SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER______________________
NET 1 UEPS TECHNOLOGIES, INC.
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(Name of Small Business Issuer in Its Charter)
FLORIDA 65-0903895
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
325-744 WEST HASTINGS STREET
VANCOUVER B.C., CANADA V6C 1A5
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(Address of Principal Executive Offices)(Zip Code)
(888) 796-2233
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Securities Exchange Act of
1934:
Title of Each Class Name of Each Exchange on Which
Registered
------------------- ------------------------------
NONE NONE
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of Class)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State registrant's revenues for the year ended December 31, 2001: $0
State the aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing bid price of its Common
Stock as reported on the OTC Bulletin Board on March 18, 2002 ($1.05):
$5,996,550
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share (the "Common Stock"), as of March 18, 2002, was 15,852,856.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
DOCUMENTS INCORPORATED BY REFERENCE
THIS ANNUAL REPORT FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER
THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY
REFERENCE INTO THIS FORM 10-KSB, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
WHEN USED IN THIS DOCUMENT THE WORDS "ANTICIPATE," "ESTIMATE," "INTENDS,"
"PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR
PROJECTED. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE
EXPECTATIONS WILL PROVE TO BE CORRECT.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Net 1 UEPS Technologies, Inc. was incorporated under the laws of the State of
Florida in May 1997 to acquire and exploit a non-exclusive worldwide license to
the "Universal Electronic Payment System" or "UEPS" payment system. The UEPS is
a software application that utilizes the "Funds Transfer System" or "FTS"
patents held by Net 1 Holdings S.a.r.l. "Net 1 Holdings", a 1929 company
incorporated in Luxembourg. In this report, we refer to Net 1 UEPS Technologies,
Inc. as "Net 1," "we," or "us." Information in this registration statement gives
effect to a 2:1 forward split of our common stock executed in June 1998.
Net 1 is a development stage company engaged in the business of commercializing
the smart card based UEPS through the development of strategic alliances with
national and international bank, card service or retail organizations. To date
our activities have consisted of acquiring certain exclusive rights to the
above- mentioned technology from Net 1 Holdings.
Our management team devotes most of their activities to establishing a new
business, primarily, the development of a detailed business plan, marketing
strategy and the raising of the funds required to develop and operate the
business successfully. Planned principal activities have not yet produced
revenues, and Net 1 has suffered operating losses. Net 1 has a working capital
deficiency of $70,938 as of December 31, 2001. These factors raise substantial
doubt about Net 1's ability to continue as a going concern. The ability of Net 1
to complete its long-term business plan depends on whether it is successful in
raising the capital it requires through equity financing and developing a market
for its products.
The UEPS technology was developed by Serge Belamant, an executive officer of Net
1, and the late Andre Mansvelt, a former executive officer of Net 1, and the
resulting FTS patents (or applications for patents) were assigned to Net 1
Investment Holdings (Pty) Ltd. ("Net 1 (Pty)") with respect to patent rights in
South Africa and the surrounding territories, and to Net 1 Holdings with respect
to rights in all other territories.
Net 1 entered into a license agreement, dated May 19, 1997 (the "License
Agreement"), with Net 1 Holdings, Net 1 Operations S.a.r.l. and Net 1 Pty
(collectively, the "Licensors"), where the licensors granted a non-exclusive
license to us for the UEPS technology. On October 1, 1997 an Amendment to the
License Agreement was signed that provided for the transfer of the ownership of
the UEPS technology and FTS patents world-wide except for South Africa and its
surrounding territories and for the assignment of the Technology License
Agreement between Visa International Service Association and Net 1 Holdings,
dated July 31, 1997 (the "Visa Agreement") to Net 1 in consideration for
4,729,612 shares of common stock of Net 1. The assignment of the Visa Agreement
and the transfer of the ownership of the UEPS technology and FTS patents to NET
1 were never consummated because certain conditions precedent were never
satisfied.
On May 3, 2000 we entered into a Patent and Technology Agreement with Net 1
Holdings S.a.r.l. that granted us an exclusive marketing license for the UEPS
technology and the FTS patents world-wide except for South Africa and its
surrounding territories, under terms similar to those stipulated in the
Amendment to the License Agreement. No conditions precedent were stipulated. The
4,729,612 shares of common stock of Net 1 previously issued in consideration for
the Amendment to the License Agreement were released to Net 1 Holdings S.a.r.l.
DESCRIPTION OF OUR BUSINESS
The following description of our business is intended to provide an
understanding of our product and the direction of our initial marketing
strategy. As Net 1 is in its developmental stages, any focus described in the
following may change and different initiatives may be pursued although none are
presently contemplated.
We intend to develop and implement a branded payment system utilizing our
proprietary technology. The payment system network will operate under the name
"Net 1." The Net 1 payment system will provide an alternative to existing
payment systems such as credit cards, debit cards, bank wires, checks and cash.
Net 1's initial focus will be on products where we do not expose ourselves to
credit risk.
The Net 1 system employs cards that are similar to credit cards, but which have
a computer chip embedded within them that can both store and process
information. The Net 1 system is based on two components developed by the
founders of Net 1, the FTS, for which patents have been obtained or applied for
in certain jurisdictions, and the UEPS. The FTS describes a secure method of
transferring funds from one smart card to another without the need for the
card-to-card transaction to be processed through a central computer issuing
system, a so-called off-line transaction. The UEPS is a suite of computer
programs that incorporates the FTS to deliver a fully integrated payment and
settlement system.
We will license our proprietary technology to other entities which will issue
Net 1 cards to their customers. Depending on the specifics of the application,
as discussed below, funds are loaded onto the computer chip on the cardholder's
card either by the cardholder or by others, including employers or governmental
benefit providers. Once loaded with funds, the cardholder may pay for goods or
services by transferring funds from his or her card to a merchant that accepts
Net 1 cards.
Unlike other smart card based cash substitute schemes, such as Mondex(R) and
VisaCash(R) which have had unsuccessful pilot programs in the past, we believe
that the technology underlying the Net 1 payment system offers a variety of
benefits to the cardholder which makes the Net 1 system much more than merely a
substitute for cash.
As two brief examples:
- the system is designed to be loss tolerant, in the event that a card is lost
or stolen, the funds loaded onto the card cannot be used by a third party
and the card can be replaced once reported lost or stolen, and
- funds can be securely transferred off-line from one card to another. A
cardholder with a home card reader/terminal can pay for goods bought over
the Internet from a merchant that accepts the card without the need to
transmit personal account information over the Internet.
In addition, interest can be paid on account balances. The benefits that are
inherent in the Net 1 system make the system attractive to issuers, cardholders
and merchants in geographically and economically diverse areas.
We are still in the developmental stages of our business and for the next twelve
months intend to focus on attracting the necessary capital to implement our
business plan as described below. No assurances can be given that we will be
successful in attracting capital or meeting our business objectives.
OUR TECHNOLOGY
Net 1's technological platform is based on two fundamental components:
- the FTS patents; and
- the UEPS.
FTS Patents. The FTS describes a method through which funds can be transferred
from one smart card to another in a secure and off-line manner. Off-line for
these purposes refers to a transaction which is effected when there is no
contact with the card issuer or authorization center at the time of the
transaction. The FTS also incorporates how these cards can be loaded or
re-loaded with funds as well as how these funds can be redeemed for value in a
banking or non-banking environment. The FTS patents have been registered in the
United States, Europe, South Africa and a number of other countries that have
patent agreements with these countries. The FTS is registered in the United
States Patent & Trademark Office under registration number 5,175,416 and in the
European Patent Office under the publication number 0 421 808 B1.
Status of FTS Patents. FTS was first patented in South Africa in 1989. The
European patent was granted on December 28, 1994, with effect in Austria,
Belgium, Switzerland, Germany, Denmark, Spain, France, Great Britain, Greece,
Italy, Liechtenstein, Luxembourg, Netherlands and Sweden. The European Patent
Convention provides for an opposition period immediately following the grant of
a European patent, and six parties filed an opposition to the grant of the
patent on the grounds that the invention was not patentable. The case was heard
before a Board of the Opposition Division in March 1998, when the patent was
upheld in a form slightly different than the original application. Following the
issue of the formal decision, a number of the opponents filed an appeal. The
appeal proceedings will be heard in September 2002 before the Board of Appeal of
the European Patent Office. Currently, the granted patent remains effective in
each of the designated states and is currently in force.
The methodology protected by the FTS patents makes possible a payment system
that is affordable, secure and flexible. The system is affordable because
transactions occur between the computer chips embedded in the two smart cards
involved using a relatively inexpensive self contained terminal. There is,
therefore, no need for existing infrastructures such as electricity, telephone
or data transmission. The Net 1 payment system utilizing the FTS is secure
because all transactions are verified (i.e., confirmation of the actual transfer
of the funds) between the two smart cards which are involved in the transaction
using advanced hardware tamper protection and cryptographic systems, together
with protocols and techniques developed by the founders of Net 1. Finally, the
FTS is flexible because transactions are completed off-line so that there are
virtually no restrictions on the locations in which verified transactions can
occur.
UEPS. The UEPS is a suite of software programs that incorporates the FTS patent
to deliver a fully integrated payment and settlement system. The first version
of the UEPS system was released in 1991. The programs included in the UEPS
include both the software which is included in the computer chip embedded in
each smart card as well as the software required to maintain the payment system.
UEPS provides all the functions that are necessary to issue and manage a smart
card and terminal base as well as those needed to effect settlement between all
the operators and participants. UEPS is fully traceable and auditable and can
provide advanced facilities such as loss tolerance and interest distribution.
UEPS is scalable and can be made available to well established market leaders or
as a starter kit to smaller organizations.
IDENTIFIED SOURCES OF REVENUE
Net 1 has identified several potential general sources of revenue including:
- manufacture licensing,
- usage licensing,
- Net 1 Holdings has received license usage fees during calendar year 2001
from FTS/UEPS Licensees for Latvia, Burundi, Malawi, Rwanda and the CIS
states. See below:
- joint ventures, and
- hardware sales.
None of the other sources of revenue have yet been developed and there can be no
assurance that they will develop.
Manufacture Licensing. Licenses will be required by all manufacturers that
produce smart cards that incorporate into their embedded computer chip
applications that utilize the FTS patents. Net 1 intends to charge a fee to
smart card manufacturers for each smart card produced by such manufacturer that
includes the FTS application. In addition, it is anticipated that a yearly fee
will also be charged which will entitle the manufacturers to product information
and workshop materials from Net 1.
Manufacturers of point of sale terminals and prepaid utility meter terminals who
wish to produce terminals capable of supporting FTS based applications will be
licensed by Net 1. It is anticipated that these manufacturer licenses will be
based on a variety of payment systems including, for example, annual payments,
per-terminal payments or transaction fees, depending upon the particular
circumstances. Generally, the terminals used in connection with the FTS/UEPS
based payment system, unlike other payment systems, do not require a great deal
of technology as the security process used by the payment system is managed in
its entirety by the two smart cards transacting at the time. Manufacturers,
therefore, can mass-produce low cost terminals for the Net 1 FTS/UEPS payment
systems.
Usage Licensing. We will license entities that will operate specific
applications that use FTS intellectual property or the combined FTS/UEPS payment
system. We anticipate that the license fees for these licenses will include a
combination of annual fees as well as transaction fees.
Net 1 receives revenue from Net 1 Holdings from all sales of licenses equal to
Net 1 Holdings annual net profit before amortization as certified by its
auditors in its annual financial statement. Net 1 will recognize the revenue in
the period when the audited financial statements of Net 1 Holdings become
available and will report the revenue on a net basis as the Company is acting as
an agent for Net 1 Holdings as per the Patent and Technology agreement dated May
3, 2000.
Net 1 Holdings has received license usage fees during calendar year 2002 from
FTS/UEPS licensees for Latvia, Burundi, Malawi, Rwanda and the CIS states.
For fiscal 2002, Net 1 will be receiving $157,565 from Net 1 Holdings.
Joint Ventures. We will explore opportunities to form joint ventures with
entities within particular geographic territories. The joint venturer would then
act as a system operator in that territory. Under this scenario we will act as a
licensor and may have an equity interest or other participation in the licensee.
It is contemplated that we will enter into technology and know-how transfer
agreements in exchange for our interest in the joint venture and the other joint
venture partner or partners will contribute capital and other expertise
necessary to exploit the technology in the given territory.
Hardware Sales. We will pursue arrangements with smart card and terminal
manufacturers which will enable us to purchase these items of hardware in volume
at preferential prices. We contemplate selling these items to our licensees,
passing along a portion of the price savings.
MARKET FOCUS
In an effort to allocate our resources in an efficient manner, management of Net
1 has identified two distinct markets for our products based on the benefits
that cardholders, merchant cardholders and others would find desirable from the
payment system. Net 1 has developed marketing strategies to develop these two
markets. The first market is one which has a reliable, extensive and inexpensive
telecommunications network, with a considerable penetration of credit and debit
card services, and in which the vast majority of the population has access to
banking products. For our purposes, this market is referred to as the "developed
market." The second market is characterized by regions which do not have
reliable, extensive and inexpensive telecommunications and related
infrastructure systems, where there is relatively little penetration of credit
or debit cards and/or where a large portion of the population does not have
access to traditional banking services. The second market is referred to as the
"less developed market."
The Developed Markets. Our principal competition in the developed markets is the
existing installed base of credit and traditional on-line debit cards, as well
as cash, checks and other forms of payment. In addition, several other companies
are developing smart card based payment systems. In order to effectively compete
in this market, an alternative payment system must offer some identifiable
benefit to the cardholder and the merchant cardholder. We believe that our
product offers substantial benefits over existing payment
systems in connection with payments for goods and services over the Internet and
other selected environments.
One significant impediment to the growth of commerce over the Internet is the
reluctance of consumers to broadcast sensitive credit or debit account
information over the Internet. Moreover, Internet transactions settled by credit
card are not generally verified, resulting in increased costs for the on-line
merchant. There is a need in this market for a payment system which can provide
on-line merchants with instant, verified (i.e., the equivalent of receiving
cash) transfers of payments from customers while not requiring the customer to
transmit any information over the Internet which can access or even identify the
customer's payment account. We believe that the Net 1 FTS/UEPS payment system
can meet these objectives as well as provide additional benefits to on-line
consumers and merchants.
We envision a system in which consumers can use their existing account at a
financial institution to load their cards with funds. This procedure will be
able to operate in many different ways depending on the relationship between Net
1 and the specific financial institution. If no relationship exists, a simple
debit or stop order could be used to allow the cardholder to load his or her
UEPS smart card through a simple Internet application. In the case where the
financial institution is a licensee of Net 1, the debit or stop order would not
be required to achieve the above mentioned result. Interest rates and other
incentives could be offered to cardholders as an incentive to maintain higher
balances on their UEPS smart cards. Internet merchants would then be able to
accept guaranteed payments for the goods or services they offer over the
Internet. Merchants and service providers would be able to deposit these
payments in any financial institution on a daily basis. Cardholders would be
protected against the unauthorized use of their card and would always maintain a
full audit trail of all their transactions.
Net 1's Internet payment solution is no different to its standard off-line
point-of-sale transaction. Our ability to readily adapt UEPS to Internet
transactions is due to the patented end-to-end security protocol that ensures
that any active communication can only be interpreted by the cardholder and the
merchant cardholders. We believe that the risk of fraud, repudiation or
non-payment is reduced compared to competing systems.
Net 1 intends to have a system that can provide payment functionality in
pay-as-you-use services. These services include, for example, access to
databases or other information systems, professional advice or advanced software
or special application systems. There are other competing systems that have been
proposed for these markets. Our continuous debit function could ensure that
payment is made while the service is being used. This same functionality can be
used in applications such as fuel dispensing and telephonic communication.
We intend to market this product to on-line retailers and service providers and
will develop a final product based on the specifications for the system required
by these entities. Once there is a sufficient installed base of cards, Net 1
will then broaden its focus to conventional banking and retail applications in
these markets.
Less Developed Markets. Net 1's present competition in the less developed
markets is principally cash. In addition, other companies are developing smart
card based systems for these markets, and these systems may be competitive. The
less developed markets comprise the great majority of the world's population,
and there is currently no alternative to cash in these markets. Due to their
lack of infrastructure, these markets have not been
particularly attractive to alternative payment systems such as debit and credit
cards, and for the most part, entities such as Visa and MasterCard have not
attempted to enter these markets. Net 1 believes that its product is
particularly well suited for these markets, and while individual transactions
may be smaller than in more well developed markets, the volume of these
transactions is potentially much greater, representing a significant opportunity
for us, our licensees and joint venture partners.
Net 1's goal in these markets is to provide a payment system to the population
as an alternative to cash. Cash is expensive to handle and is particularly prone
to theft. Moreover, since people in the less developed markets do not have
access to traditional banking products, they therefore do not deposit their
money in secure savings accounts on which they earn interest. The Net 1 FTS/UEPS
system can enhance the lives of the populations of these developing markets by
affording them much greater security with respect to their money and making
available banking products such as interest bearing savings accounts. In
addition, by simplifying the administrative burden and removing the costs
associated with handling cash, a Net 1 FTS/UEPS system will result in
significant savings to employers, governments and merchants. A significant focus
of Net 1 in these markets, therefore, is to identify licensees and/or joint
venture partners located in these regions that it believes will be in a position
to effectively market the payment system to employers and governments.
The general strategy is to market the system to those who presently transfer
money to others, as wages in the case of employers and as government benefits in
the case of governments. These entities would enter into arrangements with a
card issuer, who would issue cards to their employees or beneficiaries. The
wages or benefits for these cardholders would then be loaded onto their cards,
thus avoiding the need for the distribution of cash or checks. The funds loaded
onto the cards could then be used at local merchants that accept the card for
purchases of goods and services. Cash could also be obtained from the card at
local banks or retail establishments. The goal is to develop a large installed
cardholder base in the most efficient manner. Once a region has a sufficient
number of cardholders, additional merchants can be solicited and the payment
system expanded. As the cardholder base grows, additional benefits inherent in
the Net 1 FTS/UEPS system will become recognized and the system will continue to
grow. Net 1 is also exploring initiatives in these markets to utilize the
FTS/UEPS system in connection with public transportation, taxis and prepaid
utility services such as telephones, electricity and water.
COMPETITION
Separate from competition from cash, checks, credit and debit cards and other
existing payment systems, Net 1 has identified a number of other products
currently being produced which use smart card technology in connection with a
fund transfer system. These include Mondex, Proton and EMV, which represent
products from Visa, MasterCard and Europay. We believe that the UEPS technology
can be distinguished from these competitors in a number of significant ways.
The most important differences between our competition and Net 1 are listed
below:
- since little or no technology is required in the terminal itself,
terminals can be manufactured, distributed and installed at a fraction of
the cost of other similar terminals which require sophisticated security and
communications modules;
- the terminal network can operate "off-line" (i.e. without the need for a
data communication session to be active during the transaction) or "on line"
through the use of any communications infrastructure, including satellite,
micro-wave, radio, land lines or any other distribution channel;
- each transaction has a unique transaction sequencing algorithm that allows
verifiable auditing of the transaction creating a loss tolerant system. From
a practical perspective, this enables the detection and subsequent
elimination of fraudulent activity and an ability to replace lost or stolen
cards; and
- the encryption security protocols enable cardholders to receive fund loading
instructions from a third party through any insecure communications channel
such as word of mouth, telephone, newspaper or any analogue or digital
network.
In addition, the UEPS technology includes functionality that allows:
- transparent and automatic recovery in the event of transaction failure
resulting from terminal hardware or software problems;
- the smart card itself can be used as proof of purchase, replacing the need
for a separate ticket and ticketing system, for example, on buses, trains or
the lottery;
- continuous debiting which in turn allows for simultaneous vending and
debiting in unattended environments such as fuel dispensing and telephony;
- speed of processing that is mandatory in applications such as transportation
and access control; and
- open or restricted purses that are required to implement certain
applications such as pension and welfare distribution and specific funding
initiatives.
ITEM 2. DESCRIPTION OF PROPERTIES
Net 1 rents office facilities and services on an as needed basis at suite
325-744 West Hastings Street, Vancouver B.C. Canada from Gilmour, McKay Roberts
Consulting Limited, one of our financial consultants. We rent the offices for
One Thousand Dollars ($1,000) per month on a month to month basis.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, John Drove, as petitioner, applied for an order under Section
201 of the Company Act, R.S.B.C. 1996, allowing him to commence a derivative
action in the name of Net 1 Products (Canada) Ltd., against the individual
respondents Andre Peter Mansvelt and Serge Christian Pierre Belamant, a former
officer and current officer of Net 1 respectively, for the alleged wrongful
appropriation of a corporate opportunity belonging to Net 1 Products (Canada)
Ltd. and for breach of trust and breach of fiduciary duty of the individual
respondents to Net 1 Products (Canada) Ltd. A petition was filed in the Supreme
Court of British Columbia, Vancouver Registry under case number A972151. Because
factual disputes arose between the parties, it was necessary that the petition
be converted into an action to enable discovery and a trial to resolve the
issues in dispute. We are informed that no written contracts were entered into
with the petitioner. On October 5, 1998, the Court ordered that the matter be
brought to trial and that it proceed under action number C976027 in the Supreme
Court of British Columbia, Vancouver Registry. A writ of summons was
subsequently issued by Net 1 Products (Canada) Ltd., as plaintiff, against Andre
Peter Mansvelt and Serge Christian Pierre Belamant. The specific relief sought
by Net 1 Products (Canada) Ltd. includes a declaration that Net 1 Products
(Canada) Ltd. has certain rights to the UEPS Technology within Canada, an
accounting with respect to the third party licensing and distribution rights of
UEPS in Canada, and an order to transfer to the petitioner certain rights to the
UEPS Technology.
In February 2000, an application to join numerous other entities was filed by
Net 1 Products (Canada) Ltd. On December 6, 2001, all claims by John Drove and
Net 1 Products (Canada) Ltd. were settled by third parties resulting in no
settlement cost to Net 1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is currently limited public trading of Net 1's common stock on the OTC
Bulletin Board under the symbol NUEP. As of February 28, 2002 there were 55
shareholders of record of our common stock. Our common stock traded on the Pink
Sheets of the National Quotation System under the symbol NUEP from February 2000
to mid December 2000. In mid December 2000, our common stock again traded on the
OTC Bulletin Board as the Company complied with the OTC Bulletin Board
Eligibility Rule. The following table sets forth the high and low bid quotations
for the common stock for the periods indicated. These quotations reflect prices
between dealers, do not include retail mark-ups, mark-downs, and commissions and
may not necessarily represent actual transactions.
PERIOD HIGH LOW
------ ---- ---
Quarter ended March 31, 1999 $6.75 $3.5
Quarter ended June 30, 1999 $6.00 $3.31
Quarter ended September 30, 1999 $4.00 $1.875
Quarter ended December 31, 1999 $2.81 $1.375
Quarter ended March 31, 2000 $7.93 $2.25
Quarter ended June 30, 2000 $5.75 $3.00
Quarter ended September 31, 2000 $5.50 $3.65
Quarter ended December 31, 2000 $4.65 $2.00
Quarter ended March 31, 2001 $2.06 $1.50
Quarter ended June 30, 2001 $1.55 $1.17
Quarter ended September 30, 2001 $1.40 $0.90
Quarter ended December 31, 2001 $1.01 $0.80
Net 1's transfer agent since May 1997 is Florida Atlantic Stock Transfer Inc.,
located at 7130 NOB Hill Road, Tamarac, Florida, FL33321.
Net 1 has never paid cash dividends on its common stock and presently intends to
retain future earnings, if any, to finance the expansion of business. Net 1 does
not anticipate that any cash dividends will be paid in the foreseeable future.
The future dividend policy will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements of the Company and the notes thereto appearing elsewhere.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000.
OPERATIONS
Management has been intensively involved in negotiations to secure sufficient
equity and/or debt financing to fund the Company's business plans. In the short
term, management has suspended various expenses including the Consulting
Agreement with its CEO, Claude Guerard and its Outsourcing Agreement with Net 1
Investment Holdings, Ltd., the Company's UEPS integrators for the Central
Europe, Middle East and African regions.
Management continues to be actively involved in negotiations in view of
reaching two main targets required for the future of the Company:
- To establish a partnership agreement with IT services and financial services
entities which would provide the total technical support required by NUEP's
licensees to launch and develop their own applications based on the FTS
patent and the related UEPS technologies and services.
The first partnerships agreement has been signed in February 2001,
retroactive to January 1, 2001 with Net 1 Investment Holdings (Pty) Ltd., a
South African company for the CEMEA area (central Europe, Middle East and
Africa region).
- To develop NUEP's licensee network on a worldwide basis. We have appointed
new licensees in Latvia, Burundi, and Malawi, and are currently in advanced
negotiations with potential licensees in various countries of Africa (Kenya,
Democratic Republic of the Congo, Uganda, Tanzania) as well as Australia and
other countries in South America and the Middle East. The Australian
organization wishes to implement FTS based systems in Australia, Hong Kong,
the Philippines, and Indonesia.
On April 6, 2001, the Company issued the Reserve Bank of Malawi, Malawi's
central bank, with a license to operate the Company's FTS/UEPS technology on
its behalf and to market the technology to the banks in Malawi. A national
switching and smart card system ("Malswitch") has been installed by the
Company's UEPS integrator. Malswitch's initial launch is expected to total
approximately 200,000 smart cards with initial applications in banking
services.
REVENUE
The Company is still in its development stage. Planned principal activities have
not generated revenues at this time.
Net 1 receives revenue from Net 1 Holdings from all sales of licenses equal to
Net 1 Holdings annual net profit before amortization as certified by its
auditors in its annual financial statement. Net 1 will recognize the revenue in
the period when the audited financial statements of Net 1 Holdings become
available and will report the revenue on a net basis as the Company is acting as
an agent for Net 1 Holdings as per the Patent and Technology agreement dated May
3, 2000.
Net 1 Holdings has received license usage fees during calendar year 2002 from
FTS/UEPS licensees for Latvia, Burundi, Malawi, Rwanda and the CIS states.
For fiscal 2002, Net 1 will be receiving $157,565 from Net 1 Holdings.
ADMINISTRATIVE EXPENSES
Administrative expenses have increased $341,385 from $336,210 in the year 2000
to $677,595 during the year 2001. The increase resulted primarily from
subcontract costs of the Company's Outsourcing Agreement, consulting fees,
business development expenses and administrative costs. Management intends to
keep operating expenses at the lowest possible level by developing outsourcing
policies.
OTHER
In October 2000, the Company raised $1,000,000 by issuing 250,000 shares at
$4.00 by way of a private placement. Management continues its efforts to secure
the funding required to exploit the FTS/UEPS technology on a worldwide basis.
Strategic alliances with, and/or investments in companies having expertise in IT
services, financial services and proven market penetration are currently being
explored in targeted market areas.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of the Company's cash has been through the sale of equity.
Currently, the Company does not have available any established lines of credit
with banking facilities.
The Company will be receiving $157,565 from license fees collected up to
December 31, 2001, by Net 1 Holdings. Additional fees from the sale of new
licenses and recurring annual license fees from existing licensees will accrue
to the Company during 2002.
The Company has used the last $1,000,000 received in October 2000 for general
working capital. The Company anticipates raising additional funds from the sale
of equity during the next fiscal year. Such capital will be used for working
capital.
The Company believes its current available cash position and revenues due from
Net 1 Holdings is sufficient to meet its cash needs on a short-term basis.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Financial Statements" for the financial statements included in
this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our executive
officers and directors. Directors will be elected at our annual meeting of
shareholders and serve for one year or until their successors are elected and
qualify. Officers are elected by the board of directors and their terms of
office are, except to the extent governed by employment contract, at the
discretion of the board of directors.
Name Age Positions Held
----- --- --------------
Serge Belamant 48 Chairman of the Board of Directors
Claude Guerard 60 Director, Chief Executive Officer
David Anthony 52 Secretary and Treasurer
Serge Christian Pierre Belamant has been a director of Net 1 since its inception
in May 1997. From May 1997 to October 2000, Mr. Belamant also served as Chief
Executive Officer of Net 1. From June 1997 to present, Mr. Belamant has served
as Chief Executive Officer and a director of Net 1 Applied Technology Holdings
Limited, a company listed on the Johannesburg Stock Exchange as well as the
Chief Technology Officer and a director of Prosperity Holdings Limited, a
financial services company. From 1996 to 1997, Mr. Belamant served as a
consultant in the development of COPAC (Chip Off-Line Pre-Authorized Card), a
product currently being marketed internationally by Visa International. From
October 1989 to September 1995, Mr. Belamant served as the managing director of
Net 1 Products (Pty) Ltd., a privately owned South African company specializing
in the development of advanced technologies in the field of transaction
processing and payment systems. Mr. Belamant also serves on the board of a
number of other companies that are closely related to the smart card business
worldwide. Mr. Belamant spent ten years working as a computer scientist for
Control Data Corporation where he won a number of international awards. Later,
he was responsible for the design, development, implementation and operation of
the Saswitch Automated Teller Machine network in South Africa that rates today
as the third largest ATM switching system in the world. Mr. Belamant has
patented a number of inventions ranging from biometrics to gaming as well as the
FTS. Mr. Belamant has more than twenty years experience in the fields of
operations research, security, biometrics, artificial intelligence and on-line
and off-line transaction processing systems.
Claude Guerard has served as our director since August 1998 and as CEO since
October 2000. From December 1996 to October 1999, Mr. Guerard served as Vice
President of Gemplus S.C.A., a company in the smart card industry. During this
period, Mr. Guerard also served as the Chief Executive Officer of Gemplus' South
African division, Chief Executive Officer of Gemplus Gmbh, and general manager
of Gemplus' Central and Eastern Europe division. From 1990 to 1996, Mr. Guerard
was Chief Executive Officer and Chairman of AM International France, a
subsidiary of AM International Corp., a Chicago based multinational graphics and
printing company. Mr. Guerard also has sales and management experience in
computer/technology and related industries having worked for 13 years at IBM and
8 years with Nashua Corp., a company engaged in the sales and service of office
equipment.
David Anthony has served as Net 1's Secretary and Treasurer since May 1997. From
1991 to 1997, Mr. Anthony was the sole proprietor of an independent financial
consulting firm specializing in structuring and funding emerging growth
companies, primarily in North America. Previously, from 1986 to 1991, Mr.
Anthony was the founder of Professional Canadian Investment Group (Procan), a
venture capital firm based in Vancouver, British Columbia.
Employment Agreements.
Serge Christian Pierre Belamant and Andre Peter Mansvelt. Since Net 1's
inception in May 1997, it was decided that no employment agreement would be
entered into by Serge Christian Pierre Belamant or the late Andre Peter Mansvelt
and Net 1 until the funding necessary to operate the company would be secured.
Although that Mr. Belamant continues to perform his duties as the Chairman of
Net 1, he has not been remunerated to date in any form whatsoever. Mr. Belamant
has in fact funded Net 1 through Holdings in Luxembourg and Net 1 (Pty) in South
Africa.
Claude Guerard. Our majority shareholder, Net 1 Holdings S.a.r.l. entered into a
consulting and advisory agreement with Mr. Guerard on October 1, 1999. The term
of the agreement was to extend from October 1999 to January 2000. The agreement
has been extended for two further terms to January 2001 and January 2002.
Currently, the agreement is on a month-to-month basis. In this agreement, Net 1
Holdings S.a.r.l. agreed to pay Mr. Guerard $12,500 per month. Mr. Guerard's
responsibilities included the restructuring of the company and the general
management of the company. Mr. Guerard's contract could be extended at the
discretion of the company once we raise the necessary funds to develop our
business plan. Effective October 25, 1999 we assumed all liabilities under the
agreement through an assignment of the agreement, releasing Net 1 Holdings
S.a.r.l. from the liabilities and responsibilities of the agreement. In 2001, we
paid consulting fees totaling $150,000 to Mr. Guerard under this agreement.
Board Committees: We do not as yet have an audit committee or a compensation
committee. However, as and when we elect independent directors, we expect to
organize these committees.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") during the fiscal year ended December 31, 2001 and
Forms 5 and amendments thereto furnished to the Company with respect to the
fiscal year ended December 31, 2001, as well as any written representation from
a reporting person that no Form 5 is required, the Company is not aware of any
person that failed to file on a timely basis, as disclosed in the aforementioned
Forms, reports required by Section 16(a) of the Exchange Act during the fiscal
year ended December 31, 2001.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information relating to all compensation awarded
to, earned by or paid by us during the last four fiscal years, to: (a) our Chief
Executive Officer; and (b) each of our four most highly compensated executive
officers:
Other All
Name and Fiscal Salary Annual LTIP Other
Principal Position Year Bonus Compensation Options/(#) Payouts Compensation
------------------ ---- ------ ------------ ----------- ------- ------------
Serge Belamant, Chairman 2001 - - - - -
2000 - - - - -
1999 - - - - -
1998 - - - - -
Claude Guerard, CEO & Director 2001 - - - - -
2000 - - - - -
1999 - - - - -
1998 - - - - -
David Anthony, Secretary, 2001 - - - - -
2000 - - - - -
Treasurer 1999 - - - - -
1998 - - - - -
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning our grant of options to
purchase shares of our common stock during the fiscal year ended December 31,
2001 to (a) our Chief Executive Officer; and (b) each of our four most highly
compensated executive officers:
Percent of
Number of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price Expiration
Name Granted (#) Year ($/Sh) Date
----------------------------------------------------------------------------------------------------
Serge Belamant, Chairman -- -- -- --
Claude Guerard, CEO & Director -- -- -- --
David Anthony, Secretary, -- -- -- --
Treasurer
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
None.
OPTION EXERCISES AND HOLDINGS
The following table contains information with respect to the exercise of options
to purchase shares of common stock during the fiscal year ended December 31,
2001 to (a) our Chief Executive Officer; and (b) each of our four most highly
compensated executive officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercisable In-The-Money
Options/SARs Options/SARs
Shares At Fy-End (#) At Fy-End ($)
Acquired on Value Exercisable / Exercisable /
Name Exercise (#) Realized ($) Unexercisable Unexercisable
-------------------------------------------------------------------------------------------------
Serge Belamant, Chairman -- -- -- --
Claude Guerard, CEO -- -- -- --
and Director
David Anthony, Secretary, -- -- -- --
and Treasurer
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
Number Performance
of Shares or Other Estimated Future Payouts Under
Units or Period Until Non-Stock Price-Based Plans
------------------------------
Units or Period Until
Other Rights Maturation Threshold Target Maximum
Name (#) or Payout ($or #) ($or #) ($ or #)
-----------------------------------------------------------------------------------------------------
Serge Belamant, Chairman -- -- -- -- --
Claude Guerard, CEO and Director -- -- -- -- --
David Anthony, Secretary, -- -- -- -- --
and Treasurer
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Florida Business Corporation Act permits the indemnification of directors,
employees, officers and agents of Florida corporations. Net 1's Articles of
Incorporation and Bylaws provide that Net 1 shall indemnify its directors and
officers to the fullest extent permitted by the Corporation Act. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling Net 1 pursuant to the foregoing
provisions, Net 1 has been informed that, in the opinion of the Commission, this
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 2002 with respect
to:
* each person known to us to be the beneficial owner of more
than 5% of our common stock;
* each of our officers and directors; and
* all directors and officers as a group.
This information as to beneficial ownership was furnished to us by or on behalf
of the persons named. Unless otherwise indicated, the business address of each
person listed is 325-744 West Hastings Street, Vancouver, British Columbia,
Canada V6C1A5. Information with respect to the percent of class is based on
15,852,856 issued and outstanding shares of common stock as of February 28,
2002.
Except as otherwise indicated, to our knowledge, each stockholder has sole power
to vote and dispose of all the shares of common stock listed opposite his name.
Approximate
Percentage of
No. of Outstanding Shares
Name Shares Beneficially Owned
---- ------ ------------------
Net 1 Holdings S.a.r.l. 8,520,578 53.74%
Gemplus SCA 1,521,278 9.59%
Serge Belamant 5,030,813 31.73%
Claude Guerard 608,511 3.83%
David Anthony 0 0%
All Officers and Directors
As a Group (3 persons) 5,639,324 35.57%
Net 1 Holdings S.a.r.l., whose address is 6, rue Jean Monnet, L-2180 Luxembourg,
is a corporation controlled by Cornet Ltd. (52.7%) and a trust structure of
which Serge Christian Pierre Belamant, our Chairman (47.3%) is a beneficiary.
Net 1 Holdings owns 55.25% of the issued and outstanding common stock of Net 1.
Cornet Ltd. whose address is Westaway Chambers, 39 Don Street, St. Helier,
Jersey C.I. JE48UA, is a Jersey corporation controlled by Serge Christian Pierre
Belamant and the estate of Andre Peter Mansvelt through trust structures. The
1,521,278 shares of common stock owned by Gemplus SCA is not included in the
8,520,578 shares of common stock owned by Net 1 Holdings S.a.r.l.
Gemplus SCA, whose address is Avenue du Pic De Bertagne, 13884 Gemenos, France,
is a French corporation that is the beneficial owner of 1,521,278 (9.75%) shares
of common stock of Net 1. Mr. Claude Guerard served as an executive officer of
Gemplus from December 1996 to October 1999.
Serge Belamant, whose address is 43 Carlisle Avenue, Hurlingham, Sandton, 2196,
South Africa, is the Chairman of Net 1. He is the beneficial owner of 5,030,813
shares of Net 1's common stock pursuant to direct and indirect shareholdings in
Net 1 Holdings S.a.r.l. These shares cannot be voted by Mr. Belamant personally
but only by Net 1 Holdings S.a.r.l.
Claude Guerard, whose address is No. 20 Avenue Pozzo Di Borgo, 92210
Saint-Cloud, France, is the CEO and a director of Net 1. He is indirectly the
beneficial owner of 608,511 (3.9%) shares of the common stock through Net 1
Holdings S.a.r.l., Cornet Ltd. and a trust structure. The shares may not be
voted by Mr. Guerard but only by Net 1 Holdings S.a.r.l.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into a license agreement, dated May 19, 1997 (the "License
Agreement"), with Net 1 Holdings S.a.r.l., Net 1 Operations S.a.r.l. and Net 1
PTY (collectively, the "Licensors"), where the licensors granted a non-exclusive
license to us for the UEPS technology world-wide except for South Africa and its
surrounding territories. On October 1, 1997 an Amendment to the License
Agreement was signed that provided for the transfer of the ownership of the UEPS
and FTS technology to Net 1 and for the assignment of the Technology License
Agreement between Visa International Service Association and Net 1 Holdings
S.a.r.l, dated July 31, 1997 (the "Visa Agreement") under certain conditions
precedent in consideration for 4,729,612 shares of common stock of the Net 1.
The assignment of the Visa Agreement and the transfer of the ownership of the
UEPS technology and FTS patents to NET 1 were never consummated because the
conditions precedent were never satisfied.
On May 3, 2000 an agreement entitled "Patent and Technology Agreement" was
entered into by Net 1 and Net 1 Holdings S.a.r.l. granting Net 1 an exclusive
marketing license for the UEPS and FTS technology world-wide except for South
Africa and its surrounding territories under terms similar to those stipulated
in the Amendment to the License Agreement. No conditions precedent were
stipulated. The 4,729,612 shares of common stock of Net 1 previously issued in
consideration for the Amendment to the License Agreement were released to Net 1
Holdings S.a.r.l.
In 1998, consulting fees totaling $102,155 were paid to the President and
Director Mr. James Rodgers before his resignation effective August 4, 1998.
In 1998, consulting fees totaling $65,000 were paid to the Chief Financial
Officer Mr. Edwin Austin before his resignation effective August 4, 1998.
In 1999, consulting fees totaling $ 37,500 were paid to Mr. Claude Guerard, our
CEO and one of our directors. Of these fees, $12,500 was included in accounts
payable at December 31, 1999. In 2000, consulting fees totaling $150,000 were
paid to Mr. Guerard. Of these fees, $25,000 was included in accounts payable at
December 31, 2000.
In 2001, Consulting fees totaling $150,000 were paid to Mr. Guerard.
On February 26, 2001, the Company signed a one year agreement effective January
1, 2001, with Net 1 Investment Holdings (Pty) Ltd. to provide the Company with
marketing, sales, administrative, financial reporting and technical support
services at a rate of $30,000 per month.
On January 29, 2002, pursuant to a Director's Resolution, the above consulting
fees and subcontract costs have been postponed until the Company has sufficient
funds.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
1. Articles of Incorporation of Net 1 UEPS Technologies, Inc. (1)
2. Bylaws of Net 1 UEPS Technologies, Inc. (1)
3. Patent and Technology Agreement, between the Net 1 UEPS Technologies,
Inc. and Net 1 Holdings S.a.r.l., dated May 3, 2000. (1)
10.1 Consulting Agreement between Net 1 Holdings S.a.r.l. and Claude
Guerard, dated October 1, 1999. (1)
10.2 Assignment of Consulting Agreement between Net Holdings S.a.r.l.
("Assignor") and Net 1 UEPS Technologies, Inc. ("Assignee") dated October
25, 1999. (1)
10.3 Outsourcing Agreement between Net 1 UEPS Technologies Inc. and Net 1
Investment Holdings Ltd. effective as of January 1, 2001.
--------------------------
(1) Incorporated by reference to exhibits with the corresponding number
filed with our registration statement on Form 10-SB filed August 1, 2000.
B. REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the last quarter of the period covered
by this Report.
SIGNATURES
In accordance with Section 13 or 15(d) 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, in Vancouver, B.C., Canada, on March 26,
2002.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Claude Guerard
---------------------------------------
Claude Guerard
Chief Executive Officer and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Serge Belamant Chairman March 26, 2002
---------------------------
Serge Belamant
/s/ Claude Guerard Chief Executive Officer March 26, 2002
--------------------------- and Director
Claude Guerard
/s/ David Anthony Secretary and Treasurer March 26,2002
---------------------------
David Anthony
Financial Statements
Independent Auditors' Report F1
Balance Sheets F2
Statements of Operations F3
Statements of Cash Flows F4
Statement of Stockholders' Equity F5
Notes to the Financial Statements F6 - F9
Page F 1
[GRAPHIC OMITTED]
Manning Elliott 11th floor, 1050 West Pender Street, Vancouver, BC, Canada V7E 3S7
CHARTERED ACCOUNTANTS Phone: 604.714.3600 Fax: 604.714.3669 Web: manningelliott.com
Independent Auditors' Report
----------------------------
To the Board of Directors
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheets of Net 1 UEPS Technologies, Inc.
(A Development Stage Company) as of December 31, 2001 and 2000 and the related
statements of operations, shareholders' equity and cash flows for the period
from May 8, 1997 (Inception) to December 31, 2001 and the years ended December
31, 2001 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of Net 1 UEPS Technologies, Inc. (A
Development Stage Company), as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for the period from May 8, 1997 (Inception) to
December 31, 2001 and the years ended December 31, 2001 and 2000, in conformity
with generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has not generated any revenues or profitable operations
since inception. Although the initial absence of revenues or profitable
operations is normal for companies in the development stage, these factors may
raise doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result due to
going concern uncertainties.
/s/ Manning Elliott
CHARTERED ACCOUNTANTS
Vancouver, Canada
February 14, 2002
Page F-2
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Balance Sheets
December 31,
2001 2000
$ $
Assets
Current Assets
Cash 57,289 789,613
Prepaid expenses (Note 5) 30,000 -
-------------------------------------------------------------------------------
Total Current Assets 87,289 789,613
Property, Plant and Equipment (Note 3) 394 831
Intangible Assets (Note 4) 3,219 5,179
-------------------------------------------------------------------------------
Total Assets 90,902 795,623
===============================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable (Note 5) 148,227 182,003
Accrued liabilities 10,000 3,350
-------------------------------------------------------------------------------
Total Current Liabilities 158,227 185,353
-------------------------------------------------------------------------------
Contingent Liabilities (Notes 1 and 6)
Subsequent Event (Note 7)
Stockholders' Equity
Common Stock, 100,000,000 shares authorized,
par value $.001 per share, 15,852,856 issued
and outstanding 15,853 15,853
Additional Paid in Capital 1,991,519 1,991,519
-------------------------------------------------------------------------------
2,007,372 2,007,372
-------------------------------------------------------------------------------
Preferred Stock, 3,000,000 shares authorized,
par value $0.10 per share, none issued - -
-------------------------------------------------------------------------------
Deficit Accumulated During the Development Stage (2,074,697) (1,397,102)
-------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (67,325) 610,270
-------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 90,902 795,623
===============================================================================
(See accompanying notes)
Page F-3
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Statements of Operations
Accumulated from
May 8, 1997
(Inception) Years ended
to December 31, December 31,
2001 2001 2000
$ $ $
Revenues - - -
-------------------------------------------------------------------------------------------------
Administrative Expenses
Amortization 7,869 2,396 2,015
Bank charges 6,859 2,906 1,044
Consulting (Note 5) 829,433 186,000 235,090
Foreign exchange 8,098 - 750
Investor relations - advertising 23,519 612 -
Investor relations - consulting 37,574 - -
Office, rent and telephone 129,279 4,514 10,426
Professional fees 347,979 49,148 43,914
Subcontract (Note 5) 380,925 356,938 -
Transfer agent and regulatory fees 25,107 378 2,245
Travel 278,814 74,987 41,201
Less interest income (759) (284) (475)
-------------------------------------------------------------------------------------------------
2,074,697 677,595 336,210
-------------------------------------------------------------------------------------------------
Net Loss (2,074,697) (677,595) (336,210)
=================================================================================================
Net Loss Per Share (0.04) (0.03)
=================================================================================================
Weighted Average Shares Outstanding 15,853,000 13,103,000
=================================================================================================
(Diluted loss per share has not been presented as the result is anti-dilutive)
(See accompanying notes)
Page F-4
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Statements of Cash Flows
Accumulated from
May 8, 1997
(Inception) Years ended
to December 31, December 31,
2001 2001 2000
$ $ $
Cash Flows to Operating Activities
Net loss (2,074,697) (677,595) (336,210)
Adjustment to reconcile net loss to cash
Amortization 7,869 2,396 2,015
Change in non-cash working capital items
Increase (decrease) in accounts payable
and accrued liabilities 158,229 (27,125) 39,633
Increase in prepaid expenses (30,000) (30,000) 12,540
-------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,938,599) (732,324) (282,022)
-------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase in capital stock 1,998,010 - 1,000,000
-------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,998,010 - 1,000,000
-------------------------------------------------------------------------------------------------
Cash Flows to Investing Activities
(Increase) in property, plant and equipment (2,122) - -
-------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,122) - -
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash 57,289 (732,324) 717,978
Cash - beginning of period - 789,613 71,635
-------------------------------------------------------------------------------------------------
Cash - end of period 57,289 57,289 789,613
=================================================================================================
Non-Cash Financing Activities
9,361,846 shares were issued for a license (Note 4) 9,362 - 4,729
=================================================================================================
Supplemental Disclosures
Interest paid - - -
Income tax paid - - -
=================================================================================================
(See accompanying notes)
page 5
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity
From May 8, 1997 (Inception) to December 31, 2001
Deficit
Accumulated
Common Stock Additional During the
Par Value Paid-in Total Development
Shares Amount Capital Value Stage
# $ $ $ $
Balance - May 8, 1997 (inception) - - - - -
Stock issued for license to specific
technology (Notes 1 and 4) 2,706,122 2,706 - 2,706 -
Stock issued to change license to
exclusive (Notes 1 and 4) 2,364,806 2,365 - 2,365 -
Less cancelled in a subsequent year (438,694) (439) - (439) -
Stock issued for cash at $0.0576 per share 2,600,000 2,600 147,160 149,760 -
Stock issued for cash at $6.50 per share 130,500 131 848,119 848,250 -
Net loss for the period (134,729)
---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 7,362,734 7,363 995,279 1,002,642 (134,729)
Stock issued pursuant to stock split - net of
cancelled shares 3,510,510 3,510 (3,510) - -
Net loss for the year (659,002)
---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 10,873,244 10,873 991,769 1,002,642 (793,731)
Net loss for the year (267,161)
---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 10,873,244 10,873 991,769 1,002,642 (1,060,892)
Stock issued for cash at $4.00 per share 250,000 250 999,750 1,000,000 -
Stock issued for license (Notes 1 and 4) 4,729,612 4,730 - 4,730 -
Net loss for the year - - - - (336,210)
---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 15,852,856 15,853 1,991,519 2,007,372 (1,397,102)
Net loss for the year - - - - (677,595)
---------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2001 15,852,856 15,853 1,991,519 2,007,372 (2,074,697)
===========================================================================================================================
Page F-6
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
1. Development Stage Company
Net 1 UEPS Technologies, Inc. herein ("the Company") was incorporated in
the State of Florida on May 8, 1997.
The Company is a development stage company engaged in the business of
commercializing the smart card technology based Universal Electronic
Payment System ("UEPS") and Funds Transfer System ("FTS") through the
development of strategic alliances with national and international bank and
card service organizations. The patent rights (or applications for patents)
of the UEPS/FTS technology are for all worldwide territories (except South
Africa and its surrounding territories) are held by Net 1 Holdings
S.a.r.1., a company incorporated in Luxembourg ("Net 1 Holdings").
The Company entered into a license agreement, dated May 19, 1997 (the
"License Agreement"), with Net 1 Holdings, Net 1 Operations S.a.r.1. and
Net 1 Pty (collectively, the "Licensors"), where the licensors granted a
non-exclusive license to the Company for the UEPS technology for the
issuance of 2,706,122 shares at a fair market value of $0.001 per share. A
total of 5,412,244 shares were issued as the Company split the stock on a
two new for one old basis. On October 1, 1997 an Amendment to the License
Agreement was signed that provided for the transfer of the ownership of the
UEPS technology and FTS patents and for the assignment of the Technology
License Agreement between VISA International Service Association and Net 1
Holdings, dated July 31, 1997 (the "Visa Agreement") to the Company in
consideration for 2,364,806 shares on a pre-split basis, 4,729,612 on a
post-split basis. The assignment of the Visa Agreement and the transfer of
the ownership of the UEPS technology and FTS patents to the Company were
never consummated because certain conditions precedent were never
satisfied.
On May 3, 2000 an agreement entitled "Patent and Technology Agreement" was
entered into between the Company and Net 1 Holdings that granted the
Company an exclusive marketing license for the UEPS technology and the FTS
patent for the world excluding South Africa and its surrounding territories
under terms similar to those stipulated in the Amendment to the License
Agreement. No conditions precedent were stipulated. The 4,729,612 shares of
Net 1 previously issued into trust in consideration for the Amendment to
the License Agreement were thus released to Net 1 Holdings.
The above issuances of shares were on a pre-split basis. Net 1 Holdings as
at December 31, 2001 owns 10,141,856 common shares of 15,852,856 issued and
outstanding common shares, or 64%.
In a development stage company, management devotes most of its activities
to establishing a new business primarily, the development of a detailed
business plan, marketing strategy and the raising of funds required to
develop and operate the business successfully. Planned principal activities
have not yet produced revenues and the Company has suffered recurring
operating losses as is normal in development stage companies. These factors
raise doubt about the Company's ability to continue as a going concern. The
ability of the Company to emerge from the development stage with respect to
its planned principal business activity is dependent upon its successful
efforts to raise additional equity financing, receive funding from
affiliates and controlling shareholders, and develop a market for its
products.
In order to meet expenses over the next twelve months the Company is
actively searching for additional equity financing. For fiscal 2002 the
Company will be receiving $157,565 from sales of licenses.
Page F-7
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
2. Summary of Significant Accounting Policies
(a) Property, Plant and Equipment
Computer equipment is amortized over five years on a straight-line
basis.
(b) Long-Lived Assets
Costs to acquire exclusive license rights to specific technology are
considered "Long-Lived" assets and are capitalized as incurred. These
costs are being amortized on a straight line basis over five years.
Intangible assets are evaluated in each reporting period to determine
if there were events or circumstances which would indicate a possible
inability to recover the carrying amount. Such evaluation is based on
various analyses including assessing the Company's ability to bring
the commercial applications to market, related profitability
projections and undiscounted cash flows relating to each application
which necessarily involves significant management judgment.
(c) Basic and Diluted Net Income (Loss) per Share
The Company computes net income (loss) per share in accordance with
SFAS No. 128, "Earnings per Share"(SFAS 128). SFAS 128 requires
presentation of both basic and diluted earnings per shares (EPS) on
the face of the income statement. Basic EPS is computed by dividing
net income (loss) available to common shareholders (numerator) by the
weighted average number of common shares outstanding (denominator)
during the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period including stock options,
using the treasury stock method, and convertible preferred stock,
using the if-converted method. In computing Diluted EPS, the average
stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options or
warrants. Diluted EPS excludes all dilutive potential common shares if
their effect is antidilutive.
(d) Foreign Currency Transactions/Balances
Transactions in currencies other than the U.S. dollar are translated
at the rate in effect on the transaction date. Any balance sheet items
denominated in foreign currencies are translated into U.S. dollars
using the rate in effect on the balance sheet date.
(e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the periods. Actual results could differ from
those estimates.
(f) Tax Accounting
Potential benefits of income tax losses are not recognized in the
accounts until realization is more likely than not.
The Company has adopted Statement of Financial Accounting Standards
No. 109 ("SFAS 109") as of its inception. The Company has incurred net
operating losses as scheduled below:
Amount Year of
Year of Loss $ Expiration
1997 135,000 2012
1998 659,000 2013
1999 267,000 2014
2000 336,000 2015
2001 674,000 2016
-----------
2,071,000
===========
Page F-8
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
2. Summary of Significant Accounting Policies
(f) Tax Accounting (continued)
Pursuant to SFAS 109 the Company is required to compute tax asset
benefits for net operating losses carried forward. Potential benefit
of net operating losses have not been recognized in these financial
statements because the Company cannot be assured it is more likely
than not it will utilize the net operating losses carried forward in
future years.
The components of the net deferred tax asset at the end of December
31, 2001 and 2000, and the statutory tax rate, the effective tax rate
and the elected amount of the valuation allowance are scheduled below:
2001 2000
$ $
Net Operating Loss 673,595 336,210
Statutory Tax Rate 34% 34%
Effective Tax Rate - -
Deferred Tax Asset 229,022 114,311
Valuation Allowance (229,022) (114,311)
--------- ---------
Net Deferred Tax Asset - -
========= =========
(g) Revenue Recognition
The Company receives revenue from Net1 Holdings SARL from all sales of
licenses equal to the Net1 Holdings SARL annual net profit before
amortization as certified by its auditors in its annual financial
statement. The Company will recognize the revenue in the period when
the audited financial statements of Net1 Holdings SARL become
available. The Company will report the revenue on a net basis as the
Company is acting as an agent for Net1 Holdings SARL as per the Patent
and Technology agreement dated May 3, 2000.
3. Property, Plant and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization.
Accumulated 2001 2000
Depreciation and Net Book Net Book
Cost Amortization Value Value
$ $ $ $
Computer equipment and software 2,181 1,787 394 831
==================================================================================================================
4. Intangible Assets
2001 2000
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
Exclusive License 9,361 6,142 3,219 5,179
==================================================================================================================
See Note 1 for the description of the license and Note 6 for status of the
underlying patents.
Page F-9
Net 1 UEPS Technologies, Inc.
(A Development Stage Company)
Notes to the Financial Statements
5. Related Party Transactions
(a) Consulting fees include $150,000 (2000 - $150,000) paid or payable to
a director.
(b) Subcontract costs include $386,938 paid to a Company with a common
director. $30,000 of these costs are prepaid expenses.
(c) See Note 1 for an exclusive license purchased from a related party.
On January 29, 2002, pursuant to a Director's Resolution, the above
consulting fees and subcontract costs have been postponed until the Company
has sufficient funds.
6. Legal Proceedings
(a) Status of FTS Patents
FTS was first patented in South Africa in 1989. The European patent
was granted on December 28, 1994, with effect in Austria, Belgium,
Switzerland, Germany, Denmark, Spain, France, Great Britain, Greece,
Italy, Liechtenstein, Luxembourg, Netherlands and Sweden. The European
Patent Convention provides for an opposition period immediately
following the grant of a European patent, and six parties filed an
opposition to the grant of the patent on the grounds that the
invention was not patentable. The case was heard before a Board of the
Opposition Division in March 1998, when the patent was upheld in a
form slightly different than the original application. Following the
issue of the formal decision, a number of the opponents filed an
appeal. The appeal proceedings are scheduled for September 19, 2002 at
the European Patent Office in Munich Germany. Currently, the granted
patent remains effective in each of the designated states and is
currently in force.
(b) Potential claim
A claim to the rights for UEPS for Canada was brought about in an
action before the Supreme Court of Canada in February, 2000. The
Company, as the exclusive licensee for UEPS for the world except South
Africa, was served with a notice of claim in February, 2000. On
December 6, 2001 the claim was settled by third parties resulting in
no settlement costs to the Company.