LESAKA TECHNOLOGIES INC - Quarter Report: 2011 March (Form 10-Q)

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, 2011

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)

President Place, 4^th 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):

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 3, 2011 (the latest practicable date), 45,535,353 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

1

Part I. Financial Information

Item 1. Financial Statements

NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets

(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

See Notes to Unaudited Condensed Consolidated Financial Statements

3

NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statement of Changes in Equity (in thousands)
Net 1 UEPS Technologies, Inc. Shareholder

See Notes to Unaudited Condensed Consolidated Financial Statements

4

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

See Notes to Unaudited Condensed Consolidated Financial Statements

5

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

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, 2011 and 2010
(All amounts stated in thousands of United States Dollars, unless otherwise stated)

1.      Basis of Presentation and Summary of Significant Accounting Policies

          Unaudited Interim Financial Information

          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, 2011 and 2010 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, 2010 and the financial statements, accounting policies and financial notes thereto of KSNET, Inc. (“KSNET”) included in the Company’s Current Report on Form 8-K/A filed on January 12, 2011. 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.

          Translation of foreign currencies

          The primary functional currency of the Company is the South African Rand (“ZAR”) and its reporting currency is the US dollar. The Company also has consolidated entities which have the euro, Russian ruble, Korean won (“KRW”) or Indian rupee as their functional currency. The current rate method is used to translate the financial statements of the Company to US dollar. Under the current rate method, assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated other comprehensive income in total equity.

          Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in income for the period.

          Recent accounting pronouncements adopted

          On July 1, 2010, the Company adopted the new Financial Accounting Standards Board (“FASB”) guidance on the consolidation of variable interest entities. This guidance changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to such involvement. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

          On July 1, 2010, the Company adopted the new FASB guidance issued on the accounting for transfers of financial assets. This guidance requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for de-recognizing financial assets, and requires additional disclosures. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements.

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1.      Basis of Presentation and Summary of Significant Accounting Policies

          Recent accounting pronouncements adopted (continued)

          On July 1, 2010, the Company adopted the new FASB guidance on revenue recognition in multiple-deliverable revenue arrangements. The guidance amended the existing guidance on allocating consideration received between the elements in a multiple-deliverable arrangement and established a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on VSOE if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. The guidance replaced the term “fair value” in the revenue allocation with “selling price” to clarify that the allocation of revenue is based on entity specific assumptions rather than the assumptions of a market place participant. The guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated using the relative selling price method. It also significantly expands the disclosures related to a vendor’s multiple-deliverable revenue arrangements. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements for the periods presented.

          On July 1, 2010, the Company adopted the new FASB guidance which amended the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance must be adopted in the same period that the company adopts the amended guidance for arrangements with multiple deliverables described in the preceding paragraph. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements for the periods presented.

          On July 1, 2010, the Company adopted new FASB guidance on the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity security trades. This guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The adoption of this guidance did not have an impact on the Company’s condensed consolidated financial statements for the periods presented.

          On January 1, 2011, the Company adopted new FASB guidance related to disclosure of supplementary pro forma information for business combinations. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance has impacted the presentation of the Company’s pro forma information for business combination disclosed in note 2 to the Company’s unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2011.

          Recent accounting pronouncements not yet adopted as of March 31, 2011

          In December 2010, the FASB issued guidance regarding Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires the company to perform Step 2 if it is more likely than not that a goodwill impairment may exist. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company will adopt the authoritative guidance on July 1, 2011 and is currently assessing the impact on its condensed consolidated financial statements.

2.      Acquisitions

          2011 acquisitions

               98.73% of KSNET

          On October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately $240 million based on exchange rates on October 29, 2010), subject to post-closing working capital adjustment which is still being determined between the Company and the former shareholders of KSNET. The acquisition of KSNET expands the Company’s international footprint as well as diversifies the Company’s revenue, earnings and product portfolio. Over time, the combination is expected to capitalize on multiple revenue synergies and provide an established base in Asia for further business development activities in the region.

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2.      Acquisitions (continued)

          2011 acquisitions (continued)

               98.73% of KSNET (continued)

          Most of KSNET’s revenue is derived from the provision of payment processing services to approximately 200,000 merchants and to card issuers in Korea through its value added network, or VAN. KSNET has a diverse product offering and the Company believes it is the only total payments solutions provider offering card VAN, payment gateway and banking VAN services in Korea, which differentiates KSNET from other Korean payment solution providers and allows it to cross-sell its products across its customer base.

           The following table sets forth the preliminary allocation of the purchase price:

          The preliminary purchase price allocation is based on management estimates as of March 31, 2011, and may be adjusted up to one year following the closing of the acquisition. The purchase price allocation has not been finalized, as management has not yet analyzed in detail the assets acquired and liabilities assumed. The Company expects to finalize the purchase price allocation on or before June 30, 2011.

          The Company incurred transaction-related expenditures of $0.5 million and $5.6 million, respectively, during the three and nine months ended March 31, 2011, related to this acquisition and expects to incur some additional expenses during the three months ending June 30, 2011. The Company is currently unable to quantify the amount of these additional expenditures.

          The results of KSNET’s operations are reflected in the Company’s financial statements from November 1, 2010. The following pro forma revenue, net income and per share information has been prepared as if the acquisition of KSNET had occurred on July 1, 2009:

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2.      Acquisitions (continued)

          2011 acquisitions (continued)

               98.73% of KSNET (continued)

          The pro forma financial information presented above includes the business combination accounting and other effects from the acquisition including (1) intangibles asset amortization expense related to acquired intangibles and the related deferred tax effects for the three and nine months ended March 31, 2011 and 2010; (2) the loss of interest income, net of taxation, as a result of funding a portion of the purchase price in cash for the three and nine months ended March 31, 2011 and 2010; (3) an increase in interest expense resulting from the long-term borrowing obtained to fund a portion of the purchase price for the three and nine months ended March 31, 2011 and 2010 and (4) an adjustment to exclude all applicable transaction-related costs recognized in our condensed consolidated statements of operations for the three and nine months ended March 31, 2010. The pro forma net income and per share information presented above does not include any cost savings or other synergies that may result from the acquisition.

          The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on these dates.

          Since the closing of the acquisition, KSNET has contributed revenue of $41.0 million and a net loss, including transaction-related interest and intangible assets amortization related to assets acquired, net of deferred taxes, of $4.3 million.

               19.9% of Net1 UTA

          On December 23, 2010, the Company acquired the remaining 19.9% of the issued share capital of Net 1 Universal Technologies (Austria) AG (“Net1 UTA”) for $0.6 million in cash. The Company now owns 100% of Net1 UTA.

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 2011 payment service commenced during the last four days of March 2011 and was offered at merchant locations only.

4.      Inventory

          The Company’s inventory comprised the following categories as of March 31, 2011 and June 30, 2010.

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

          Fair value of financial instruments

               Risk management

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

                    Currency exchange risk

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

10

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

          Fair value of financial instruments (continued)

               Risk management (continued)

                    Currency exchange risk (continued)

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

          As of March 31, 2011

          None

          As of March 31, 2010

                    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.

                    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.

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

          Financial instruments

          The following section describes the valuation methodologies the Company uses to measure is significant financial asset at fair value.

               Investments in common stock

          In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology 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.

          The Company's Level 3 asset represents an investment of 84,632,525 shares of common stock of Finbond. The Company’s ownership interest in Finbond as of March 31, 2011, is approximately 22%. The Company has no rights to participate in the financial, operating, or governance decisions made by Finbond. The Company also has no participation on Finbond’s board of directors whether through contractual agreement or otherwise. Consequently, the Company has concluded that it does not have significant influence over Finbond and therefore equity accounting is not appropriate.

          Finbond’s shares are traded on the JSE Limited (“JSE”) and the Company has designated such shares as available for sale investments. The Company has concluded that the market for Finbond shares is not active and consequently has employed alternative valuation techniques in order to determine the fair value of such stock. Currently, the operations of Finbond include 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, 2011 according to the fair value hierarchy:

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

          Financial instruments (continued)

          The following table presents the Company’s assets measured at fair value on a recurring basis as of March 31, 2010 according to the fair value hierarchy:

               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, 2011, SmartSwitch Namibia repaid outstanding loans, including outstanding interest. The repayments received have been allocated to the equity-accounted investments presented in our condensed consolidated balance sheet as of March 31, 2011, and reduce this balance. The cash inflow from principal repayments have been allocated to cash flows from investing activities and the cash inflow from the interest repayments have been included in cash flow from operating activities in our condensed consolidated statement of cash flows for the three and nine months ended March 31, 2011.

          During the three months ended March 31, 2011, SmartSwitch Botswana capitalized all shareholder loan funding provided and shareholders agreed to waive all interest on these loans. The net effect of the reversal of the interest and related foreign exchange effects are included in the Company’s condensed consolidated statements of operations for the three and nine months ended March 31, 2011.

          In July 2010, the Company provided additional loan funding of $375,000 for a specific growth initiative at VTU Colombia. As of March 31, 2011, the Company’s share in VTU Colombia’s accumulated losses continued to exceed its investment. VTU Colombia’s other shareholders are providing short-term funding for continued operations and the Company has no obligation to provide any additional funding at this stage.

          The Company has sold hardware, software and/or licenses to SmartSwitch Namibia and SmartSwitch Botswana and defers recognition of 50% of the net income after tax related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has used the purchased asset or has sold it to a third party. The deferral of the net income after tax is shown in the Elimination column in the table below.

          The functional currency of the Company’s equity-accounted investments is not the US dollar and thus the investments are 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, the functional currency of SmartSwitch Botswana is the Botswana pula, the functional currency of VTU Colombia is the Colombian peso and the functional currency of Vinapay is the Vietnamese dong.

13

5.      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, 2010 and March 31, 2011:

          Summarized below is the Company’s equity-accounted (loss) earnings for the three months ended March 31, 2011:

          There were no significant sales to these investees that require elimination during the three and nine months ended March 31, 2011 and 2010.

6.      Goodwill and intangible assets

          Goodwill

          Summarized below is the movement in the carrying value of goodwill for the nine months ended March 31, 2011.

          (1) – represents goodwill arising from the acquisition of KSNET and translated at the foreign exchange rate applicable on the date the transactions became effective. This goodwill has been allocated to the International transaction-based activities operating segment. 
          (2) – 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 associated with the acquisition of KSNET represents the excess of cost over the fair value of acquired net assets and is not tax deductible.

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6.      Goodwill and intangible assets (continued)

          Goodwill (continued)

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

          Intangible assets

               Impairment loss

          The Company assesses the carrying value of intangible assets for impairment whenever events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. During the three months ended March, 2011, one of Net1 UTA’s largest customers advised the Company of its intention to transition to an alternative payment platform which will negatively impact the Company’s revenue, net income and cash flow in the medium term. As a consequence of this development, as well as deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows, the Company reviewed customer relationships acquired as part of the Net1 UTA acquisition for impairment. As a result of this review, the Company recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008. In addition, the Company reversed the deferred tax liability of $10.4 million associated with this intangible asset.

          The expected undiscounted future cash flows related to the Net1 UTA customer relationships was compared to the carrying value of the asset and management determined that the carrying value exceeded the undiscounted future cash flows. Accordingly, management performed the second step in the asset impairment analysis to determine the impairment loss. The second step requires a comparison of the carrying value of the customer relationships with its fair value. The fair value of the customer relationships was determined using an income approach valuation technique. The calculation of the fair value required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable.

          The impairment loss has been allocated to the Company’s Hardware, software and related technology sales operating segment.

               KSNET intangible assets acquired

          Summarized below is the fair value of the KSNET intangible assets acquired, translated at the exchange rate applicable as of October 31, 2010, and the weighted-average amortization period of the intangible assets:

          On acquisition, the Company recognized a deferred tax liability of approximately $31.0 million related to the acquisition of the intangible assets.

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6.      Goodwill and intangible assets (continued)

          Intangible assets (continued)

               Carrying value and amortization of intangible assets

          Summarized below is the carrying value and accumulated amortization of the intangible assets as of March 31, 2011 and June 30, 2010:

(1) Includes the customer relationships, software and unpatented technology and trademarks acquired as part of the KSNET acquisition in October 2010.
(2) The Net1 UTA customer relationships that have been impaired are excluded from the March 31, 2011, balances but included in the June 30, 2010, balances.

          Aggregate amortization expense on the finite-lived intangible assets for the three and nine months ended March 31, 2011, was approximately $7.3 million and $17.3 million, respectively (three and nine months ended March 31, 2010, was approximately $4.0 million and $11.3 million, respectively).

          Future estimated annual amortization expense for the next five fiscal years, assuming exchange rates prevailing on March 31, 2011, is presented in the table below. Actual amortization expense in future periods could differ from this estimate as a result of acquisitions, changes in useful lives, exchange rate fluctuations and other relevant factors.

7.      Short-term facilities

          As of March 31, 2011, the Company had a short-term facility in South African rand of approximately $36.5 million, translated at exchange rates applicable as of March 31, 2011, with Nedbank Limited (“Nedbank”). As of March 31, 2011, the overdraft rate on this facility was 7.85% . Certain of the Company’s South African subsidiaries have provided a cross deed of suretyship whereby each of these companies has bound itself as surety and co-principal debtor with each other for the fulfillment of each other's obligations under the facility. These South African subsidiaries have agreed that any debit and credit bank account balances with Nedbank may be set off against each other. Certain South African subsidiaries have ceded trade receivables with an aggregate value of approximately $19.7 million, translated at exchange rates applicable as of March 31, 2011, as security for the facility as well as the Company’s investment in Cash Paymaster Services (Proprietary) Limited, a wholly owned South African subsidiary. As of March 31, 2011, the Company had utilized none of its South African short-term facility.

          In addition, Net1 UTA had short-term facilities of approximately $1.4 million, translated at exchange rates applicable as of March 31, 2011, with each of two of Austria’s largest banks. These facilities are available to the Company. The interest rate applicable to these short-term facilities is negotiated when the facilities are utilized. As of March 31, 2011, the Company had utilized none of its Austrian short-term facilities.

          Management believes that the Company’s current short-term facilities are sufficient in order to meet its future obligations as they arise.

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8.      Long-term borrowings

          The Company financed a portion of the KSNET acquisition price and related transaction expenses with the proceeds of a KRW 130.5 billion (approximately $115.9 million based on October 29, 2010 exchange rates) five-year senior secured loan facility provided by a consortium of banks under a facilities agreement (the “Facilities Agreement”). The Facilities Agreement provides for three separate facilities: a Facility A loan to the Company’s wholly owned subsidiary, Net1 Applied Technologies Korea (“Net1 Korea”), of up to KRW 130.5 billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0 billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility B loan, if drawn, must be used to repay the Facility A2 loan and may be borrowed only if Net1 Korea and KSNET complete a merger transaction with each other. Interest on the loans is payable quarterly and is based on the Korean CD rate in effect from time to time plus a margin of 4.10% for Facility A loans and 3.90% for the Facility B loan. The CD rate was 3.0% on March 31, 2011. Total interest expense for the three and nine months ended March 31, 2011, was $2.0 million and $3.4 million, respectively. Interest of approximately $1.4 million, translated at exchange rates applicable as of March 31, 2011, has been accrued as of March 31, 2011.

          The Facility A1 loan matures on the fifth anniversary of the initial drawdown with no required principal prepayments. Principal on the Facility A2 loan and Facility B loan is repayable in scheduled installments, beginning twelve months after initial drawdown and thereafter, semi-annually with final maturity scheduled for 54 months after initial drawdown. The first scheduled installment of $7.3 million, translated at exchange rates applicable as of March 31, 2011, is due on October 29, 2011, and has been classified as current in our condensed consolidated balance sheet.

          The loans are secured by substantially all of KSNET’s assets, a pledge by Net1 Korea of its entire equity interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one of the Company’s subsidiaries) of its entire equity interest in Net1 Korea. The Facilities Agreement contains customary covenants that require Net1 Korea and its consolidated subsidiaries to maintain certain specified financial ratios (including a leverage ratio and a debt service coverage ratio) and restrict their ability to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make capital expenditures above specified levels, engage in certain business combinations and engage in other corporate activities. The loans under the Facilities Agreement are without recourse to, and the covenants and other agreements contained therein do not apply to, the Company or any of our subsidiaries (other than Net1 Korea and its subsidiaries, including KSNET).

9.      Capital structure

          The Company’s capital structure is described in Note 11 to the Company’s audited consolidated financial statements included within the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

          Common stock repurchases

          During the three and nine months ended March 31, 2011, the Company did not repurchase any shares. On July 28, 2009, the Company repurchased an aggregate of 9,221,526 shares of its common stock from two shareholders, who originally acquired their shares in connection with the Aplitec transaction. The purchase price was $13.50 (ZAR 105.98) per share and was paid from the Company’s cash reserves in ZAR for an aggregate purchase price of $124.5 million (ZAR 977.3 million).

10.    Earnings per share

          Basic earnings per share includes 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, 2011 and 2010, 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, 2011 and 2010, 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, 2011 and 2010, the vesting conditions in respect of a portion of the awards had not been satisfied.

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10.    Earnings per share (continued)

          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, 2011 and 2010.

11.    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, 2011, and 2010:

          No stock options became exercisable during the three and nine months ended March 31, 2011 and 2010.

          No stock options were exercised during the three and nine months ended March 31, 2011. During the nine months ended March 31, 2010, the Company received approximately $0.3 million from stock options exercised and approximately $0.4 million from repayment of stock option-related loans. The Company issues new shares to satisfy stock option exercises.

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11.    Stock-based compensation (continued)

          Stock option and restricted stock activity (continued)

               Restricted stock

          The following table summarizes restricted stock activity for the three and nine months ended March 31, 2011, and 2010:

          The fair value of restricted stock vested during the three and nine months ended March 31, 2011 was $0.01 million and $2.3 million, respectively and during the nine months ended March 31, 2010, was $3.8 million.

          Stock-based compensation charge and unrecognized compensation cost

          The Company has recorded a stock compensation charge of $1.6 million and $1.4 million for the three months ended March 31, 2011 and 2010, respectively, which comprised:

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11.    Stock-based compensation (continued)

          Stock-based compensation charge and unrecognized compensation cost (continued)

          The Company has recorded a stock compensation charge of $4.6 million and $4.3 million for the nine months ended March 31, 2011 and 2010, respectively, which comprised:

          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, 2011, the total unrecognized compensation cost related to stock options was approximately $3.6 million, which the Company expects to recognize over approximately three years. As of March 31, 2011, the total unrecognized compensation cost related to restricted stock awards was approximately $3.0 million, which the Company expects to recognize over approximately four years.

          As of March 31, 2011, the Company has recorded a deferred tax asset of approximately $1.1 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.

12.    Operating segments

          The Company discloses segment information as reflected in the management information systems reports that its chief operating decision maker uses in making decisions and to report certain entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets or reports material revenues.

          The Company allocated its international transaction-based activities to a new operating segment, namely International transaction-based activities. This operating segment comprises the transaction processing activities of KSNET, Net1 Virtual Card, and NUETS transaction processing activities in Iraq. Segment results for fiscal 2010 have not been restated due to the insignificance of the transaction processing activities of Net1 Virtual Card, and NUETS transaction processing activities in Iraq. However, for comparative purposes in future periods, the Company’s reported results for the nine months ended March 31, 2011, include all legacy international transaction-processing activities from July 1, 2010 and include KSNET from November 1, 2010.

          The Company currently has five reportable segments: SA transaction-based activities, International transaction-based activities, Smart card accounts, Financial services and Hardware, software and related technology sales. Each segment, other than International transaction-based activities and the Hardware, software and related technology sales segment, operates mainly within South Africa. The Company’s reportable segments offer different products and services and require different resources and marketing strategies and share the Company’s assets.

          The SA transaction-based activities segment currently consists mainly of a state pension and welfare benefit distribution service provided to the South African government and transaction processing for retailers, utilities, medical-related claim service customers and banks. Fee income is earned based on the number of beneficiaries included in the government pay-file as well as from merchants and card holders using the Company’s merchant retail application. In addition, utility providers and banks are charged a fee for transaction processing services performed on their behalf at retailers. This segment has individually significant customers that each provides more than 10% of the total revenue of the Company. For the three and nine months ended March 31, 2011, there was one such customer providing 44% and 48%, respectively, of total revenue (the three and nine months ended March 31, 2010: there was one such customer providing 65% and 67%, respectively, of total revenue).

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12.    Operating segments (continued)

          The International transaction-based activities segment currently consists mainly of KSNET which generates revenue from the provision of payment processing services to merchants and card issuers through its VAN. This segment generates fee revenue from the provision of payment processing services and to a lesser extent from the sale of goods, primarily point of sale terminals, to customers in Korea. The segment also generates transaction fee revenue from transaction processing of UEPS-enabled smartcards through NUETS initiative in Iraq.

          The Smart card accounts segment derives revenue from the provision of smart card accounts, as a fixed monthly fee per card is charged for the maintenance of these accounts.

          The Financial services segment provides short-term loans as a principal and life insurance products on an agency basis and generates initiation and services fees.

          The Hardware, software and related technology sales segment markets, sells and implements the UEPS as well as develops and provides Prism secure transaction technology, solutions and services. The segment also includes the operations of Net1 UTA, which comprise mainly hardware sales and licenses of the DUET system. The segment undertakes smart card system implementation projects, delivering hardware, software and business solutions in the form of customized systems. Sales of hardware, SIM cards, cryptography services, SIM card licenses and other software licenses are recorded within this segment. This segment also generates rental income from hardware provided to merchants enrolled in the Company’s merchant retail application.

          Corporate/Eliminations includes the Company’s head office cost centers in addition to the elimination of inter-segment transactions.

          The Company evaluates segment performance based on operating income. The following tables summarize segment information which is prepared in accordance with GAAP:

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12.    Operating segments (continued)

          The segment information as reviewed by the chief operating decision maker does not include a measure of segment assets per segment as all of the significant assets are used in the operations of all, rather than any one, of the segments. The Company does not have dedicated assets assigned to a particular operating segment. Accordingly, it is not meaningful to attempt an arbitrary allocation and segment asset allocation is therefore not presented.

          It is impractical to disclose revenues from external customers for each product and service or each group of similar products and services.

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13.    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 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, 2011, 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, 2011, was 7.0% and 135.8%, respectively, as a result of non-deductible expenses, the impairment loss (see note 6) including transaction-related expenses and interest expense related to the acquisition of KSNET.

          The Company increased its unrecognized tax benefits by $0.1 million and $0.3 million, respectively, during the three and nine months ended March 31, 2011. As of March 31, 2011, the Company had accrued interest related to uncertain tax positions of approximately $0.2 million on its balance sheet.

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

          The Company files income tax returns mainly in South Africa, Korea, Austria, the Russian Federation and in the US federal jurisdiction. As of March 31, 2011, the Company is no longer subject to income tax examination by the South African Revenue Service for years before March 31, 2008. In 2007, the Korea National Tax Service had effectively completed the examination of the Company’s returns in Korea related to years 2002 through 2006. 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.

14.    Subsequent events

          Under the Company’s SASSA contract, it provides its social welfare grants distribution service to SASSA in five of South Africa’s nine provinces (KwaZulu-Natal, Limpopo, North West, Northern Cape and Eastern Cape). The contract contains a standard pricing formula for all provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum number of beneficiaries per month. As it has previously disclosed, the Company’s SASSA contract has been extended and now runs through September 30, 2011, unless it is further extended. On April 15, 2011, SASSA publicly issued an invitation to bid, inviting service providers to submit proposals for the provision of payment services for social grants in any one or more of the nine provinces of South Africa by May 27, 2011. The Company will participate in the bid process.

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

          The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Forward-looking statements

          Some of the statements in this Quarterly Report on 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 “Risk Factors” in Item 1A. below and “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended June 30, 2010 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. 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 Quarterly Report on Form 10-Q to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

          You should read this Quarterly Report on 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.

Business Developments During the Third Quarter of Fiscal 2011

               South Africa

          SASSA update

          Under our SASSA contract, we provide our social welfare grants distribution service to SASSA in five of South Africa’s nine provinces (KwaZulu-Natal, Limpopo, North West, Northern Cape and Eastern Cape). The contract contains a standard pricing formula for all provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum number of beneficiaries per month. As we have previously disclosed, our SASSA contract has been extended and now runs through September 30, 2011, unless it is further extended. On April 15, 2011, SASSA publicly issued an invitation to bid, inviting service providers to submit proposals for the provision of payment services for social grants in any one or more of the nine provinces of South Africa by May 27, 2011. We will participate in the bid process.

          See “1. Legal Proceedings” and “Item 1A. Risk Factors” for more information and the risks associated with our SASSA contract, the recently initiated new tender process and for an update on litigation between us and SASSA.

          EasyPay Kiosk pilot project extended to end of fiscal 2011

          In September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at select locations in the Gauteng province of South Africa. The EP Kiosk enables users to purchase prepaid electricity and airtime and perform any post paid bill payment service requirements using the interactive user-friendly touch screen kiosk interface. The user will also be able to transfer prepaid voucher value to other mobile phone users. Users can register their own prepaid voucher wallet on the EP Kiosk, with access to the wallet guaranteed via biometric identification of the user at time of registration. A five digit personal identification number, or PIN, is also required by the user so as to facilitate transactions done via their own mobile phones or via the website.

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          South African transaction processors

          During the third quarter of fiscal 2011 our South African transaction processors were awarded various new business contracts to perform transaction processing including, for a top five petroleum company and a medium-size retailer, as well as perform distribution of prepaid electricity for a large metropolitan area (near Johannesburg) in the Gauteng province. In addition, FIHRST continues to expand its client base and number and value of transactions processed.

               Outside South Africa

          Republic of Korea

          KSNET’S operating performance during fiscal 2011 has been largely in-line with our expectations and the integration of KSNET has progressed well since the acquisition closed at the end of October 2010. We have commenced a number of strategic initiatives in the Republic of Korea to maintain our current market share and to expand into adjacent markets. Specifically, we have embarked on a number of medium-term initiatives which will be funded from our existing Korean cash reserves. We do not expect to use funds generated by our other operations to fund these initiatives in Korea. Our management teams are actively engaged in identifying and evaluating opportunities in the Korean market place.

          The African Continent and Iraq

          During the third quarter of fiscal 2011, Net1 Universal Electronic Technological Solutions (Proprietary) Limited, or NUETS, recorded revenue from transaction fees and the delivery of UEPS-enabled smartcards under its contract with the government of Iraq. NUETS expects to generate ongoing revenues from transaction fees under the Iraqi contract during the fourth quarter of fiscal 2011. NUETS has entered the second phase of its initiative in Ghana and now generates recurring income in the form of hardware and software maintenance fees.

          NUETS continued to service its current customers on the African continent and in Iraq and continued its business development efforts, including responding to a number of tenders, in multiple new countries on the African continent during the quarter.

          During the third quarter of fiscal 2011, SmartSwitch Namibia generated incremental transaction fees from transactions conducted between Namibian merchants and UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees during the third quarter of fiscal 2011 from the payment of food voucher grants. We expect SmartSwitch Namibia and Botswana to continue generating transaction fees during the fourth quarter of fiscal 2011. During the third quarter of fiscal the shareholders of SmartSwitch Botswana agreed to convert their loan funding to equity funding and waive all interest due. The net effect of the reversal of the interest and related foreign exchange effects are included in our results for the third quarter of fiscal 2011.

          Net 1 Universal Technologies (Austria) AG, or Net1 UTA

          During the third quarter of fiscal 2011, one of Net1 UTA’s largest customers advised us of its intention to transition to an alternative payment platform which will negatively impact our revenue, net income and cash flow in the medium term. As a consequence of this development, as well as deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows, we reviewed customer relationships acquired as part of the Net1 UTA acquisition for impairment. As a result of this review, we recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008. In addition, we reversed the deferred tax liability of $10.4 million associated with this intangible asset.

          The impairment loss has been allocated to our hardware, software and related technology sales operating segment.

          Net1 Virtual Card

          We launched our VCPay^TM, offering in the United States during the second quarter of fiscal 2011. Our mobile phone-based virtual payment card application is designed to eliminate fraud in Card-Not-Present (“CNP”) transactions. We have teamed up with MetroPCS Communications, Inc., or MetroPCS, The Bancorp Bank, a wholly-owned subsidiary of The Bancorp, Inc., FSV Payment Systems and MoneyGram International to offer a comprehensive card issuing, processing and distribution network to wireless subscribers in the United States.

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          MetroPCS offers our VCPay^TM to its prepaid customers as an application that is pre-loaded on new Smartphones or can be downloaded on select existing devices. VCPay^TM allows a subscriber to generate a unique, one-time use prepaid virtual card number to securely purchase goods and services or perform bill payments in any CNP environment. We believe that the VCPay^TM application is the first mobile phone-based prepaid program with no requirement for the user to have a physical card or a bank account. Subscribers can load their prepaid virtual accounts with cash at any of MoneyGram’s 40,000 U.S. agent locations, which are located in most communities including many grocery, pharmacy and convenience store chains, or electronically via their bank accounts or via direct deposit.

          Medikredit / XeoHealth

          During the third quarter of fiscal 2011, our wholly owned subsidiary XeoHealth Corporation, Inc., or XeoHealth, intensified its marketing efforts in the United States of its Real Time Adjudication, or RTA, solutions for the end-to-end electronic processing of medical claims information. There has been significant interest from various participants in the United States healthcare industry in the solutions offered by XeoHealth for the current and newly mandated Health Insurance Portability and Accountability Act, or HIPAA, Electronic Data Interchange, or EDI, transactions and we will intensify our marketing and business development activities in the United States.

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, 2010.

• Deferred taxation;
• Stock-based compensation;
• Intangible assets acquired through acquisitions;
• Accounts receivable and provision for doubtful debts; and
• Research and development.

          Recent accounting pronouncements adopted

          Refer to Note 1 of the unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements adopted as of March 31, 2011, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

          Recent accounting pronouncements not yet adopted as of March 31, 2011

          Refer to Note 1 of the unaudited condensed consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of March 31, 2011, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.

Currency Exchange Rate Information

          Actual exchange rates

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

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          Translation exchange rates

          We are required to translate our results of operations from ZAR to US dollars on a monthly basis. Thus, the average rates used to translate this data for the three and nine months ended March 31, 2011 and 2010, 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:

Results of operations

          The discussion of our consolidated overall results of operations is based on amounts as reflected in “Item 1 – Financial Statements” which are reported in US dollars and are prepared in accordance with US GAAP. Our discussion analyzes our results of operations both in US dollars and 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. The results of operations for the three and nine months ended March 31, 2011, include:

• KSNET from November 1, 2010, (allocated to our International transaction-based activities operating segment);
• FIHRST for the entire period (allocated to our SA transaction-based activities operating segment); and
• MediKredit for the entire period as well as for the three months ended March 31, 2010 as the transaction closed in January 2010 (allocated to our SA transaction-based activities operating segment.)

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          We analyze our business and operations in terms of five inter-related but independent operating segments: (1) SA 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 fiscal 2011 compared to third quarter of fiscal 2010

          The following factors had an influence on our results of operations during the third quarter of fiscal 2011 as compared with the same period in the prior year:

• Impairment loss related to Net1 UTA customer relationships: We recorded an impairment loss of $41.8 million related to Net1 UTA’s customer relationships, which resulted in an operating loss for the quarter;
• SASSA price and volume reductions: Our contract with SASSA has reduced our revenue and operating income, before impairment loss, as a result of the previously announced price and volume reductions;
• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 7% compared to the ZAR during the third quarter of fiscal 2011 compared to fiscal 2010 which positively impacted our reported results;
• Increased revenue from KSNET at lower operating margins than our legacy businesses, before acquired intangible asset amortization: Our KSNET acquisition increased our revenue during the entire third quarter of fiscal 2011, however, because KSNET has an operating margin that is lower than our legacy businesses, before acquired intangible asset amortization, it reduced our consolidated operating margin. The inclusion of KSNET in our results has also contributed to the increase in selling, general and administration and depreciation and amortization expenses;
• Increased transaction volumes at EasyPay: Our reported results were favorably impacted by increased transaction volumes at EasyPay resulting from growth in value-added services;
• Lower revenue and operating loss generated by MediKredit: MediKredit’s revenue for the third quarter of fiscal 2011 was lower than the comparable period due to the inclusion in the third quarter of fiscal 2010 of claims processing support fees received from a customer it lost in late calendar 2009 and which contractually continued to pay fees through the end of April 2010. MediKredit generated an operating loss during the third quarter of fiscal 2011, in line with our expectations;
• Increased revenue from FIHRST at lower operating margins than other SA transaction-based activity business:
  FIHRST increased our revenue during the third quarter of fiscal 2011, however, because FIHRST has an operating margin that is lower than our other SA transaction-based activity businesses, it negatively impacted our consolidated operating margin. The inclusion of FIHRST in our results has also contributed to the increase in selling, general and administration expense;
• Increased user adoption in Iraq: We recorded increased transaction revenues at NUETS from the adoption of our UEPS technology in Iraq;
• Lower revenues and margins from hardware, software and related technology sales segment: Our hardware, software and related technology sales segment was adversely impacted by lower revenues at NUETS, partially offset by increased sales by Net1 UTA;
• Intangible asset amortization related to acquisitions: Our reported results were adversely impacted by additional intangible asset amortization of approximately $3.1 million related to the acquisition of KSNET in the second quarter of fiscal 2011, as well as FIHRST during the third quarter of fiscal 2010;
• Lower interest income and increased interest expense resulting from KSNET acquisition: Our reported results were adversely impacted by lower interest income due to the payment of a portion of the KSNET purchase price in cash and increased interest expense due to the payment of a portion of the KSNET purchase price utilizing long- term debt; and
• Non-recurring items included in selling, general and administration expense: During the third quarter of fiscal 2011, we incurred transaction-related expenses of $0.5 million, primarily for the acquisition of KSNET.

           Consolidated overall results of operations

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

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

          Analyzed in ZAR, the increase in revenue for the third quarter of fiscal 2011, was primarily due to higher revenues from the inclusion of KSNET and FIHRST, an increase in the number of UEPS-based loans made, increased transaction volumes at EasyPay and higher utilization of our UEPS system in Iraq, which was partially offset by lower revenues under our new SASSA contract, discussed under “—Business Developments during the Third Quarter of Fiscal 2011—South Africa—SASSA update” and fewer sales of hardware, software and related technology. Analyzed in ZAR, cost of goods sold, IT processing, servicing and support for the third quarter of fiscal 2011 was higher primarily due to the inclusion of KSNET and FIHRST.

          Analyzed in ZAR, selling, general and administration expense increased during the third quarter of fiscal 2011 primarily due to increases in goods and services purchased from third parties and the inclusion of KSNET and FIHRST’s operations. During the third quarter of fiscal 2011, selling, general and administration expense also included transaction-related costs of $0.5 million (ZAR 3.7 million), primarily for the KSNET acquisition.

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          Our operating income margin, before the impairment loss discussed below, for the third quarter of fiscal 2011 and 2010 was 21% and 37%, respectively. We discuss the components of the operating income margin under “—Results of operations by operating segment”, however the significant decrease from the prior period is attributable to the price and volume reductions under our SASSA contract, lower margin contribution from KSNET and transaction-related costs.

          Our direct costs of maintaining a listing on Nasdaq and the JSE, as well as compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of Sarbanes, primarily includes independent directors’ fees, legal fees, fees paid to Nasdaq and the JSE, investor relations expenses, our compliance officer’s salary, fees paid to consultants who assist with Sarbanes compliance and fees paid to our independent accountants related to the audit and review process. This has resulted in expenditures of $0.9 million (ZAR 6.1 million) and $0.6 million (ZAR 4.5 million) during the third quarter of fiscal 2011 and 2010, respectively.

          In ZAR, depreciation and amortization increased during fiscal 2011 primarily as a result of intangible asset amortization related to the KSNET and FIHRST acquisitions. The intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented in the tables below:

          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.

          The expected undiscounted future cash flows related to the Net1 UTA customer relationships was compared to the carrying value of the asset and management determined that the carrying value exceeded the undiscounted future cash flows. Accordingly, management performed the second step in the asset impairment analysis in order to determine the impairment loss. The second step requires a comparison of the carrying value of the customer relationships with its fair value. The fair value of the customer relationships was determined using an income approach valuation technique. The calculation of the fair value required the Company to make a number of assumptions and estimates about the fair value of assets and liabilities where the fair values were not readily available or observable.

          Interest on surplus cash for the third quarter of fiscal 2011 decreased to $1.5 million (ZAR 10.6 million) from $2.5 million (ZAR 18.8 million) for the third quarter of fiscal 2010. The decrease in interest on surplus cash held in South Africa was due to a lower average daily ZAR cash balance during the third quarter of fiscal 2011 compared with the third quarter of fiscal 2010 as a result of the payment of a portion of the KSNET purchase price in cash as well as lower deposit rates resulting from the adjustment in the South African prime interest rate from an average of approximately 10.47% per annum for the third quarter of fiscal 2010 to 9.00% per annum for the third quarter of fiscal 2011.

          Finance costs increased to $2.5 million (ZAR 17.3 million) for the third quarter of fiscal 2011 from $0.2 million (ZAR 1.5 million for the third quarter of fiscal 2010. Interest expense increased during the third quarter of fiscal 2011 due to the incurrence of long-term debt.

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          Total tax benefit for the third quarter of fiscal 2011 was $1.6 million (ZAR 11.2 million) compared with an income tax expense of $10.4 million (ZAR 78.7 million) during the same period in the prior fiscal year. Our total tax expense decreased primarily due to the reversal of deferred tax liabilities associated with the intangible assets impaired and lower taxable income resulting from the SASSA price and volume reductions and a decrease in overall profitability. Our effective tax rate for the third quarter of fiscal 2011 was 7.0%, compared to 35.9% for the third quarter of fiscal 2010. The change in our effective tax rate was primarily due to an increase in non-deductible expenses, the impairment loss and the interest expense related to the acquisition of KSNET, during the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010.

          Net loss from equity-accounted investments for the third quarter of fiscal 2011 increased from the prior year primarily due to waiver of interest and related currency effects at SmartSwitch Botswana offset by an increase in transaction fees generated by SmartSwitch Namibia and SmartSwitch Botswana.

               Results of operations by operating segment

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