,387             3,398             -  
     Amortization of intangible assets   (3,192 )           (3,124 )           2%  
Smart card accounts   3,435       28%     3,767       (17% )   (9% )
Financial services   1,248       10%     1,540       (7% )   (19% )
Hardware, software and related technology sales   (1,301 )     (10% )   (44,086 )     199%     (97% )
     Operating (loss) income before amortization .   (1,209 )           140             nm  
     Impairment loss   -             (41,771 )           nm  
     Amortization of intangible assets   (92 )           (2,455 )           (96% )
Corporate/eliminations   207       -     (2,186 )     10%     nm  
     Total consolidated operating income (loss)   12,478       100%     (22,125 )     100%     nm  

Table 8   In South African Rand (US GAAP)  
    Three months ended March 31,  
    2012             2011                
    ZAR       % of     ZAR       % of     %  
Operating Segment   ’000       total     ’000       total     change  
Consolidated revenue:                                  
SA transaction-based activities   364,518       51%     330,495       51%     10%  
International transaction-based activities   221,335       31%     172,027       27%     29%  
Smart card accounts   59,346       8%     57,894       9%     3%  
Financial services   17,973       3%     15,165       2%     19%  
Hardware, software and related technology sales   48,730       7%     72,361       11%     (33% )
     Total consolidated revenue   711,902       100%     647,942       100%     10%  
Consolidated operating income (loss):                                  
SA transaction-based activities   68,266       70%     129,689       (84% )   (47% )
     Operating income before amortization   82,079             139,662             (41% )
     Amortization of intangible assets   (13,813 )           (9,973 )           39%  
International transaction-based activities   1,531       2%     1,913       (1% )   (20% )
     Operating income before amortization   26,595             23,735             12%  
     Amortization of intangible assets   (25,064 )           (21,822 )           15%  
Smart card accounts   26,972       28%     26,314       (17% )   3%  
Financial services   9,799       10%     10,758       (7% )   (9% )
Hardware, software and related technology sales   (10,216 )     (10% )   (307,953 )     199%     (97% )
     Operating (loss) income before amortization .   (9,499 )           981             nm  
     Impairment loss   -             (291,783 )           nm  
     Amortization of intangible assets   (717 )           (17,151 )           (96% )
Corporate/eliminations   1,625       -     (15,270 )     10%     nm  
     Total consolidated operating income (loss)   97,977       100%     (154,549 )     100%     nm  

32


          South African transaction-based activities

     In ZAR, increases in segment revenue were primarily due to higher prepaid airtime sales resulting mainly from the Eason acquisition and increased transaction volumes in merchant acquiring and FIHRST. Revenue from our pension and welfare operations was relatively stable on a year-over-year basis. Segment revenues include the transaction fees we earn through our merchant acquiring system and reflect the elimination of inter-company transactions.

     Our operating income margin for the third quarter of fiscal 2012 and 2011 was 19% and 39%, respectively, and declined primarily due to SASSA implementation costs and cash bonuses paid and the inclusion of increased low-margin prepaid airtime sales as well as Eason intangible asset amortization.

     We operate as a reseller of non-refundable virtual prepaid airtime vouchers that we purchase from mobile-phone operators and sell to retailers; and earn a commission from the sale of prepaid electricity. The cost of the prepaid airtime vouchers is recorded in cost of goods sold, IT processing, servicing and support. Margins on the sale of prepaid airtime vouchers are significantly lower than those generated by our other business in this segment and therefore, as we expand into the prepaid airtime market in South Africa, we expect higher revenue and cost of goods sold, IT processing, servicing and support in this operating segment.

          Pension and welfare operations:

     Our pension and welfare operations continue to generate the majority of our revenues and operating income in this operating segment. See also discussion under “—Recent Developments—South Africa—New SASSA contract” for a description of our new SASSA contract, the status of our implementation and the costs we have incurred to date and expect to incur during the next four quarters as we continue the implementation process.

          South African transaction processors:

     The table below presents the total volume and value processed during the third quarter of fiscal 2012 and 2011:

Table 9                                      
      Total volume (‘000s)     Total value $(‘000)     Total value ZAR (‘000)  
      Three months ended     Three months ended     Three months ended  
Transaction     March 31,     March 31,     March 31,  
processor     2012     2011     2012     2011     2012     2011  
EasyPay(1)     96,139     172,821     2,519,319     5,804,242     19,781,946     40,544,369  
     Remaining core     96,139     119,166     2,519,319     3,762,555     19,781,946     26,282,575  
     Discontinued     -     53,655     -     2,041,687     -     14,261,794  
MediKredit     2,733     2,507     147,120     132,370     1,155,201     924,647  
FIHRST     5,951     5,281     2,411,275     2,387,363     18,933,574     16,676,447  

(1)

– includes Eason prepaid airtime and electricity volume and value from October 1, 2011 and reclassified to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities.

     During the second quarter of fiscal 2012, one of EasyPay’s large customers decided to perform its EFT/switching activities in-house, which had an adverse impact on our volumes this quarter. EasyPay has retained its value-added services relationship with this customer and therefore the overall impact to revenue and profitability is modest. EasyPay volumes and values were impacted by its focus on higher-margin value-added services and termination of certain inefficient activities such as the hosting of processing servers for financial institutions. MediKredit volumes and values were higher due to increased adjudication and processing activities for new providers, including public hospitals, private hospitals and specialist doctors. FIHRST volumes and values increased due to an increased number of customers.

33


          Key statistics of our merchant acquiring system:

     The key statistics and indicators of our merchant acquiring system during the third quarter of fiscal 2012 and 2011, in each of the five South African provinces where we distributed social welfare grants during the quarter are summarized in the table below:

Table 10   Three months ended  
    March 31,  
    2012     2011  
Total POS devices installed as of period end   4,976     4,835  
Number of participating UEPS retail locations as of period end   2,416     2,541  
Value of transactions processed through POS devices during the quarter (1) (in $ ’000)   484,862     411,233  
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in $ ’000)   459,495     401,723  
Value of transactions processed through POS devices during the quarter (1) (in ZAR ’000)   3,773,295     2,920,454  
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in ZAR ’000)   3,575,890     2,852,913  
Number of grants paid through POS devices during the quarter (1)   5,320,585     4,804,540  
Number of grants paid through POS devices during the completed pay cycles for the quarter (2)   5,088,020     4,739,062  
Average number of grants processed per terminal during the quarter (1)   1,063     995  
Average number of grants processed per terminal during the completed pay cycles for the quarter (2)   1,017     981  

  (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 continues to contribute the majority of our revenues in this operating segment. Operating margin for the segment is lower than most of our South African transaction-based businesses and was negatively impacted by start-up expenditures related to our XeoHealth launch in the United States, MVC activities at Net1 UTA and on-going losses at Net1 Virtual Card, but these expenses were partially offset by revenue contributions from KSNET, and to a lesser extent from XeoHealth and NUETS’ initiative in Iraq.

          Smart card accounts

     Operating income margin from providing smart card accounts was constant at 45%.

     In ZAR, revenue from the provision of smart card accounts was relatively constant on a year-over-year basis. A total number of 3,549,030 smart card accounts were active at March 31, 2012, compared to 3,537,126 active accounts as at March 31, 2011.

          Financial services

     UEPS-based lending contributes the majority of the revenue and operating income in this operating segment. Revenue increased primarily due to an increase in the number of loans granted. Our current UEPS-based lending portfolio comprises loans made to qualifying old age grant recipients in some of the provinces where we distribute social welfare grants. We continue to incur start-up expenditures related to our SmartLife business and other financial services offerings. SmartLife did not contribute significantly to our operating income in the third quarter of fiscal 2012 as it had not commenced operating activities under its new business model.

     Operating income margin for the financial services segment decreased to 55% from 71%, primarily as a result of startup expenditures related to SmartLife and other financial services offerings, which was offset by increased UEPS-based lending activities.

34


          Hardware, software and related technology sales

     The decrease in revenue and operating income was due to a lower contribution from all contributors to hardware and software sales. Significant quarter over quarter fluctuations in revenue, operating income and operating margin are expected due to ad hoc orders in this operating segment.

     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 lower stock-based compensation charges, primarily because the performance-based restricted stock granted in August 2007 was fully expensed in prior periods. These expense reductions were offset by higher corporate head office-related expenses. In addition, our third quarter of fiscal 2011 results include transaction related expenditures of $0.5 million (ZAR 3.7 million.)

     Our corporate expenses also include expenditure related to compliance with Sarbanes; non-executive directors’ fees; employee and executive salaries and bonuses; stock-based compensation; legal and audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.

Year to date fiscal 2012 compared to year to date 2011

     The following factors had an influence on our results of operations during the year to date fiscal 2012 as compared with the same period in the prior year:

35


     Consolidated overall results of operations

     This discussion is based on the amounts which were prepared in accordance with US GAAP.

     The following tables show the changes in the items comprising our statements of operations, both in US dollars and in ZAR:

    In United States Dollars  
Table 11         (US GAAP)        
    Nine months ended March 31,  
    2012     2011     %  
    $’000     $’000     change  
Revenue   282,648     246,052     15%  
Cost of goods sold, IT processing, servicing and support   99,605     76,551     30%  
Selling, general and administration   92,297     91,707     1%  
Depreciation and amortization   27,194     25,188     8%  
Impairment of intangible assets   -     41,771     nm  
Operating income   63,552     10,835     487%  
Interest income   5,981     5,950     1%  
Interest expense   7,215     6,149     17%  
Income before income taxes   62,318     10,636     486%  
Income tax expense   9,785     14,440     (32% )
Net income (loss) before loss from equity-accounted investments   52,533     (3,804 )   nm  
Income (Loss) from equity-accounted investments   100     (509 )   nm  
Net income (loss)   52,633     (4,313 )   nm  
Less (Add) net income (loss) attributable to non-controlling interest   5     (128 )   nm  
Net income (loss) attributable to us   52,628     (4,185 )   nm  

    In South African Rand  
Table 12   (US GAAP)  
    Nine months ended March 31,  
    2012     2011     ZAR  
    ZAR     ZAR     %  
    ’000     ’000     change  
Revenue   2,211,580     1,744,287     27%  
Cost of goods sold, IT processing, servicing and support   779,360     542,677     44%  
Selling, general and administration   722,178     650,120     11%  
Depreciation and amortization   212,780     178,560     19%  
Impairment of intangible assets   0     296,119     nm  
Operating income   497,262     76,811     547%  
Interest income   46,799     42,180     11%  
Interest expense   56,454     43,591     30%  
Income before income taxes   487,607     75,400     547%  
Income tax expense   76,563     102,367     (25% )
Net income (loss) before loss from equity-accounted investments   411,044     (26,967 )   nm  
Income (Loss) from equity-accounted investments   782     (3,608 )   nm  
Net income (loss)   411,826     (30,575 )   nm  
Less (Add) net income (loss) attributable to non-controlling interest   39     (907 )   nm  
Net income (loss) attributable to us   411,787     (29,668 )   nm  

     Analyzed in ZAR, the increase in revenue was primarily due to the inclusion of KSNET, modest growth in our pension and welfare business, higher prepaid airtime sales resulting from the Eason acquisition, an increase in the number of UEPS-based loans made, and higher utilization of our UEPS system in Iraq.

      Analyzed in ZAR, cost of goods sold, IT processing, servicing and support was higher primarily due to the inclusion of KSNET.

     The increase in selling, general and administration expense is the result of the KSNET acquisition and SASSA implementation costs of $1.3 million and cash bonuses of $5.4 million paid which was offset by lower stock-based compensation charge, primarily because the performance-based restricted stock granted in August 2007 was fully expensed in prior periods and due to the non-cash profit related to the liquidation of SmartSwitch Nigeria of $4.0 million. During the year to date fiscal 2011, selling, general and administration expense included transaction-related costs of $5.7 million (ZAR 40.1 million), primarily for the KSNET acquisition.

36


     Our operating income margin for the year to date fiscal 2012 and 2011 was 22% and 21%, respectively. We discuss the components of the operating income margin under “—Results of operations by operating segment”, however the increase is attributable to lower stock-based compensation charges and the non-cash profit related to the liquidation of SmartSwitch Nigeria of $4.0 million in the year to date fiscal 2012 compared with fiscal 2011 and transaction-related costs during fiscal 2011.

     In ZAR, depreciation and amortization increased primarily as a result of KSNET depreciation and intangible asset amortization, but was partially offset by the full impairment of Net1 UTA intangibles in 2011. The intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented in the tables below:

    Nine months ended  
Table 13   March 31,  
    2012       2011  
     $’000       $ ’000  
Amortization included in depreciation and amortization expense:   14,709       16,595  
     South African transaction-based activities   4,805       4,221  
     International transaction-based activities   9,630       5,156  
     Hardware, software and related technology sales (1)   274       7,218  

  (1)

Nine months ended March 31, 2011, includes Net1 UTA customer relationship amortization of $6.7 million.


    Nine months ended  
Table 14   March 31,  
    2012       2011  
    ZAR ’000       ZAR ’000  
Amortization included in depreciation and amortization expense:   115,096       117,644  
     South African transaction-based activities   37,594       29,918  
     International transaction-based activities   75,350       36,551  
     Hardware, software and related technology sales (1)   2,152       51,175  

  (1)

Nine months ended March 31, 2011, includes Net1 UTA customer relationship amortization of ZAR 47.8 million.

     During the third quarter of fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition 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 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.

     In ZAR, interest on surplus cash increased to $6.0 million (ZAR 46.8 million) from $6.0 million (ZAR 42.2 million). The increase resulted primarily from higher average daily ZAR cash balances offset by lower deposit rates resulting from the decrease in the South African prime interest rate from an average of approximately 9.39% to 9.00% per annum.

     Interest expense increased to $7.2 million (ZAR 56.5 million) from $6.1 million (ZAR 43.6 million) due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense for the year to date fiscal 2012 and 2011, includes amortized debt facility fees of $0.5 million (ZAR 3.9 million) and $1.8 million (ZAR 12.8 million), respectively.

     Total 2012 tax expense decreased to$9.8 million (ZAR 76.6 million) from$14.4 million (ZAR 102.4 million) in 2011 and our effective tax rate decreased to 15.7% from 47.6% (before the effect of the reversal of the impaired Net1 UTA intangible asset deferred tax liability). Our 2012 tax expense includes $18.3 million related to a change in South African tax law and the creation of a valuation allowance of $8.2 million related to foreign tax credits. The reduction in our effective tax rate was primarily due to the tax law change, a non-taxable profit on liquidation of SmartSwitch Nigeria and fewer non-deductible expenses, including stock-based compensation charges and acquisition-related expenses, which was offset by non-deductible interest expenses related to our Korean long-term debt.

37


     Results of operations by operating segment

     The composition of revenue and the contributions of our business activities to operating income (loss) are illustrated below.

Table 15   In United States Dollars (US GAAP)  
    Nine months ended March 31,  
    2012       % of     2011       % of     %  
Operating Segment   $ ’000       total     $ ’000       total     change  
Consolidated revenue:                                  
SA transaction-based activities   142,773       51%     138,939       56%     3%  
International transaction-based activities   87,278       31%     42,482       17%     105%  
Smart card accounts   23,074       8%     24,692       10%     (7% )
Financial services   6,344       2%     5,072       2%     25%  
Hardware, software and related technology sales   23,179       8%     34,867       15%     (34% )
     Total consolidated revenue   282,648       100%     246,052       100%     15%  
Consolidated operating income (loss):                                  
SA transaction-based activities   44,643       70%     54,892       507%     (19% )
     Operating income before amortization   49,448             59,113             (16% )
     Amortization of intangible assets   (4,805 )           (4,221 )           14%  
International transaction-based activities   1,120       2%     (295 )     (3% )   nm  
     Operating income (loss) before amortization .   10,750             4,861             121%  
     Amortization of intangible assets   (9,630 )           (5,156 )           87%  
Smart card accounts   10,487       17%     11,221       104%     (7% )
Financial services   3,685       6%     3,365       31%     10%  
Hardware, software and related technology sales   1,545       2%     (46,474 )     (429% )   nm  
     Operating income (loss) before amortization .   1,819             2,515             (28% )
     Impairment loss   -             (41,771 )           nm  
     Amortization of intangible assets   (274 )           (7,218 )           (96% )
Corporate/eliminations   2,072       3%     (11,874 )     (110% )   nm  
     Total consolidated operating income   63,552       100%     10,835       100%     487%  

Table 16   In South African Rand (US GAAP)  
    Nine months ended March 31,  
    2012             2011                
    ZAR       % of     ZAR       % of     %  
Operating Segment   ’000       total     ’000       total     change  
Consolidated revenue:                                  
SA transaction-based activities   1,117,127       51%     984,952       56%     13%  
International transaction-based activities   682,907       31%     301,159       17%     127%  
Smart card accounts   180,543       8%     175,044       10%     3%  
Financial services   49,639       2%     35,956       2%     38%  
Hardware, software and related technology sales   181,364       8%     247,176       15%     (27% )
     Total consolidated revenue   2,211,580       100%     1,744,287       100%     27%  
Consolidated operating income (loss):                                  
SA transaction-based activities   349,309       70%     389,135       507%     (10% )
     Operating income before amortization   386,903             419,053             (8% )
     Amortization of intangible assets   (37,594 )           (29,918 )           26%  
International transaction-based activities   8,763       2%     (2,091 )     (3% )   nm  
     Operating income (loss) before amortization .   84,113             34,460             144%  
     Amortization of intangible assets   (75,350 )           (36,551 )           106%  
Smart card accounts   82,056       17%     79,547       104%     3%  
Financial services   28,833       6%     23,855       31%     21%  
Hardware, software and related technology sales   12,089       2%     (329,459 )     (429% )   nm  
     Operating income (loss) before amortization .   14,241             17,835             (20% )
     Impairment loss   -             (296,119 )           nm  
     Amortization of intangible assets   (2,152 )           (51,175 )           (96% )
Corporate/eliminations   16,212       3%     (84,176 )     (110% )   nm  
     Total consolidated operating income   497,262       100%     76,811       100%     547%  

38


          South African transaction-based activities

     In ZAR, the increases in segment revenue were primarily due to modest growth in our pension and welfare business, higher prepaid airtime sales resulting primarily from the Eason acquisition and increased transaction volumes at MediKredit. Segment revenues include the transaction fees we earn through our merchant acquiring system and reflect the elimination of inter-company transactions.

     Our operating income margin for the year to date fiscal 2012 and 2011 was 31% and 40%, respectively, and has declined primarily due to SASSA implementation costs and cash bonuses paid and higher low margin prepaid airtime sales and higher intangible asset amortization attributable to the Eason acquisition.

          Pension and welfare operations:

     Modest revenue growth as well as operational efficiencies, before implementation activities, contributed directly to the increase in our operating income.

          South African transaction processors:

     The table below presents the total volume and value processed during the year to date fiscal 2012 and 2011:

Table 17                                      
      Total volume (‘000s)     Total value $ (‘000)     Total value ZAR (‘000)  
      Nine months ended     Nine months ended     Nine months ended  
Transaction     March 31,     March 31,     March 31,  
processor     2012     2011     2012     2011     2012     2011  
EasyPay (1)     347,161     539,021     9,460,086     17,405,932     74,020,446     121,585,660  
     Remaining core     322,765     370,333     8,682,822     11,060,275     67,938,741     77,259,342  
     Discontinued     24,396     168,688     777,264     6,345,657     6,081,705     44,326,318  
MediKredit     7,913     7,221     443,550     359,236     3,470,559     2,546,663  
FIHRST     18,046     16,349     7,348,474     6,981,903     57,498,134     49,495,412  

(1)

– includes Eason prepaid airtime and electricity volume and value from October 1, 2011 and reclassified to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities.

     We are refocusing EasyPay’s activities on higher-margin value-added services and have terminated certain inefficient activities such as the hosting of processing servers for financial institutions. We have reclassified the 2011 transaction volumes and values in the table above to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities.

     Activity in our South African transaction processors volumes and values are discussed under “—Third quarter of fiscal 2012 compared to the third quarter of fiscal 2011—Results of operations by operating segment—South African transaction-based activities— South African transaction processors:”.

          International transaction-based activities

      KSNET continues to contribute the majority of our revenues in this operating segment. Operating margin for the segment is lower than most of our South African transaction-based businesses and was negatively impacted by start-up expenditures related to our multiple XeoHealth launches in the United States, MVC activities at Net1 UTA and on-going losses at Net1 Virtual Card, but these expenses were partially offset by revenue contributions from KSNET, and to a lesser extent from XeoHealth and NUETS’ initiative in Iraq.

          Smart card accounts

     Operating income margin from providing smart card accounts was constant at 45%.

     In ZAR, revenue from the provision of smart card accounts was relatively constant on a year-over-year basis. A total number of 3,549,030 smart card accounts were active at March 31, 2012, compared to 3,537,126 active accounts as at March 31, 2011.

          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 qualifying old age grant recipients in some of the provinces where we distribute social welfare grants.

39


     Operating income margin for the financial services segment decreased to 58% from 66%, primarily as a result of startup expenditures related to our SmartLife business and other financial services offerings, offset by increased UEPS-based lending activities.

          Hardware, software and related technology sales

     The decrease in revenue and operating income was due to a lower contribution from all contributors to hardware and software sales. The increase in operating margin to 7% compared with an operating loss margin of 13% (before the intangible asset impairment) is attributable to the sale of more software and license revenues in 2012, which contribute higher margins compared to hardware sales.

          Corporate/eliminations

     The decrease in our corporate expenses resulted primarily from lower stock-based compensation charges, primarily because the performance-based restricted stock granted in August 2007 was fully expensed in prior periods and due to the $4.0 million profit related to the liquidation of SmartSwitch Nigeria. These expense reductions were offset by higher corporate head office-related expenses. In addition, our year to date fiscal 2011 results includes transaction related expenditures of $5.7 million (ZAR 40.1 million).

Liquidity and Capital Resources

     Our business has historically generated and continues to generate high levels of cash. At March 31, 2012, our cash balances were $88.3 million, which comprised mainly ZAR-denominated balances of ZAR 509.2 million ($66.2 million), KRW-denominated balances of KRW 17.5 billion ($15.4 million) and US dollar-denominated balances of $4.9 million and other currency deposits, primarily euro, of $1.8 million. The decrease in our cash balances from June 30, 2011, has resulted primarily from capital expenditures to expand operations as we implement our new SASSA contract, repayment of our long-term debt and strengthening in the USD against the ZAR, offset by an increase in cash generated from operations.

     We currently believe that our cash and credit facilities are sufficient to fund our future operations, including our SASSA implementation, 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. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs.

     We have a South African short-term credit facility of approximately ZAR 250 million ($32.5 million) which remained fully undrawn as of March 31, 2012.

     During the second quarter of fiscal 2012 we received $4.9 million, net, in cash, in final settlement of any and all claims and contractual adjustments between us and the former shareholders of KSNET. Our Korean debt agreement required us to use the settlement proceeds to repay a portion of our outstanding debt thereunder. We made the prepayment on January 30, 2012.

     As of March 31, 2012, we had outstanding long-term debt of 116.8 billion KRW (approximately $102.9 million translated at exchange rates applicable as of March 31, 2012) under credit facilities with a group of Korean banks. The loans bear interest at the Korean CD rate in effect from time to time (3.54% as of March 31, 2012) plus a margin of 4.10% . Semi-annual principal payments of approximately $7.2 million (translated at exchange rates applicable as of March 31, 2012) were due starting in October 2011, with final maturity scheduled for October 2015.

40


Cash flows from operating activities

          Third quarter of fiscal 2012

     Net cash provided by operating activities for the third quarter of fiscal 2012 was $22.0 million (ZAR 172.7 million) compared to $28.3 million (ZAR 197.4 million) for the third quarter of fiscal 2011. Excluding the impact of interest paid under our Korean debt and taxes presented in the table below, the decrease in cash provided by operating activities resulted from timing of receipts of accounts receivable in our South African transaction-based activities operating segment and the payment of SASSA implementation costs and bonuses related to our recent SASSA award.

     During the third quarter of fiscal 2012 and 2011, we paid STC of $0.3 million (ZAR 3 million) and $1.1 million (ZAR 8 million), respectively, related to intercompany dividends paid from South Africa to the United States.

     Taxes paid during the third quarter of fiscal 2012 and 2011 were as follows:

Table 18   Quarter ended March 31,  
    2012     2011     2012     2011  
    $     $     ZAR     ZAR  
    ‘000     ‘000     ‘000     ‘000  
Taxation refunds received   -     (4 )   -     (25 )
Secondary taxation on companies   326     1,110     2,500     8,000  
       Total South African taxes paid   326     1,106     2,500     7,975  
          Foreign taxes paid: Korea   177     458     1,424     3,177  
               Total tax paid   503     1,564     3,924     11,152  

     We expect to pay our second provisional payments in South Africa related to our 2012 tax year in the fourth quarter of fiscal 2012.

          Year to date fiscal 2012

     Net cash provided by operating activities for the year to date fiscal 2012 was $43.0 million (ZAR 336.5 million) compared to $53.4 million (ZAR 378.9 million) for the year to date fiscal 2011. Excluding the impact of interest paid under our Korean debt and taxes presented in the table below, the decrease in cash provided by operating activities resulted from the timing of receipts of accounts receivable in our South African transaction-based activities operating segment.

     During the year to date fiscal 2012, we paid South African tax of $15.0 million (ZAR 123.3 million) related to our 2012 tax year and $3.5 million (ZAR 26.3 million) related to our 2011 tax year. We also paid provisional Korean taxes of $1.2 million. During the year to date fiscal 2011, we made South African tax payments of $16.6 million (ZAR 113.7 million) related to our 2011 tax year and provisional Korean taxes of $1.0 million. In addition, during the year to date fiscal 2012 and 2011 we paid STC of $1.8 million (ZAR 14.6 million) and $14.7 million (ZAR 103 million), respectively, related to intercompany dividends paid from South Africa to the United States.

     Taxes paid during the year to date fiscal 2012 and 2011 were as follows:

Table 19   Quarter ended March 31,  
    2012     2011     2012     2011  
    $     $     ZAR     ZAR  
    ‘000     ‘000     ‘000     ‘000  
First provisional payments   15,014     16,565     123,271     113,708  
Third provisional payments   -     335     -     2,296  
Taxation paid related to prior years   3,504     1,774     26,303     12,716  
Taxation refunds received   (284 )   (176 )   (2,096 )   (1,327 )
Secondary taxation on companies   1,811     14,702     14,615     103,000  
       Total South African taxes paid   20,045     33,200     162,093     230,393  
          Foreign taxes paid: Korea   1,213     989     9,217     6,890  
               Total tax paid   21,258     34,189     171,310     237,283  

41


Cash flows from investing activities

          Third quarter of fiscal 2012

     Cash used in investing activities for the third quarter of fiscal 2012 includes capital expenditure of $13.9 million (ZAR 109.1 million), primarily for payment vehicles for of our new SASSA contract, acquisition of payment processing terminals in Korea and POS devices to service our merchant acquiring system in South Africa.

     Cash used in investing activities for the third quarter of fiscal 2011 includes capital expenditure of $4.7 million (ZAR 32.7 million), primarily for the acquisition of payment processing terminals in Korea, kiosks to service our EasyPay Kiosk pilot project and the acquisition of POS devices to service our merchant acquiring system.

          Year to date fiscal 2012

     During the year to date fiscal 2012, we received a net settlement of $4.9 million from the former shareholders of KSNET. During the year to date fiscal 2011, we paid approximately $230.2 million (ZAR 1.6 billion), net of cash received, for 98.73% of KSNET. We also paid $4.5 million (ZAR 36.4 million) for the Eason prepaid electricity and airtime business.

     Cash used in investing activities for the year to date fiscal 2012 includes capital expenditure of $23.5 million (ZAR 183.9 million), primarily for payment vehicles for our SASSA contracts, acquisition of payment processing terminals in Korea and POS devices to service our merchant acquiring system in South Africa.

     Cash used in investing activities for the year to date fiscal 2011 includes capital expenditure of $9.5 million (ZAR 67.0 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.

Cash flows from financing activities

          Third quarter of fiscal 2012

     During the third quarter of fiscal 2012, we made an unscheduled $4.8 million long-term debt repayment.

     During the third quarter of fiscal 2011, we repaid KSNET’s outstanding debt of $7.1 million.

          Year to date fiscal 2012

     During the year to date fiscal 2012, we made long-term debt repayments of $12.0 million and acquired 180,656 shares of our common stock for $1.1 million.

     During the year to date fiscal 2011 we obtained long-term debt to fund a portion of the KSNET purchase price. In addition, we paid the facility fee of approximately $3.1 million in October 2010. In addition, we paid approximately $0.6 million for the remaining 19.9% of Net1 UTA during the year to date of fiscal 2011.

     During the year to date fiscal 2011, we repaid KSNET’s outstanding debt of $7.1 million.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements.

Capital Expenditures

     We expect that our capital expenditures will increase significantly over the next 12 months as we transition into our new SASSA contract. In addition to these capital expenditures, we expect that capital spending for the fourth quarter of fiscal 2012 will also relate to providing a switching service through EasyPay and expanding our operations in Korea.

     Our historical capital expenditures for the third quarter of fiscal 2012 and 2011 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 March 31, 2012, of $2.6 million related mainly to equipment and cards to implement our new SASSA contract. We expect to fund these expenditures through internally-generated funds.

42


Contingent Liabilities, Commitments and Contractual Obligations

     The following table sets forth our contractual obligations as of March 31, 2012:

Table 20   Payments due by Period, as of March 31, 2012 (in $ ’000s)  
          Less                 More  
          than 1     1-3     3-5     than 5  
    Total     year     years     years     years  
Long-term debt obligations (A)   123,395     21,724     40,166     61,505     -  
Operating lease obligations   9,717     5,793     1,963     1,441     521  
Purchase obligations   3,872     3,872     -     -     -  
Other long-term obligations (B)   27,024     -     -     -     27,024  
       Total   164,008     31,389     42,129     62,946     27,545  

  (A)

– Includes $102.9 million of long-term debt discussed under “—Liquidity and capital resources” and includes interest payable at the rate applicable as of March 31, 2012.

  (B)

– Includes policy holder liabilities $26.3 million related to our insurance business.

43


Item 3. Quantitative and Qualitative Disclosures About Market Risk

     In addition to the tables below, see note 6 to the unaudited condensed consolidated financial statements for a discussion of market risk.

     The following table illustrates the effect on our annual expected interest charge, translated at exchange rates applicable as of March 31, 2012, 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 March 31, 2012, is shown. The selected 1% hypothetical change does not reflect what could be considered the best or worst case scenarios.

    As of March 31, 2012  
Table 21               Estimated  
                annual  
                expected  
    Annual           interest charge  
    expected     Hypothetical     after change in  
    interest     change in     Korean CD  
    charge     Korean CD     rate  
    ($ ’000)     rate     ($ ’000)  
Interest on Korean long-term debt   7,864     1%     8,893  
          (1)%     6,834  

      The following table summarizes our exchange-traded equity securities with equity price risk as of March 31, 2012. The effects of a hypothetical 10% increase and a 10% decrease in market prices as of March 31, 2012, is also shown. The selected 10% hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far worse due both to the nature of equity markets and the aforementioned liquidity risk.

    As of March 31, 2012  
Table 22                        
                      Hypothetical  
                Estimated fair     Percentage  
                value after     Increase  
    Fair           hypothetical     (Decrease) in  
    value     Hypothetical     change in price     Shareholders’  
    ($ ’000)     price change     ($ ’000)     Equity  
Exchange-traded equity securities   8,199     10%     9,019     0.23%  
    8,199     (10% )   7,379     (0.23% )

Item 4. Controls and Procedures

     Evaluation of disclosure controls and procedures

     Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2012. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

     Changes in Internal Control over Financial Reporting

     There have not been any changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

     On February 8, 2012, AllPay Consolidated Investment Holdings (Pty) Ltd filed an application in the North Gauteng High Court of South Africa seeking to set aside the award of the SASSA tender to us. AllPay was one of the unsuccessful bidders during the recent SASSA tender process and was a former contractor to SASSA. We are included as one of several respondents in this proceeding. As a respondent, we are entitled to oppose the application, which we are doing. When SASSA publicly announced the award of the tender to us in January 2012, it stated that it had conducted the tender in accordance with all relevant legislation. The High Court is scheduled to hear this matter commencing May 29, 2012, and we expect that it will hand down a decision several weeks thereafter. Any of the parties to the proceeding will thereafter be entitled to apply to the High Court for leave to appeal the judgment and, provided that such leave is granted, the appeal process could take several months to be finalized. We cannot predict when the proceeding will be resolved or its ultimate outcome.

     On February 3, 2012, another unsuccessful bidder and former SASSA contractor, Empilweni Payout Services (Pty) Ltd, requested SASSA to provide it with all reasons for the award and information that we provided to SASSA in connection with the tender process. Empilweni filed a High Court application to compel SASSA to provide such reasons and information. We opposed the application but SASSA provided certain of the requested information to Empilweni pursuant to an agreed court order. No further action is expected in this proceeding.

     In addition, on March 22, 2012, Empilweni filed an urgent High Court application to interdict and restrain SASSA from taking any steps to implement our appointment as a service provider of SASSA in the province of Mpumalanga, pursuant to the award of the tender. On March 27, 2012 the High Court ruled that the matter was not urgent and accordingly it was struck from the court roll. If Empilweni wants to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no further steps to advance this proceeding since March 27, 2012.

Item 1A. Risk Factors

     See “Item 1A RISK FACTORS” in Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, for a discussion of risk factors relating to (i) our business, (ii) operating in South Africa and other foreign markets, (iii) governmental regulation, and (iv) our common stock. Except as set forth below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

     We have recently signed a new contract with SASSA for the distribution of pension and welfare benefits in all of South Africa’s nine provinces. While the new contract will substantially increase the number of beneficiaries to whom we distribute benefits, it will also increase our dependence on our pension and welfare business while also reducing our operating margins, at least in the near term. If we cannot successfully leverage an expanded beneficiary base to provide recipients with additional financial and other services, our financial performance may suffer.

     On January 17, 2012, SASSA awarded us a tender to provide payment services for social grants in all of South Africa’s nine provinces for a period of five years. On February 3, 2012, we entered into a new contract, together with a related service level agreement, with SASSA.

     Although we expect our revenues from our new SASSA contract to increase as a result of the larger number of beneficiaries we will serve as we roll out our distribution service to all beneficiaries in all nine provinces, we also have incurred and will continue to incur significant increases in operating expenses. We will also be required to make significant capital expenditures to build out our infrastructure across South Africa, primarily in the additional four provinces where we currently do not provide a service. As a result, despite the higher volumes of payments, as we implement the new contract, these additional expenses are likely to result in lower operating margins in our pension and welfare business, both in the short-term and perhaps on a longer term basis. We could also encounter delays or unexpected expenses during the implementation phase of the contract, which could adversely affect us and require additional management time and attention. While we will seek to offset the additional increases in operating expenses and capital expenditures throughout the implementation of our SASSA contract by expanding the scope and volumes of financial and other services we can provide to our new and existing beneficiaries, we may not be successful in doing so, which could adversely affect our business, results of operations, operating cash flow and financial condition.

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     Moreover, the expansion of our service offering to all nine South African provinces will increase our dependence on our contract with SASSA, which is and will continue to be our largest customer. While for a number of years, we derived a majority of our revenues from our SASSA contract, this percentage has been decreasing as a result of our efforts to diversify our business in South Africa and expand internationally. However, as we transition to our new SASSA contract, we expect that our pension and welfare will once again account for a majority of our revenues. If we were to lose all or part of these revenues for any reason, our business would suffer.

     In order to meet our obligations under our new SASSA contract, we are required to deposit government funds with financial institutions in South Africa before commencing the payment cycle and are exposed to counterparty risk.

     In order to meet our obligations under our new SASSA contract, we are required to deposit government funds, which will ultimately be used to pay social welfare grants, with financial institutions in South Africa before commencing the payment cycle. If these financial institutions are unable to meet their commitments to us, in a timely manner or at all, we would be unable to discharge our obligations under our SASSA contract and could be subject to penalties, loss of reputation and potentially, the cancellation of our contract. As we are unable to influence these financial institutions' operations, including their internal information technology structures, capital structures, risk management, business continuity and disaster recovery programs, or their regulatory compliance systems, we are exposed to counterparty risk.

     Two of the unsuccessful tenderors have challenged SASSA’s award of the tender to us.

     On February 8, 2012, AllPay filed an application in the North Gauteng High Court of South Africa seeking to set aside the award of the SASSA tender to us. AllPay was one of the unsuccessful bidders during the recent SASSA tender process and was a former contractor to SASSA. We are included as one of several respondents in this proceeding. As a respondent, we are entitled to oppose the application, which we are doing. When SASSA publicly announced the award of the tender to us in January 2012, it stated that it had conducted the tender in accordance with all relevant legislation. The High Court is scheduled to hear this matter commencing May 29, 2012, and we expect that it will hand down a decision several weeks thereafter. Any of the parties to the proceeding will thereafter be entitled to apply to the High Court for leave to appeal the judgment and, provided that such leave is granted, the appeal process could take several months to be finalized. We cannot predict when the proceeding will be resolved or its ultimate outcome.

     On February 3, 2012, another unsuccessful bidder and former SASSA contractor, Empilweni Payout Services (Pty) Ltd, requested SASSA to provide it with all reasons for the award and information that we provided to SASSA in connection with the tender process. Empilweni filed a High Court application to compel SASSA to provide such reasons and information. We opposed the application but SASSA provided certain of the requested information to Empilweni pursuant to an agreed court order. No further action is expected in this proceeding.

     In addition, on March 22, 2012, Empilweni filed an urgent High Court application to interdict and restrain SASSA from taking any steps to implement our appointment as a service provider of SASSA in the province of Mpumalanga, pursuant to the award of the tender. On March 27, 2012 the High Court ruled that the matter was not urgent and accordingly it was struck from the court roll. If Empilweni wants to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no further steps to advance this proceeding since March 27, 2012.

     If AllPay’s challenge is successful, the contract could be set aside. If Empilweni advances proceedings and is successful a portion of the contract could be set aside. It is also possible that other unsuccessful bidders may challenge the award. Our management may be required to expend significant time and resources in an attempt to defeat these challenges.

     We have disclosed competitively sensitive information as a result of the AllPay litigation, which could adversely affect our competitive position in the future.

     In connection with the AllPay litigation discussed above challenging the award of the SASSA tender to us, we have included our entire SASSA tender submission in the court record, which court record is in the public domain. Our tender submission contains competitively sensitive business information. As a result of this disclosure, our existing and future competitors have access to this information which could adversely affect our competitive position in any future similar tender submissions to the extent that such information continues to remain competitively sensitive.

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Item 6. Exhibits

     The following exhibits are filed as part of this Form 10-Q:

            Incorporated by Reference Herein
Exhibit       Included            
No.   Description of Exhibit   Herewith   Form   Exhibit   Filing Date
10.21   Relationship Agreement dated January 25, 2012 by and among the Company, Business Venture Investments No 1567 (Proprietary) Limited (RF), Mosomo Investment Holdings (Proprietary) Limited and Brian Kgomotso Mosehla     8-K   99.1   January 26, 2012
10.22   Form of Option to be issued by the Company to Business Venture Investments No 1567 (Proprietary) Limited (RF)     8-K   99.2   January 26, 2012
10.23   Contract for the Payment of Social Grants dated February 3, 2012 between CPS and SASSA     8-K   99.1   February 6, 2012
10.24   Service Level Agreement dated February 3, 2012 between CPS and SASSA     8-K   99.2   February 6, 2012
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act   X      
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act   X      
32   Certification pursuant to 18 USC Section 1350   X      
101.INS   XBRL Instance Document   X            
101.SCH   XBRL Taxonomy Extension Schema   X            
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   X      
101.DEF   XBRL Taxonomy Extension Definition Linkbase   X      
101.LAB   XBRL Taxonomy Extension Label Linkbase   X            
101.PRE   XBRL Taxonomy Extension Presentation Linkbase   X      

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 9, 2012.

NET 1 UEPS TECHNOLOGIES, INC.

By: /s/ Dr. Serge C.P. Belamant

Dr. Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director

By: /s/ Herman Gideon Kotzé

Herman Gideon Kotzé
Chief Financial Officer, Treasurer and Secretary, Director

47


Net 1 UEPS Technologies, Inc. - Exhibit 31.1 - Filed by newsfilecorp.com

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Serge Belamant, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of (“Net1”) for the quarter ended March 31, 2012;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;

4.      Net1’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:

               (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

               (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

               (c) Evaluated the effectiveness of Net1’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

               (d) Disclosed in this report any change in Net1’s internal control over financial reporting that occurred during Net1’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Net1’s internal control over financial reporting; and

5.      Net1’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Net1’s auditors and the Audit Committee of Net1’s Board of Directors (or persons performing the equivalent functions):

               (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1’s ability to record, process, summarize and report financial information; and

               (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1’s internal control over financial reporting.

Date: May 10, 2012 /s/ Dr. Serge C. P. Belamant
  Dr. Serge C. P. Belamant
  Chief executive officer


Net 1 UEPS Technologies, Inc. - Exhibit 31.2 - Filed by newsfilecorp.com

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Herman Kotzé, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of Net 1 UEPS Technologies, Inc. (“Net1”) for the quarter ended March 31, 2012;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Net1 as of, and for, the periods presented in this report;

4.      Net1’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:

               (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Net1, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

               (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

               (c) Evaluated the effectiveness of Net1’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

               (d) Disclosed in this report any change in Net1’s internal control over financial reporting that occurred during Net1’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Net1’s internal control over financial reporting; and

5.      Net1’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Net1’s auditors and the Audit Committee of Net1’s Board of Directors (or persons performing the equivalent functions):

               (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Net1’s ability to record, process, summarize and report financial information; and

               (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Net1’s internal control over financial reporting.

Date: May 10, 2012 /s/ Herman Gideon Kotzé
  Herman Gideon Kotzé
  Chief financial officer


Net 1 UEPS Technologies, Inc. - Exhibit 32.1 - Filed by newsfilecorp.com

Exhibit 32

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

               In connection with the quarterly report of Net 1 UEPS Technologies, Inc. (“Net1”) on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dr. Serge Belamant and Herman Kotzé, Chief Executive Officer and Chief Financial Officer, respectively, of Net1, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:

  1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

     
  2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Net1.


 

Date: May 10, 2012 /s/: Dr. Serge C. P. Belamant
  Name: Dr. Serge C. P. Belamant
  Chief Executive Officer and Chairman
  of the Board
   
Date: May 10, 2012 /s/: Herman Kotzé
  Name: Herman Kotzé
  Chief Financial Officer, Treasurer and
  Secretary