Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-Q**

 

**x****               ****Quarterly ReportPursuant to Section 13 or 15(d) of the Securities****ExchangeAct of 1934**

 

**forthe quarterly period ended September 30, 2010**

 

**OR**

 

o                    **Transition ReportPursuant to Section 13 or 15(d) of the Securities****ExchangeAct of 1934**

 

**for the transition period from                         to                         **

 

**Commission filenumber: 001-34915**

 

**NETSPEND HOLDINGS, INC.**

(Exact nameof registrant as specified in its charter)

 

| **Delaware**                              | ** ** | **20-2306550**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of  organization)                  |       | (I.R.S.  Employer Identification No.) |
|                                      |       |                                  |
| **701 BRAZOS STREET**                     |       |                                  |
| **SUITE, 1300**                           |       |                                  |
| **AUSTIN, TEXAS**                         | ** ** | **78701-2582**                        |
| (Address  of principal executive offices) |       | (Zip Code)                            |

 

**(512) 532-8200**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes o No x

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of 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 postsuch files).  Yes o No o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                 |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer x                   |   | Smaller reporting company o |
| (Do not check if a smaller reporting  company) |   |                             |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

The Registrant had 88,742,047 shares of commonstock, par value $0.001 per share, outstanding as of November 5, 2010.

 

 

 

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Table of Contents

 

**TABLEOF CONTENTS**

 
| **Item**   | ** ** | **Description**                                                                             | ** ** | **Page**   |
|------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** ** | ** **                                                                                  | ** ** | ** ** |
| ** ** | ** ** | **PART I—FINANCIAL  INFORMATION**                                                 |       |       |
|       |       |                                                                                        |       |       |
| 1.         |       | Financial  Statements                                                                       |       | 1          |
|       |       |                                                                                        |       |       |
| 2.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 22         |
|       |       |                                                                                        |       |       |
| 3.         |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 38         |
|       |       |                                                                                        |       |       |
| 4.         |       | Controls and  Procedures                                                                    |       | 38         |
|       |       |                                                                                        |       |       |
| ** ** | ** ** | **PART II—OTHER  INFORMATION**                                                    |       |       |
|       |       |                                                                                        |       |       |
| 1.         |       | Legal Proceedings                                                                           |       | 39         |
|       |       |                                                                                        |       |       |
| 1A.        |       | Risk Factors                                                                                |       | 40         |
|       |       |                                                                                        |       |       |
| 2.         |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 54         |
|       |       |                                                                                        |       |       |
| 6.         |       | Exhibits                                                                                    |       | 54         |

 

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Table of Contents

 

**PART I. FINANCIALINFORMATION**

 

**Item 1. Unaudited FinancialStatements**

 

**NetSpend Holdings, Inc.**

**CondensedConsolidated Balance Sheets**

**As of December 31, 2009 and September 30,2010**

 
| ** **                                                                                                                                                                                                                                                           | ** ** | **December 31,**                                                             | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                           | ** ** | **2009**                                                                          | ** ** | **2010**               | ** ** |
| ** **                                                                                                                                                                                                                                                           | ** ** | ** **                                                                        | ** ** | **(Unaudited)**        | ** ** |
| ** **                                                                                                                                                                                                                                                           | ** ** | **(in thousands, except share and per-share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                                                           |       |                                                                              |       |                   |       |
| Current assets                                                                                                                                                                                                                                                       |       |                                                                              |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                                            |       | $                                                                                 | 21,154     |                   | $          | 27,077 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $50 and $93 as of December 31, 2009 and September 30,  2010, respectively                                                                                                                  |       | 4,513                                                                             |       | 5,601                  |       |
| Prepaid card supply                                                                                                                                                                                                                                                  |       | 1,783                                                                             |       | 1,471                  |       |
| Prepaid expenses                                                                                                                                                                                                                                                     |       | 2,357                                                                             |       | 2,388                  |       |
| Other current assets                                                                                                                                                                                                                                                 |       | 1,845                                                                             |       | 2,824                  |       |
| Income tax receivable                                                                                                                                                                                                                                                |       | 2,375                                                                             |       | —                 |       |
| Deferred tax assets                                                                                                                                                                                                                                                  |       | 2,872                                                                             |       | 5,121                  |       |
| Total current assets                                                                                                                                                                                                                                                 |       | 36,899                                                                            |       | 44,482                 |       |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| Property and equipment, net                                                                                                                                                                                                                                          |       | 24,441                                                                            |       | 22,589                 |       |
| Goodwill                                                                                                                                                                                                                                                             |       | 128,567                                                                           |       | 128,567                |       |
| Intangible assets                                                                                                                                                                                                                                                    |       | 28,981                                                                            |       | 26,616                 |       |
| Long-term investment                                                                                                                                                                                                                                                 |       | —                                                                            |       | 4,800                  |       |
| Other assets                                                                                                                                                                                                                                                         |       | 3,397                                                                             |       | 4,420                  |       |
| Total assets                                                                                                                                                                                                                                                         |       | $                                                                                 | 222,285    |                   | $          | 231,474 |   |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| **Liabilities &  Stockholders’ Equity**                                                                                                                                                                                                                |       |                                                                              |       |                   |       |
| Current liabilities                                                                                                                                                                                                                                                  |       |                                                                              |       |                   |       |
| Accounts payable (includes $609 and $0 of related  party payables as of December 31, 2009 and September 30, 2010,  respectively)                                                                                                                           |       | $                                                                                 | 3,444      |                   | $          | 2,264 |   |
| Income tax payable                                                                                                                                                                                                                                                   |       | —                                                                            |       | 107                    |       |
| Accrued expenses (includes $2,593 and $2,966 of  accrued related party expenses as of December 31, 2009 and  September 30, 2010, respectively)                                                                                                             |       | 21,531                                                                            |       | 26,332                 |       |
| Cardholders’ reserve                                                                                                                                                                                                                                            |       | 1,620                                                                             |       | 2,813                  |       |
| Deferred revenue                                                                                                                                                                                                                                                     |       | 2,158                                                                             |       | 1,274                  |       |
| Long-term debt, current portion                                                                                                                                                                                                                                      |       | 21,513                                                                            |       | 1,676                  |       |
| Total current liabilities                                                                                                                                                                                                                                            |       | 50,266                                                                            |       | 34,466                 |       |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| Long-term debt, net of current portion                                                                                                                                                                                                                               |       | 51,979                                                                            |       | 58,500                 |       |
| Deferred tax liabilities                                                                                                                                                                                                                                             |       | 10,318                                                                            |       | 11,159                 |       |
| Other non-current liabilities                                                                                                                                                                                                                                        |       | 370                                                                               |       | 405                    |       |
| Total liabilities                                                                                                                                                                                                                                                    |       | 112,933                                                                           |       | 104,530                |       |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| Commitments and contingencies (Note 14)                                                                                                                                                                                                                              |       |                                                                              |       |                   |       |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| Stockholders’ equity                                                                                                                                                                                                                                            |       |                                                                              |       |                   |       |
| Class A common stock, $0.001 par value;  150,000,000 shares authorized; outstanding: (as of December 31, 2009 -  77,198,193 issued less 1,870,000 held in treasury and as of  September 30, 2010 - 77,444,353 issued less 3,370,000 held in treasury) |       | 77                                                                                |       | 77                     |       |
| Class B common stock, $0.001 par value;  15,000,000 shares authorized; outstanding: (as of December 31, 2009 -  10,244,609 shares and as of September 30, 2010 - 10,459,659 shares)                                                                   |       | 10                                                                                |       | 11                     |       |
| Treasury stock at cost                                                                                                                                                                                                                                               |       | (5,704                                                                            | )          | (11,374                | )          |
| Additional paid-in capital                                                                                                                                                                                                                                           |       | 119,484                                                                           |       | 124,463                |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                               |       | —                                                                            |       | 1,014                  |       |
| Retained earnings (accumulated deficit)                                                                                                                                                                                                                              |       | (4,515                                                                            | )          | 12,753                 |       |
| Total stockholders’ equity                                                                                                                                                                                                                                      |       | 109,352                                                                           |       | 126,944                |       |
|                                                                                                                                                                                                                                                                 |       |                                                                              |       |                   |       |
| Total liabilities & stockholders’ equity                                                                                                                                                                                                               |       | $                                                                                 | 222,285    |                   | $          | 231,474 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**NetSpendHoldings, Inc.**

**CondensedConsolidated Statements of Operations**

**Forthe Three and Nine Months Ended September 30, 2009 and 2010**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **Three Months Ended**                              | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                       | ** ** | **September 30,**                                        | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                                                                                                       | ** ** | **2009**                                                      | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                                                                                                                                                                                                                                       | ** ** | **(in thousands, except per-share data)** | ** ** |
|                                                                                                                                                                                                                                                             |       |                                                          |       |                            |       |   |   |   |   |
| **Operating Revenues**(includes $753 and $1,138 of related party  revenues for the three months ended September 30, 2009 and 2010,  respectively, and $2,039 and $3,397 for the nine months ended September 30,  2009 and 2010, respectively)     |       | $                                                             | 55,962     |                            | $          | 68,208 |   | $ | 165,598 |   | $ | 205,175 |   |
|                                                                                                                                                                                                                                                             |       |                                                          |       |                            |       |   |   |   |   |
| **Operating Expenses**                                                                                                                                                                                                                                           |       |                                                          |       |                            |       |   |   |   |   |
| Direct operating costs (includes $6,556 and $9,281  of related party expenses for the three months ended September 30, 2009  and 2010, respectively, and $21,396 and $28,375 for the nine months ended September 30,  2009 and 2010, respectively)     |       | 25,754                                                        |       | 32,364                          |       | 77,580 |   | 95,381 |   |
| Salaries, benefits and other personnel expenses                                                                                                                                                                                                                  |       | 11,862                                                        |       | 13,149                          |       | 35,419 |   | 39,732 |   |
| Advertising, marketing and promotion costs                                                                                                                                                                                                                       |       | 3,617                                                         |       | 3,369                           |       | 9,790 |   | 10,738 |   |
| Other general and administrative costs (includes $29  and $34 of related party expenses for the three months ended  September 30, 2009 and 2010, respectively, and $157 and $210 for the  nine months ended September 30, 2009 and 2010, respectively) |       | 5,234                                                         |       | 4,777                           |       | 17,209 |   | 13,865 |   |
| Depreciation and amortization                                                                                                                                                                                                                                    |       | 2,537                                                         |       | 3,223                           |       | 7,681 |   | 9,298 |   |
| Settlement (gains) and other losses                                                                                                                                                                                                                              |       | —                                                        |       | —                          |       | (10,229 | ) | 4,300 |   |
| Total operating expenses                                                                                                                                                                                                                                         |       | 49,004                                                        |       | 56,882                          |       | 137,450 |   | 173,314 |   |
| Operating income                                                                                                                                                                                                                                                 |       | 6,958                                                         |       | 11,326                          |       | 28,148 |   | 31,861 |   |
|                                                                                                                                                                                                                                                             |       |                                                          |       |                            |       |   |   |   |   |
| **Other Income (Expense)**                                                                                                                                                                                                                                       |       |                                                          |       |                            |       |   |   |   |   |
| Interest income                                                                                                                                                                                                                                                  |       | 4                                                             |       | 20                              |       | 31 |   | 66 |   |
| Interest expense                                                                                                                                                                                                                                                 |       | (1,312                                                        | )          | (926                            | )          | (4,065 | ) | (2,983 | ) |
| Loss on extinguishment of debt                                                                                                                                                                                                                                   |       | —                                                        |       | (734                            | )          | — |   | (734 | ) |
| Total other expense                                                                                                                                                                                                                                              |       | (1,308                                                        | )          | (1,640                          | )          | (4,034 | ) | (3,651 | ) |
| Income before income taxes                                                                                                                                                                                                                                       |       | 5,650                                                         |       | 9,686                           |       | 24,114 |   | 28,210 |   |
| Provision for income taxes                                                                                                                                                                                                                                       |       | 2,070                                                         |       | 3,306                           |       | 9,456 |   | 10,766 |   |
| Net income                                                                                                                                                                                                                                                       |       | $                                                             | 3,580      |                            | $          | 6,380 |   | $ | 14,658 |   | $ | 17,444 |   |
|                                                                                                                                                                                                                                                             |       |                                                          |       |                            |       |   |   |   |   |
| Net income per share for class A and class B  common stock:                                                                                                                                                                                                      |       |                                                          |       |                            |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                            |       | $                                                             | 0.04       |                            | $          | 0.07 |   | $ | 0.17 |   | $ | 0.20 |   |
| Diluted                                                                                                                                                                                                                                                          |       | $                                                             | 0.04       |                            | $          | 0.07 |   | $ | 0.17 |   | $ | 0.20 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**NetSpendHoldings, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**Forthe Nine Months Ended September 30, 2009 and 2010**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **2009**                | ** ** | **2010**               | ** ** |
| ** **                                                                        | ** ** | **(in thousands)** | ** ** |
|                                                                              |       |                    |       |                   |       |
| **Cash flows from operating activities**                                          |       |                    |       |                   |       |
| Net income                                                                        |       | $                       | 14,658     |                   | $          | 17,444 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities |       |                    |       |                   |       |
| Depreciation and amortization                                                     |       | 7,681                   |       | 9,298                  |       |
| Amortization of debt issuance costs                                               |       | 336                     |       | 343                    |       |
| Loss on extinguishment of debt                                                    |       | —                  |       | 734                    |       |
| Gain on settlement                                                                |       | (1,192                  | )          | —                 |       |
| Stock-based compensation                                                          |       | 3,407                   |       | 4,414                  |       |
| Tax benefit associated with stock options                                         |       | (18                     | )          | (46                    | )          |
| Provision for cardholder losses                                                   |       | 3,626                   |       | 5,931                  |       |
| Deferred income taxes                                                             |       | 244                     |       | (1,984                 | )          |
| Changes in operating assets and liabilities                                       |       |                    |       |                   |       |
| Accounts receivable                                                               |       | 2,024                   |       | (1,088                 | )          |
| Income tax receivable or payable                                                  |       | 2,980                   |       | 2,528                  |       |
| Prepaid card supply                                                               |       | 329                     |       | 312                    |       |
| Prepaid expenses                                                                  |       | (1,190                  | )          | (31                    | )          |
| Other current assets                                                              |       | (1,087                  | )          | (979                   | )          |
| Other long-term assets                                                            |       | (1,876                  | )          | (638                   | )          |
| Accounts payable and accrued expenses                                             |       | (333                    | )          | 3,621                  |       |
| Cardholders’ reserve                                                         |       | (3,598                  | )          | (4,738                 | )          |
| Other liabilities                                                                 |       | 538                     |       | (849                   | )          |
| Net cash provided by operating activities                                         |       | 26,529                  |       | 34,272                 |       |
|                                                                              |       |                    |       |                   |       |
| **Cash flows from investing  activities**                                         |       |                    |       |                   |       |
| Purchase of property and equipment                                                |       | (10,501                 | )          | (5,081                 | )          |
| Long-term investment                                                              |       | —                  |       | (3,210                 | )          |
| Net cash used in investing activities                                             |       | (10,501                 | )          | (8,291                 | )          |
|                                                                              |       |                    |       |                   |       |
| **Cash flows from financing  activities**                                         |       |                    |       |                   |       |
| Dividends paid                                                                    |       | (5,000                  | )          | —                 |       |
| Dividend equivalents paid                                                         |       | (213                    | )          | (176                   | )          |
| Proceeds from the exercise of stock options                                       |       | 113                     |       | 494                    |       |
| Proceeds from the exercise of stock warrants                                      |       | —                  |       | 26                     |       |
| Tax benefit associated with stock options                                         |       | 18                      |       | 46                     |       |
| Proceeds drawn from revolving credit facility                                     |       | —                  |       | 58,500                 |       |
| Issuance cost of long-term debt                                                   |       | (361                    | )          | (1,462                 | )          |
| Principal payments on debt                                                        |       | (17,025                 | )          | (71,816                | )          |
| Treasury stock purchase                                                           |       | (219                    | )          | (5,670                 | )          |
| Net cash used in financing activities                                             |       | (22,687                 | )          | (20,058                | )          |
|                                                                              |       |                    |       |                   |       |
| Net change in cash and cash equivalents                                           |       | (6,659                  | )          | 5,923                  |       |
|                                                                              |       |                    |       |                   |       |
| Cash and cash equivalents at beginning of period                                  |       | 21,490                  |       | 21,154                 |       |
| Cash and cash equivalents at end of period                                        |       | $                       | 14,831     |                   | $          | 27,077 |   |
|                                                                              |       |                    |       |                   |       |
| **Supplemental disclosure of cash  flow information:**                            |       |                    |       |                   |       |
| Cash paid for interest                                                            |       | $                       | 3,825      |                   | $          | 2,699 |   |
| Cash paid for income taxes                                                        |       | 6,567                   |       | 10,666                 |       |
| Capital lease entered into for the purchase of  software                          |       | 3,383                   |       | —                 |       |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**Note1: Organization and Business**

 

**Nature of Operations**—NetSpend Holdings, Inc. (‘‘NetSpend’’ or the ‘‘Company’’), based inAustin, Texas was formed as a Delaware corporation on February 18, 2004.It was formed in connection with the recapitalization of one of the Company’scurrent subsidiaries, NetSpend Corporation, which was founded in 1999. TheCompany operates in one reportable business segment to provide general purposereloadable (‘‘GPR’’) prepaid debit cards and alternative financial servicesolutions to underbanked consumers in the United States. The Company’s productsempower underbanked consumers to become ‘‘self-banked’’ by providingFDIC-insured depository accounts with a menu of pricing and featuresspecifically tailored to their needs. The Company has built an extensivedistribution and reload network comprised of financial service centers andother retail locations throughout the United States.

 

TheCompany is an agent of FDIC-insured depository institutions that serve as theissuers of the Company’s products. The Company has agreements with Meta PaymentSystems, a division of Meta Financial Group (‘‘Meta’’ or “MetaBank”), InterNational Bank (‘‘INB’’), U.S. Bank and Sun Trust Bank (collectively, the ‘‘issuingbanks’’) whereby the issuing banks issue MasterCard International (‘‘MasterCard’’)or Visa USA, Inc. (‘‘Visa’’) branded cards to customers. The Company’sproducts may be used to purchase goods and services wherever MasterCard andVisa are accepted or to withdraw cash via automatic teller machines (‘‘ATMs’’).

 

**Basis of Presentation**— The accompanying unaudited condensed consolidated financialstatements of NetSpend and its subsidiaries (collectively, the ‘‘Company’’) donot include all information and footnotes necessary for a fair presentation offinancial position, results of operations and cash flows in conformity withaccounting principles generally accepted in the United States of America (‘‘U.S.GAAP’’). The Company’s significant accounting policies are disclosed in thenotes to the Company’s Audited Consolidated Financial Statements for the yearended December 31, 2009. Therefore, the condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto contained in the Company’s Audited ConsolidatedFinancial Statements for the year ended December 31, 2009 included in ourprospectus filed pursuant to Rule 424(b)(4) under the Securities Actwith the Securities and Exchange Commission (“SEC”) on October 19, 2010.

 

In the opinion of management, the accompanyingcondensed consolidated financial statements reflect all adjustments of anormal, recurring nature considered necessary to be fairly stated.

 

**Use of Estimates**—The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions about future events. Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities as of the date of thefinancial statements and reported amounts of revenues and expenses during thereporting period. These accounting estimates reflect the best judgment ofmanagement. Actual results could significantly differ from management’sestimates and judgments.

 

**Significant Concentrations**—Financial instruments that potentially expose the Company to concentrations ofcredit risk consist primarily of cash and cash equivalents and accountsreceivable. A significant portion of the Company’s cash is deposited in cashand money market funds at large depository institutions, many of which havereceived funds under the U.S. government’s Troubled Asset Relief Program.Deposits of cash and cash equivalents exceed federally insured limits; however,the Company has not experienced any losses on its deposits.

 

Accountsreceivable as of December 31, 2009 and September 30, 2010 areprimarily receivables due from cardholders for service fees and for interchangerevenues due from card associations related to merchant point of saletransactions.

 

Cardholderfunds and deposits related to the Company’s products are held at FDIC insuredissuing banks for the benefit of the cardholders. The Company uses four primaryissuing banks; however, Meta holds a majority of cardholder funds. The failureof any of the Company’s issuing banks could have a material adverse effect onthe Company’s business.

 

TheCompany derives approximately one-third of its revenue from GPR cards soldthrough one of its third-party distributors, ACE Cash Express, Inc. (‘‘ACE’’).The Company’s current distribution agreement with ACE is effective through March 2016.

 

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**Note 2: Other Financial Data**

 

**CompensatingBalances and Restricted Cash —**The Company has established compensating balances at its issuing banks tooffset overdrawn cardholder accounts. Some of these compensating balanceaccounts are included in the Company’s Condensed Consolidated Balance Sheets ascash and cash equivalents because there are no legal or contractualrestrictions over deposits in these accounts. As of December 31, 2009 and September 30, 2010 thesecompensating balances totaled $1.2 million.

 

Restrictedcash is cash with statutory or contractual restrictions that prevent it frombeing used in the Company’s operations. Restricted cash is classified in othernon-current assets on the Company’s Condensed Consolidated Balance Sheets. TheCompany had restricted cash of $0.4 million and $0.5 million as of December 31,2009 and September 30, 2010, respectively.

 

**Cardholders’Reserve —** The Company isexposed to transaction losses due to cardholder fraud and other lossesresulting from cardholder activity, as well as non-performance of thirdparties. The Company establishes a cardholders’ reserve for estimated lossesarising from processing customer transactions, debit card overdrafts,chargebacks for unauthorized card use, and merchant-related chargebacks due tonon-delivery of goods or services. These reserves are established based uponhistorical loss and recovery rates, and cardholder activity for which specificlosses can be identified. The cardholders’ reserve was approximately $1.6million and $2.8 million as of December 31, 2009 and September 30,2010, respectively. The provision for cardholder losses is included in directoperating costs in the Condensed Consolidated Statements of Operations.

 

Establishingthe reserve for transaction losses is an inherently uncertain process, andultimate losses may vary from the current estimate. The Company regularlyupdates its reserve estimate as new facts become known and events occur that mayimpact the settlement or recovery of losses.

 

**FairValue Of Assets And Liabilities —**The Company’s financial instruments include cash, cash equivalents, accountsreceivable, accounts payable, long-term investments and current and non-currentborrowings. As of December 31, 2009 and September 30, 2010, the fairvalues of cash, cash equivalents, accounts receivable and accounts payableapproximated carrying values because of the short-term nature of theseinstruments. As of December 31, 2009 and September 30, 2010 thelong-term investment was recorded at its fair value based on quoted prices inan active market.

 

Asof December 31, 2009 and September 30, 2010, the fair value of theCompany’s outstanding borrowings approximated their carrying value based on prevailingmarket rates for borrowings with similar ratings and maturities.

 

Asof September 30, 2010 there was no required fair value measurement forassets and liabilities measured at fair value on a non-recurring basis.

 

**Note 3: Investments**

 

InJanuary 2010, the Company purchased 150,000 shares of the common stock of MetaFinancial Group, Inc., the holding Company of Meta, one of the Company’sissuing banks, for the purchase price of $3.2 million. The investment in Metais an available-for-sale security and is included in the Condensed ConsolidatedBalance Sheet as a long-term investment. As of September 30, 2010, theCompany’s long-term investment is stated at fair value using its quoted pricein an active market. As of September 30, 2010, the fair value of theCompany’s investment in Meta was $4.8 million. Subsequent to September 30,2010, the value of the Company’s investment in Meta significantly declined. SeeNote 17 for further discussion.

 

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**Note4: Recent Accounting Pronouncements**

 

InJanuary 2010, the Financial Accounting Standards Board (“FASB”) issuedguidance on fair value measurements and disclosures to require new disclosuresrelated to transfers into and out of Levels 1 and 2 of the fair value hierarchyand additional disclosure requirements related to Level 3 measurements. Theguidance also clarifies existing fair value measurement disclosures about thelevel of disaggregation and about inputs and valuation techniques used tomeasure fair value. The additional disclosure requirements are effective forthe first reporting period beginning after December 15, 2009, except forthe additional disclosure requirements related to Level 3 measurements, whichare effective for fiscal years beginning after December 15, 2010. Theadoption of the additional requirements is not expected to have a materialimpact on the consolidated financial statements.

 

InFebruary 2010, the FASB issued an amendment to the guidelines onaccounting for subsequent events. The amendment clarifies that an SEC filer isrequired to evaluate subsequent events through the date that the financialstatements are issued, but that SEC filers are not required to disclose thedate through which subsequent events have been evaluated. The amendment waseffective upon issuance and did not have an impact on the consolidatedfinancial statements.

 

**Note 5: Comprehensive Income**

 

TheCompany’s comprehensive income is included as a component of stockholders’equity and is composed of net income and unrealized gains and losses oninvestments designated as available-for-sale. As of September 30, 2010,the Company had an unrealized gain of $1.0 million, net of tax, related to thedifference between the fair value of the long-term investment of $4.8 millionon September 30, 2010 and the $3.2 million purchase price.

 

The following table presents the calculationof comprehensive income:

 
| ** **                                        | ** ** | **Nine Months Ended**              | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                        | ** ** | **September 30,**                       | ** ** |
| ** **                                        | ** ** | **2009**                                     | ** ** | **2010** | ** ** |
| ** **                                        | ** ** | **(in thousands of dollars)** | ** ** |
| Net income                                        |       | $                                            | 14,658     |   | $ | 17,444 |   |
| Unrealized holding gain on investment, net of tax |       | —                                       |       | 1,014 |   |
| Comprehensive income                              |       | $                                            | 14,658     |   | $ | 18,458 |   |

 

**Note 6****:****Earnings Per Share**

 

Basicearnings per common share is calculated by dividing net income available tocommon stockholders by the number of weighted average common shares issued andoutstanding for the period. The Company calculates basic and diluted earningsper share using the treasury stock method, the if-converted method, and thetwo-class method, as applicable.

 

TheCompany has two classes of common stock — class A common stock and class Bcommon stock. Each share of class B common stock is convertible to one share ofclass A common stock as set forth in the Company’s certificate ofincorporation. The rights, including the liquidation and dividend rights, ofthe holders of class A and class B common stock are identical, except withrespect to voting.  As a result, theundistributed earnings are allocated based on the contractual participationrights of the class A and class B common shares as if all of the earnings forthe period had been distributed.  As theliquidation and dividend rights are identical, the undistributed earnings areallocated on a proportionate basis.  TheCompany assumes the conversion of shares of class B common stock into shares ofclass A common stock in the computation of diluted earnings per share of classA common stock.

 

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Certain employee options and awards containrights to dividend equivalents. The options with dividend equivalent rights areconsidered participating securities to the extent that the options have vested.In calculating basic earnings per share using the two-class method, thedividend equivalents paid on participating securities are excluded from netincome available to common stockholders.

 

Dilutedearnings per common share is calculated by dividing net income available tocommon stockholders by the weighted average number of common shares issued andoutstanding for the period plus amounts representing the dilutive effect ofstock options, warrants, and restricted stock. The Company calculates dilutivepotential common shares using the treasury stock method, which assumes that theCompany will use proceeds from the exercise of stock options to repurchaseshares of common stock to hold in its treasury stock reserves.

 

Incomputing diluted earnings per share, certain options and restricted stockawards were excluded because the number of shares that the Company couldpotentially repurchase with the use of proceeds from option exercises andrestricted stock vesting, when adjusted for unamortized expense and taxbenefits, would be greater than the number of options exercised and awardsvested. During the three months ended September 30, 2009 and 2010,respectively, the potential dilutive effect of 9.7 million and 0.4 millionstock options and restricted stock awards were excluded from the computation ofdiluted weighted average shares outstanding. During the nine months ended September 30, 2009 and 2010,respectively, the potential dilutive effect of 9.8 million and 1.6 million stockoptions and restricted stock awards were excluded from the computation ofdiluted weighted average shares outstanding. These excluded options and awards could potentially dilute earnings pershare in the future.

 

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Thefollowing is a reconciliation of the numerator (net income) and the denominator(weighted average number of common shares) used in the calculation of basic anddiluted earnings per share for the three and nine months ended September 30,2009 and 2010:

 
| ** **                                                                                          | ** ** | **Three Months Ended**                              | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,**                                        | ** ** |
| ** **                                                                                          | ** ** | **2009**                                                      | ** ** | **2010** | ** ** |
| ** **                                                                                          | ** ** | **Class A**                                              | ** ** | **Class B** | ** ** | **Class A** | ** ** | **Class B** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except per-share data)** | ** ** |
| **Basic earnings per share:**                                                                       |       |                                                          |       |   |   |   |   |   |   |
| Net income                                                                                          |       | $                                                             | 3,160      |   | $ | 420 |   | $ | 5,590 |   | $ | 790 |   |
| Less: Earnings distributed to participating securities                                              |       | —                                                        |       | — |   | — |   | — |   |
| Less: Undistributed earnings allocated to participating  securities                                 |       | (28                                                           | )          | (4 | ) | (61 | ) | (9 | ) |
| Undistributed earnings available to common  stockholders                                            |       | $                                                             | 3,132      |   | $ | 416 |   | $ | 5,529 |   | $ | 781 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Weighted-average shares outstanding used in basic  calculation                                      |       | 75,495                                                        |       | 10,043 |   | 74,027 |   | 10,458 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Basic earnings per share                                                                            |       | $                                                             | 0.04       |   | $ | 0.04 |   | $ | 0.07 |   | $ | 0.07 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| **Diluted earnings per share:**                                                                     |       |                                                          |       |   |   |   |   |   |   |
| Undistributed earnings available to common  stockholders                                            |       | 3,132                                                         |       | 416 |   | 5,529 |   | 781 |   |
| Add: Earnings distributed to participating securities                                               |       | —                                                        |       | — |   | — |   | — |   |
| Add: Undistributed earnings allocated to participating  securities                                  |       | 32                                                            |       | — |   | 70 |   | — |   |
| Add: Reallocation of undistributed earnings as a  result of conversion of class B to class A shares |       | 416                                                           |       | — |   | 781 |   | — |   |
| Add: Reallocation of undistributed earnings to class  B shares                                      |       | —                                                        |       | — |   | — |   | — |   |
| Net income                                                                                          |       | $                                                             | 3,580      |   | $ | 416 |   | $ | 6,380 |   | $ | 781 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Weighted-average shares outstanding used in basic  calculation                                      |       | 75,495                                                        |       | 10,043 |   | 74,027 |   | 10,458 |   |
| Weighted-average effect of dilutive securities:                                                     |       |                                                          |       |   |   |   |   |   |   |
| Conversion of class B to class A common shares  outstanding                                         |       | 10,043                                                        |       | — |   | 10,458 |   | — |   |
| Options                                                                                             |       | 626                                                           |       | — |   | 3,549 |   | — |   |
| Warrants                                                                                            |       | 370                                                           |       | — |   | 544 |   | — |   |
| Restricted stock                                                                                    |       | 39                                                            |       | 39 |   | 148 |   | 34 |   |
| Weighted-average shares outstanding used in  diluted calculation                                    |       | 86,573                                                        |       | 10,082 |   | 88,726 |   | 10,492 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Diluted earnings per share                                                                          |       | $                                                             | 0.04       |   | $ | 0.04 |   | $ | 0.07 |   | $ | 0.07 |   |

 

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** **
| ** **                                                                                          | ** ** | **Nine Months Ended**                               | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,**                                        | ** ** |
| ** **                                                                                          | ** ** | **2009**                                                      | ** ** | **2010** | ** ** |
| ** **                                                                                          | ** ** | **Class A**                                              | ** ** | **Class B** | ** ** | **Class A** | ** ** | **Class B** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except per-share data)** | ** ** |
| **Basic earnings per share:**                                                                       |       |                                                          |       |   |   |   |   |   |   |
| Net income                                                                                          |       | $                                                             | 12,932     |   | $ | 1,726 |   | $ | 15,299 |   | $ | 2,145 |   |
| Less: Earnings distributed to participating securities                                              |       | (188                                                          | )          | (25 | ) | (154 | ) | (22 | ) |
| Less: Undistributed earnings allocated to participating  securities                                 |       | (115                                                          | )          | (15 | ) | (150 | ) | (21 | ) |
| Undistributed earnings available to common  stockholders                                            |       | $                                                             | 12,629     |   | $ | 1,686 |   | $ | 14,995 |   | $ | 2,102 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Weighted-average shares outstanding used in basic  calculation                                      |       | 75,580                                                        |       | 10,085 |   | 74,293 |   | 10,416 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Basic earnings per share                                                                            |       | $                                                             | 0.17       |   | $ | 0.17 |   | $ | 0.20 |   | $ | 0.20 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| **Diluted earnings per share:**                                                                     |       |                                                          |       |   |   |   |   |   |   |
| Undistributed earnings available to common  stockholders                                            |       | 12,629                                                        |       | 1,686 |   | 14,995 |   | 2,102 |   |
| Add: Earnings distributed to participating securities                                               |       | 213                                                           |       | — |   | 176 |   | — |   |
| Add: Undistributed earnings allocated to participating  securities                                  |       | 130                                                           |       | — |   | 171 |   | — |   |
| Add: Reallocation of undistributed earnings as a  result of conversion of class B to class A shares |       | 1,686                                                         |       | — |   | 2,102 |   | — |   |
| Add: Reallocation of undistributed earnings to class  B shares                                      |       | —                                                        |       | 31 |   | — |   | — |   |
| Net income                                                                                          |       | $                                                             | 14,658     |   | $ | 1,717 |   | $ | 17,444 |   | $ | 2,102 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Weighted-average shares outstanding used in basic  calculation                                      |       | 75,580                                                        |       | 10,085 |   | 74,293 |   | 10,416 |   |
| Weighted-average effect of dilutive securities:                                                     |       |                                                          |       |   |   |   |   |   |   |
| Conversion of class B to class A common shares  outstanding                                         |       | 10,085                                                        |       | — |   | 10,416 |   | — |   |
| Options                                                                                             |       | 634                                                           |       | — |   | 1,749 |   | — |   |
| Warrants                                                                                            |       | 368                                                           |       | — |   | 486 |   | — |   |
| Restricted stock                                                                                    |       | 82                                                            |       | 82 |   | 109 |   | 59 |   |
| Weighted-average shares outstanding used in  diluted calculation                                    |       | 86,749                                                        |       | 10,167 |   | 87,053 |   | 10,475 |   |
|                                                                                                |       |                                                          |       |   |   |   |   |   |   |
| Diluted earnings per share                                                                          |       | $                                                             | 0.17       |   | $ | 0.17 |   | $ | 0.20 |   | $ | 0.20 |   |

 

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**NOTE 7****:****PROPERTY AND EQUIPMENT**

 

Propertyand equipment consisted of the following as of December 31, 2009 and September 30,2010:

 
| ** **                     | ** ** | **December 31,**                        | ** ** | **September 30,** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **2009**                                     | ** ** | **2010**               | ** ** |
| ** **                     | ** ** | **(in thousands of dollars)** | ** ** |
| Computer and office equipment  |       | $                                            | 14,033     |                   | $          | 13,633 |   |
| Computer software              |       | 16,583                                       |       | 24,398                 |       |
| Furniture and fixtures         |       | 1,317                                        |       | 1,381                  |       |
| Leasehold improvements         |       | 1,609                                        |       | 1,621                  |       |
| Construction in progress       |       | 9,387                                        |       | 4,189                  |       |
|                           |       | 42,929                                       |       | 45,222                 |       |
| Less: Accumulated depreciation |       | (18,488                                      | )          | (22,633                | )          |
|                           |       | $                                            | 24,441     |                   | $          | 22,589 |   |

 

Propertyand equipment are assessed for impairment whenever events or circumstancesindicate the carrying value of an asset group may not be fully recoverable bycomparing the carrying value to total future undiscounted cash flows.Impairment is recorded for long-lived assets equal to the excess of thecarrying amount of the asset group over its estimated fair value. During thenine months ended September 30, 2010, there were no events orcircumstances indicating that the Company’s long-lived assets were impaired.

 

Depreciationexpense for the three months ended September 30, 2009 and 2010 wasapproximately $1.8 million and $2.4 million, respectively.  Depreciation expense for the nine monthsended September 30, 2009 and 2010 was approximately $5.0 million and $6.9million, respectively.

 

**NOTE 8: INTANGIBLE ASSETS**

 

Intangible assets consisted of the followingas of December 31, 2009 and September 30, 2010:

 
| ** **                            | ** ** | **December 31,**                        | ** ** | **September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **2009**                                     | ** ** | **2010**               | ** ** |
| ** **                            | ** ** | **(in thousands of dollars)** | ** ** |
| Distributor and partner relationships |       | $                                            | 26,426     |                   | $          | 26,426 |   |
| Trademarks and tradenames             |       | 10,615                                       |       | 10,615                 |       |
| Developed technology                  |       | 7,261                                        |       | 7,261                  |       |
| Other                                 |       | 168                                          |       | 168                    |       |
|                                  |       | 44,470                                       |       | 44,470                 |       |
| Less: Accumulated amortization        |       | (15,489                                      | )          | (17,854                | )          |
|                                  |       | $                                            | 28,981     |                   | $          | 26,616 |   |

 

Amortization expense for each of the threemonths ended September 30, 2009 and 2010 was $0.8 million.  Amortization expense for the nine monthsended September 30, 2009 and 2010 was $2.7 million and $2.4 million,respectively.

 

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**NOTE 9: ACCRUED EXPENSES**

 

Accrued expenses asof December 31, 2009 and September 30, 2010 consisted of thefollowing:

 
| ** **                                   | ** ** | **December 31,**                        | ** ** | **September 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **2009**                                     | ** ** | **2010**               | ** ** |
| ** **                                   | ** ** | **(in thousands of dollars)** | ** ** |
| Commissions payable to distributors          |       | $                                            | 4,972      |                   | $          | 5,178 |   |
| Accrued wages and related personnel expenses |       | 5,819                                        |       | 7,040                  |       |
| Other accrued expenses                       |       | 10,740                                       |       | 14,114                 |       |
|                                         |       | $                                            | 21,531     |                   | $          | 26,332 |   |

 

**NOTE 10: DEBT**

 

As of December 31, 2009 and September 30,2010, the Company’s outstanding principal borrowings consisted of thefollowing:

 
| ** **                             | ** ** | **December 31,**                        | ** ** | **September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **2009**                                     | ** ** | **2010**               | ** ** |
| ** **                             | ** ** | **(in thousands of dollars)** | ** ** |
| Term loan                              |       | $                                            | 61,875     |                   | $          | — |   |
| Revolving credit facility              |       | 9,000                                        |       | 58,500                 |       |
| Capital lease                          |       | 2,617                                        |       | 1,676                  |       |
| Total long-term debt                   |       | 73,492                                       |       | 60,176                 |       |
| Less:                                  |       |                                         |       |                   |       |
| Current portion of term loan           |       | 11,250                                       |       | —                 |       |
| Current portion of credit facility     |       | 9,000                                        |       | —                 |       |
| Current portion of capital lease       |       | 1,263                                        |       | 1,676                  |       |
| Long-term debt, current portion        |       | 21,513                                       |       | 1,676                  |       |
| Long-term debt, net of current portion |       | $                                            | 51,979     |                   | $          | 58,500 |   |

 

In2008, the Company entered into a credit facility with a syndicate of banks withJP Morgan as administrative agent (the “prior credit facility”). The priorcredit facility provided financing of $105.0 million, consisting of a $75.0million term loan and a $30.0 million revolving credit facility, which includeda $2.0 million swingline facility and commitments for up to $2.5 million inletters of credit. The term loan was repayable in quarterly installments with amaturity date of June 2013, and the revolving credit facility had amaturity date of July 2013. Loans under the prior credit facility boreinterest at the greater of 6.0% per annum or at a market rate based on eitherthe alternate base rate or LIBOR, plus a spread.

 

InSeptember 2010, the Company entered into a new credit facility with asyndicate of banks with Sun Trust Bank as administrative agent. The new creditfacility provides a $135.0 million revolving credit facility with an accordionfeature that allows the Company to request increases to the revolving credit facilityup to $50.0 million. The initial borrowings under the new credit facility of$58.5 million were used to repay in full the $56.3 million of outstandingindebtedness under the prior credit facility, $0.7 million of accrued interest,and $1.5 million of debt issuance costs associated with the new creditfacility, which are being amortized over the 5-year term of the new creditfacility. The Company recorded a $0.7 million loss on the early extinguishmentof the prior credit facility related to the write-off of remaining capitalizeddebt issuance costs associated with the prior credit facility.

 

Futureproceeds drawn under the new credit facility may be used for ongoing workingcapital, capital expenditures, acquisitions and other general corporate purposes.The new credit facility has a maturity date of September 2015, andprovides for and includes a $5.0 million swingline facility and $15.0 millionletter of credit facility. At the Company’s option, the Company may prepay anyborrowings in whole or in part, without any prepayment penalty or premium.

 

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Theoutstanding borrowings under the new credit facility bear interest, at theCompany’s election, as either base rate or Eurodollar loans. Base rate loansbear annual interest at the base rate (the greater of the federal funds rateplus 0.50%, the prime rate, or one-month LIBOR plus 1.00%) plus a spread of1.50% to 2.25% based on the Company’s leverage ratio. Eurodollar loans bearinterest at the adjusted LIBOR for the interest period in effect for suchborrowings plus a spread of 2.50% to 3.25% based on the Company’s leverageratio. The Company’s interest rate on Eurodollar loans, which comprised all ofthe Company’s outstanding borrowings as of September 30, 2010 was 3.0%.

 

Thenew credit facility contains certain financial and non-financial covenants andrequirements, including a leverage ratio, fixed charge ratio and certainrestrictions on the Company’s ability to make investments, pay dividends orsell assets.  It also provides forcustomary events of default as defined in the agreement, including failure topay any principal or interest when due, failure to comply with covenants, anddefault in the event of a change in control. The Company was in compliance withthese covenants as of September 30, 2010.

 

Underthe new credit facility, letters of credit may be issued for a period of up toone year and will have an expiration date of one year or ten business daysprior to the new credit facility’s maturity date of September 2015, andmay contain provisions for automatic renewal, subject to certainconditions.  Letters of credit bearinterest, at the Company’s election, as either base rate or Eurodollarloans.  The Company pays a participationfee with respect to any participation in letters of credit, which accrues atthe applicable rate on the average daily amount of such lender’s letter ofcredit exposure from the effective date to the date on which such lender ceasesto have any letter of credit and exposure. The Company also pays the lending bank a fronting fee, which accrues atthe rate of 0.25% per annum on the average daily amount of the letter of creditexposure from the effective date to the date on which there ceases to be anyletter of credit exposure, as well as the issuing bank’s standard fees.  Participation fees and fronting fees arepayable in arrears on the last day of each calendar quarter for such calendarquarter, commencing with the calendar quarter ending December 31, 2010.

 

Theterms of the new credit facility require the Company to pay a commitment fee tothe administrative agent for the account of each lender, which accrues at arate per annum equal to 0.45% to 0.50%, based on the Company’s leverage ratio,on the average daily unused amount of each commitment of such lender, and ispayable in arrears on the last day of each calendar quarter for such calendarquarter, commencing with the calendar quarter ending December 31, 2010.

 

Inaddition to balances under the new credit facility, as of September 30,2010, the Company’s debt consists of a capital lease entered into in 2009 forthe purchase of software. During the nine months ended September 30, 2010,the Company made payments of $1.0 million towards the capital lease, whichincludes interest payments at an effective interest rate of 6.0%.

 

Asof December 31, 2009 and September 30, 2010, all of the Company’sdebt represents variable interest rate debt that re-prices within oneyear.  As a result, the fair value of theCompany’s debt approximates the carrying value as of December 31, 2009 andSeptember 30, 2010.

 

The aggregate amounts of annual principalmaturities of long-term debt and required payments under the capital lease areas follows:

 
| **(in thousands of dollars)** | ** ** | **Long-term debt** | ** ** | **Capital lease** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Remainder of 2010                            |       |                    | —     |                   | 348        |   |
| 2011                                         |       |                    | —     |                   | 1,401      |   |
| 2012                                         |       |                    | —     |                   | —     |   |
| 2013                                         |       |                    | —     |                   | —     |   |
| 2014                                         |       |                    | —     |                   | —     |   |
| 2015                                         |       |                    | 58,500     |                   | —     |   |
|                                         |       | $                       | 58,500     |                   | $          | 1,749 |   |
|                                              |            |                         |            |                        |            |  |  |  |

 

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The following table presents the availabilityunder the $135.0 million revolving credit facility as of September 30,2010:

 
| **(in thousands of dollars)**                | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|
|                                                        |       |       |       |
| Total available revolving credit facility                   |       | $          | 135,000    |   |
| Less: outstanding revolving credit loans                    |       | (58,500    | )          |
| Less: outstanding swingline loans                           |       | —     |       |
| Less: outstanding letters of credit                         |       | —     |       |
| Remaining availability under the revolving credit  facility |       | $          | 76,500     |   |

 

**Note 11: Stockholders’ Equity**

 

**Class A and B Common Stock**

TheCompany’s certificate of incorporation authorize the Company to issue150,000,000 shares of class A common stock, par value $0.001 per share, and15,000,000 shares of class B common stock, par value $0.001 per share. Eachshare of class B common stock is convertible into one share of class A commonstock as set forth in the Company’s certificate of incorporation.

 

**Treasury Stock**

Treasurystock is accounted for under the cost method and is included as a component ofstockholders’ equity. During the nine months ended September 30, 2009, theCompany reached agreements with defendants named in the MPower litigation,settling all disputes and claims between the Company and the defendants (seeNote 14). In connection with the settlement, the Company acquired 570,000shares of its outstanding class A common stock held by the defendants. Thesettlement transactions resulted in the Company’s non-cash acquisition of400,000 shares of class A common stock, which is recorded as a litigationsettlement gain of $1.2 million on the Company’s Condensed ConsolidatedStatement of Operations, and a $0.2 million cash purchase of 170,000 shares ofclass A common stock.

 

InMarch 2010, the Company repurchased 1,500,000 shares of its class A commonstock for $5.7 million.

 

**Dividend Equivalents**

Certainemployee options and awards contain rights to dividend equivalents. Thedividend equivalents are paid when the underlying options vest. During each ofthe nine months ended September 30, 2009 and 2010, the Company paid $0.2million in dividend equivalents.

 

**Dividends**

In2008, the Company declared a $30.0 million dividend. The Company paid $25.0million of the $30.0 million dividend in 2008 and paid the remaining $5.0million in March 2009. The Company did not declare or pay any dividendsduring the nine months ended September 30, 2010.

 

**Warrants**

InFebruary 2009, the Company issued 20,000 warrants to purchase shares ofclass A common stock to one of its distributors at a weighted average exerciseprice of $1.50 per share. The Company did not issue any warrants during thenine months ended September 30, 2010. No warrants were exercised orforfeited during the nine months ended September 30, 2009.  15,382 warrants were exercised and 4,086warrants were forfeited during the nine months ended September 30, 2010.

 

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A summary of warrant activity for the ninemonths ended September 30, 2010 is as follows:

 
| ** **                                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Terms (Years)** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------------|------------|
| Warrants outstanding January 1, 2010            |       | 726,683                    |       | $                                      | 1.69       |                                                              | 4.3        |   |
| Granted                                              |       | —                     |       | $                                      | —     |                                                              |       |   |
| Exercised                                            |       | (15,382                    | )          | $                                      | 1.70       |                                                              |       |   |
| Forfeited                                            |       | (4,086                     | )          | $                                      | 1.69       |                                                              |       |   |
| Warrants outstanding September 30, 2010         |       | 707,215                    |       | $                                      | 1.69       |                                                              | 3.5        |   |
| Exercisable and outstanding September 30,  2010 |       | 707,215                    |       | $                                      | 1.69       |                                                              | 3.5        |   |

 

**Note 12: Share Based Payment**

 

**StockIncentive Plans**

Asof September 30, 2010, the Company has one stock-based compensation plan,the Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and RestrictedStock Plan (the “Plan”). The Plan provides for the grant of stock options andother stock-based awards to key employees, directors, and consultants,including executive officers. Under the Plan, the Company issues standard,event-based and performance-based options.

 

Standardoptions issued to employees vest over a four-year period and options granted tomembers of the board of directors vest over a three-year period. The Companyexpenses the grant-date fair value of standard options, net of estimatedforfeitures, over the vesting period on a straight-line basis. During the ninemonths ended September 30, 2009 and 2010, the Company granted 1.2 millionand 1.8 million standard stock options to employees, respectively.

 

Event-basedoptions vest upon the earlier of (1) a change in control of the Company or(2) the second anniversary of the closing of an initial public offering.If a change in control or an initial public offering is not consummated by theCompany during the legal life of the event-based option, the option will becancelled. During the nine months ended September 30, 2010, the Companygranted 0.9 million event-based options to employees.  The Company did not issue any event-basedoptions during the nine months ended September 30, 2009. In the ninemonths ended September 30, 2010, the Company did not record stockcompensation expense in connection with event-based options because vesting wascontingent upon future events.

 

Performance-basedoptions to purchase common stock carry service, market and performanceconditions different from the Company’s other stock option agreements. Theterms of the performance-based options specify that the options vest at theearlier of: (1) the Company’s achievement of a performance condition andthe option holder’s continued employment with the Company over a four-yearperiod, or (2) the option holder’s continued employment with the Companyover a six-year period. During the nine months ended September 30, 2009,the Company issued a total of 0.1 million performance-based options. TheCompany did not issue any performance-based options during the nine monthsended September 30, 2010.

 

Thefair value of the stock options granted under the employee stock incentive planduring the nine months ended September 30, 2009 and 2010 was $2.7 millionand $7.1 million, respectively.

 

InMarch 2010, the Board modified the terms of certain options held by aformer member of the Company’s board of directors to allow the former boardmember’s options to continue vesting subsequent to the termination of theoption holder’s board membership. The modification was approved by the board ofdirectors in exchange for consulting services. The services were deemednon-substantive and additional compensation expense of approximately $0.2million was recognized during the nine months ended September 30, 2010.

 

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InApril 2010, the Board also modified the performance condition of allperformance-based options. Prior to the modification, the performance conditionfor employee option holders was the Company’s achievement of a pre-determinedequity value hurdle in an initial public offering or change of control. Theperformance condition for all employee option holders, except the Company’sChief Executive Officer, was modified to be the earlier of (1) the Company’sachievement of a determined equity value hurdle in an initial public offering,or (2) a change in control prior to an initial public offering and December 31,2011, or (3) the Company’s achievement of a pre-determined earningstarget.

 

Asa result of the modification of the performance-based options, the Companyrecognized additional performance-based option expense of $0.2 million duringthe nine months ended September 30, 2010 and the future recognition periodrelated to the unamortized performance-based option expense of $0.8 million wasreduced from approximately four years to approximately two years.

 

Thefollowing table presents a summary of stock option activity for the nine monthsended September 30, 2010:

 
| ** **                                              | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
|                                                    |       |       |       |                                   |       |                                                |       |                                |       |
| Outstanding January 1, 2010                        |       | 9,716,961  |       | $                                      | 3.26       |                                                |       |                                |       |   |
|                                                    |       |       |       |                                   |       |                                                |       |                                |       |
| Granted                                                 |       | 2,622,700  |       | $                                      | 3.78       |                                                |       |                                |       |   |
| Exercised                                               |       | (230,778   | )          | 2.15                                   |       |                                                |       |                                |       |
| Expired                                                 |       | (82,608    | )          | 1.44                                   |       |                                                |       |                                |       |
| Forfeited                                               |       | (593,597   | )          | 3.54                                   |       |                                                |       |                                |       |
| Outstanding September 30, 2010                     |       | 11,432,678 |       | $                                      | 3.40       |                                                | 7.8        |                                | $          | 41,584,985 |   |
|                                                    |       |       |       |                                   |       |                                                |       |                                |       |
| Vested and expected to vest at September 30,  2010 |       | 9,777,067  |       | $                                      | 3.36       |                                                | 7.7        |                                | $          | 36,191,513 |   |
|                                                    |       |       |       |                                   |       |                                                |       |                                |       |
| Exercisable at September 30, 2010                  |       | 3,306,490  |       | $                                      | 2.94       |                                                | 6.8        |                                | $          | 13,638,682 |   |

 

Theaggregate intrinsic value in the table above represents the total pre-taxvalue, which is calculated as the difference between the Company’s stock priceon September 30, 2010 and the exercise price, multiplied by the number ofin-the-money options that would have been received by the option holders hadall option holders exercised their options on September 30, 2010.  This amount changes based on the fair valueof the Company’s stock.  Total intrinsicvalue of options exercised during the nine months ended September 30, 2009and 2010 was less than $0.1 million and $0.8 million, respectively.

 

Options with the following characteristicswere outstanding as of September 30, 2010:

 
| **Exercise Prices** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------|------------|----------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
| $0.25 - $2.79            |       | 850,946                    |       | 5.9                                                              |       | $                                          | 1.24       |                    | 818,176    |                                       | $          | 1.22 |   |
| 3.45                     |       | 1,112,375                  |       | 7.5                                                              |       | $                                          | 3.45       |                    | 558,631    |                                       | $          | 3.45 |   |
| 3.47                     |       | 1,363,775                  |       | 7.9                                                              |       | $                                          | 3.47       |                    | 531,302    |                                       | $          | 3.47 |   |
| 3.53                     |       | 5,623,882                  |       | 7.3                                                              |       | $                                          | 3.53       |                    | 1,398,381  |                                       | $          | 3.53 |   |
| 3.78                     |       | 2,481,700                  |       | 9.6                                                              |       | $                                          | 3.78       |                    | —     |                                       | $          | — |   |
|                     |       | 11,432,678                 |       | 7.8                                                              |       | $                                          | 3.40       |                    | 3,306,490  |                                       | $          | 2.94 |   |

 

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**Assumptionsfor Estimating Fair Value of Stock Option Grants**

TheCompany uses the Binomial Lattice model for determining the estimated fairvalue for stock-based awards. The Binomial Lattice model requires analysis ofactual exercise behavior data and a number of assumptions including expectedvolatility, risk-free interest rate, expected dividends, option cancellations,and forfeitures.

 

The following assumptions were used to valueoptions granted during the nine months ended September 30, 2009 and 2010:

** **
| ** **              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------------|------------|
| ** **              | ** ** | **2009**                                                | ** ** | **2010** | ** ** |
|                    |       |                                                    |       |   |   |
| Expected volatility     |       | 56.3% - 60.6%                                           |       | 57.9% - 58.4% |   |
| Expected dividend yield |       | —                                                  |       | — |   |
| Expected term           |       | 7.7 - 9.4 years                                         |       | 7.2 - 8.5 years |   |
| Risk-free rate          |       | 2.5% - 3.5%                                             |       | 3.2% - 3.8% |   |

 

TheCompany derived its volatility assumptions from the historical volatilities ofcomparable public companies. The dividend yield assumption is based on theCompany’s expectation of future dividend payouts. The expected term of employeestock options represents the weighted-average period that the stock options areexpected to remain outstanding, based on the Company’s historical experienceand the contractual terms and vesting schedules of the underlying options. Therisk-free interest rate assumption is based upon observed interest ratesappropriate for the term of the Company’s employee stock options.

 

**Restricted Stock**

During the nine months ended September 30,2010, the Company issued awards of 0.7 million shares of restricted stock toits employees.  Restricted stock awards generallyvest annually over a three to five year period.

 

Activity related to the Company’s restrictedstock awards during the nine months ended September 30, 2010 is asfollows:

 
| ** **                         | ** ** | **Shares of  Unvested  Restricted Stock  Outstanding** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Balance at January 1, 2010    |       | 262,073                                                          |       | $                                                           | 3.47       |   |
| Granted                            |       | 674,043                                                          |       | $                                                           | 5.76       |   |
| Vested                             |       | (215,050                                                         | )          | $                                                           | 3.47       |   |
| Forfeited                          |       | (12,258                                                          | )          | $                                                           | 3.78       |   |
| Balance at September 30, 2010 |       | 708,808                                                          |       | $                                                           | 4.75       |   |

 

**Stock-BasedCompensation Expense**

Duringthe three months ended September 30, 2009 and 2010, the Company recordedtotal stock-based compensation expense of $1.1 million and $1.4 million,respectively. During the nine months ended September 30, 2009 and 2010,the Company recorded total stock-based compensation expense of $3.4 million and$4.4 million, respectively.

 

Includedin stock-based compensation expense for the nine months ended September 30,2010 is $0.5 million related to the accelerated vesting of certain restrictedstock awards held by former executives and employees of the Company inaccordance with their employment agreements and $0.2 million associated withthe modification of the terms of certain options held by a former member of theCompany’s board of directors. During the three months ended September 30,2010, the Company had no expense related to comparable items.

 

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**Note 13: Income Taxes**

 

The Company’s provision for income taxesconsists of U.S. federal and state taxes in amounts necessary to align theCompany’s year-to-date provision for income taxes with the effective tax ratethat the Company expects to achieve for the full year.

 

For the three months ended September 30,2010, the Company recorded a provision for income taxes of $3.3 million, whichresulted in an effective tax rate for the period of 34.1%. The effective taxrate for the three months ended September 30, 2010, was lower than thestatutory rate as a result of discrete items, including the benefit for aresearch and development tax credit claimed on the Company’s 2009 U.S.Corporation Income Tax Return.

 

**Note 14: Commitments AndContingencies**

 

**Operating Leases**

TheCompany has commitments under operating lease agreements, principally acommitment for office space which extends through November 2011. Rent expensefor each of the three months ended September 30, 2009 and 2010 was $0.4million. Rent expense for each of the nine months ended September 30, 2009and 2010 was $1.1 million. There have been no significant changes to theCompany’s future lease commitments during the nine months ended September 30,2010.

 

**Service Agreements**

The Company has agreements with variousthird-party vendors to provide card issuance services, card processingservices, internet data center services, and other consulting services. Theremaining term of the agreements range from one to six years in length andrequire monthly payments.

 

In January 2010, the Company amended itsprogram management agreement with MetaBank, pursuant to which the Companyagreed to use commercially reasonable efforts to promote MetaBank as apreferred issuing bank and MetaBank agreed to use commercially reasonableefforts to promote the Company as a preferred program manager.

 

Duringthe nine months ended September 30, 2010, the Company accrued a $0.8 millioncontingent loss related to a contractual dispute with a vendor and the Companyamended its agreement with the vendor pursuant to which the parties agreed tocommence winding down the relationship. The $0.8 million contingent loss isincluded in settlement gains and other losses on the Condensed ConsolidatedStatement of Operations.

 

Therewere no other significant changes to the Company’s contractual commitmentsduring the nine months ended September 30, 2010.

 

**Guarantees**

Asignificant portion of the Company’s business is conducted through retaildistributors that provide load and reload services to cardholders at theirretail locations. Members of the Company’s distribution and reload networkcollect cardholders’ funds and remit them by electronic transfer directly tothe issuing banks for deposit in the cardholder accounts. The Company does nottake possession of cardholders’ funds at any time during the settlementprocess. The Company’s issuing banks typically receive cardholders’ funds noearlier than three business days after they are collected by the retailer. Ifany retailer fails to remit cardholders’ funds to the Company’s issuing banks,the Company typically reimburses the issuing banks for such funds. The Companymanages the settlement risk associated with this process through a formalizedset of credit standards, limiting load volumes for certain retailers, requiringcertain retailers to maintain deposits on account, and by typically maintaininga right of offset of cardholders’ funds against commissions payable toretailers. The Company has not experienced any significant historical lossesassociated with settlement failures and has not recorded a settlement guaranteeliability as of December 31, 2009 or September 30, 2010. As of December 31,2009 and September 30, 2010, the Company’s estimated gross settlementexposure was $11.0 million and $12.2 million, respectively.

 

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Cardholderscan incur charges in excess of the funds available in their card accounts andare liable for the resulting overdrawn account balance. While the Companygenerally declines authorization attempts for amounts that exceed the availablebalance in a cardholder’s account, the application of card association andnetwork organization rules and regulations, the timing of the settlementof transactions and the assessment of subscription, maintenance or other fees,among other things, can result in overdrawn card accounts. The Company alsoprovides, as a courtesy and at its discretion, certain cardholders with a ‘‘cushion’’which allows them to overdraw their card accounts. In addition, eligiblecardholders may enroll in the issuing banks’ overdraft protection programspursuant to which the issuing banks fund transactions that exceed the availablebalance in the cardholders’ card accounts. The Company is responsible to theissuing banks for any losses associated with these overdrawn account balances.As of December 31, 2009 and September 30, 2010, the Company’sreserves intended to cover the risk that it may not recover cardholders’overdrawn account balances were $1.6 million and $2.8 million, respectively. Asof December 31, 2009 and September 30, 2010, cardholders’ overdrawnaccount balances totaled $4.1 million and $6.1 million, respectively.

 

**Recoveries**

In2009, the Company, in conjunction with two of its issuing banks, identifiedexcess funds related to chargebacks and fee-related recoveries from cardassociations, much of which the Company had previously written off in its lossreserves. As a result, the Company recorded a $9.0 million settlement gain inits Condensed Consolidated Statement of Operations during the nine months endedSeptember 30, 2009, the period in which the chargebacks and fee-relatedrecoveries were settled.

 

**Alexsam Litigation**

InOctober 2007, Alexsam, Inc. (‘‘Alexsam’’) filed suit against theCompany in the District Court of Travis County, Texas, 419th Judicial District,asserting breach of a license agreement entered into between the Company andAlexsam in 2004. The license agreement was entered into by the partiesfollowing Alexsam’s assertion and subsequent dismissal without prejudice of aclaim of patent infringement filed by Alexsam against the Company in 2003.Pursuant to the license agreement, NetSpend agreed to pay Alexsam certainroyalty payments if NetSpend changed its business process to allow NetSpendcards to be activated or recharged in a manner allegedly covered by the patentsheld by Alexsam. The parties mediated the case in both 2008 and 2010 withoutreaching a settlement. In April 2010, NetSpend filed a motion for summaryjudgment, and following a hearing, the Court denied the motion without comment.The Company is evaluating the possible outcomes related to the litigation andhas not recorded a contingent loss because it is currently unable to estimateits loss exposure, if any. The Company plans to vigorously contest Alexsam’sclaims.  In November 2010, the case wasremoved to the United States District Court — Western District of Texas.

 

**ACE Arbitration**

InJune 2010, during the course of negotiations with the Company’s largestdistributor, ACE Cash Express, Inc. (“ACE”) regarding possiblemodifications to a distribution agreement, ACE initiated arbitration allegingbreach of the agreement based on certain activities of the Company’sdirect-to-consumer and online marketing programs and seeking, among otherthings, termination of the agreement. On July 14, 2010, the partiesdismissed and released with prejudice all claims in the proceeding.  In September 2010, the Company enteredinto an amendment to its distribution agreement with ACE to reflect thesemodifications, which the Company does not expect to have a material impact onits business, financial condition or operating results.

 

**Katz Settlement**

In 2008, the Company received a letter fromRonald A. Katz Technology Licensing, L.P. (“RAKTL”), which contained an offerfor the Company to acquire a license under the RAKTL portfolio of patents. In March 2010,the Company recorded a $4.0 million contingent loss as a result of substantivediscussions and negotiations it held with RAKTL in early 2010. In July 2010,the Company and RAKTL reached an agreement on the matter. In accordance withthe agreement, the Company will pay RAKTL a total of $3.5 million in exchangefor the Company’s release from potential infringement liability related to theCompany’s possible use of RAKTL patents. As part of the agreement, the Companyalso acquired a non-exclusive license related to certain pending RAKTL patents.The initial $4.0 million contingent loss was reversed and a $3.5 million losswas recorded in settlement gains and other losses on the Condensed ConsolidatedStatement of Operations for the nine months ended September 30, 2010.

 

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**MPower Litigation**

In2008, the Company filed a lawsuit against MPower Ventures, LP, MPower Labs, Inc.,Mango Financial, Inc., MPower Ventures Management, LLC, Rogelio Sosa,Bertrand Sosa, Richard Child, and John Mitchell, and subsequently amended thesuit to add Futeh Kao and Mattrix Group, L.L.C (collectively,  “defendants”). In this lawsuit, the Companyalleged breach of fiduciary duties, breach of contractual and common-law dutiesof confidentiality, breach of contractual non-solicitation, misappropriation ofthe Company’s trade secrets and confidential and proprietary informationbelonging to the Company, breach of noncompetition agreements, and engagementin a civil conspiracy. Defendant Mitchell asserted counterclaims against theCompany alleging breach of contract relating to consulting services and paymentof certain dividends, as well as for defamation. Mitchell sought actual and consequentialdamages and attorneys’ fees.

 

In March and June 2009, the Companyreached agreements with the defendants, settling all disputes and claimsbetween the Company and the defendants. In connection with the settlement, theCompany acquired 570,000 shares of its outstanding class A common stock held bycertain of the defendants. The settlement transactions resulted in the Company’snon-cash acquisition of 400,000 shares of class A common stock, which isrecorded as a litigation settlement gain of $1.2 million in the Company’sCondensed Consolidated Statement of Operations during the nine months ended September 30,2009, and a $0.6 million cash payment to Richard Child, which included therepurchase of 170,000 shares of class A common stock for $0.2 million.

 

**Note 15: Employee BenefitPlans**

 

The Company has established a defined contributionretirement plan under Section 401(k) of the Internal Revenue Code (“401(k) Plan”).The Company’s 401(k) Plan covers substantially all employees who meetminimum age and service requirements and allows participants to defer a portionof their annual compensation, not to exceed a federally specified maximum, on apre-tax basis. The Company may contribute to the program by matching fundsbased on a percentage of the employee’s contribution. For the three monthsended September 30, 2009 and 2010, the Company’s match under the 401(k) Planwas approximately $0.1 million and $0.2 million, respectively.  For the nine months ended September 30,2009 and 2010, the Company’s match under the 401(k) Plan was approximately$0.5 million and $0.6 million, respectively.

 

In addition, the Company has a deferred compensationplan under which certain employees have the option to defer a portion of theircompensation. As of December 31, 2009 and September 30, 2010, theCompany’s liability with regard to the deferred compensation plan was less than$0.1 million.

 

**Note 16: Related PartyTransactions**

 

JLLPartners Fund IV, LP and JLL Partners Fund V, LP (collectively “theJLL Funds”) own approximately 97% of ACE Cash Express, Inc. (“ACE”), oneof the Company’s largest distributors. The JLL Funds beneficially own more thanfive percent of the Company’s outstanding class A common stock andclass B common stock. In 2008, the Company entered into an amended andrestated independent agency agreement with ACE through March of 2016related to the sale of the Company’s gift and GPR cards. The Company incurredexpenses from transactions with ACE of $5.5 million and $7.2 millionfor the three months ended September 30, 2009 and 2010, respectively, and$17.1 million and $22.8 million for the nine months endedSeptember 30, 2009 and 2010, respectively. Although revenues generatedfrom cardholders acquired at ACE represent approximately one third of theCompany’s revenues, the portion of those revenues earned from transactionsdirectly with ACE were $0.8 million and $1.1 million for the threemonths ended September 30, 2009 and 2010, respectively, and$2.0 million and $3.4 million for the nine months ended September 30,2009 and 2010, respectively. At December 31, 2009 and September 30,2010, $2.0 million and $2.3 million, respectively, was payable toACE.

 

OakInvestment Partners X, LP and Oak X Affiliates Fund, LP (collectively“Oak”) own in excess of 10% of Sutherland Global Services, Inc. (“Sutherland”),one of the Company’s external customer service providers. Oak is a beneficialowner of more than five percent of the Company’s outstanding class Acommon stock. The Company incurred expenses from transactions with Sutherlandof $1.1 million and $2.0 million during the three months endedSeptember 30, 2009 and 2010, respectively, and $4.3 million and$5.5 million during the nine months ended September 30, 2009 and2010, respectively. At December 31, 2009 and September 30, 2010,$1.2 million and $0.6 million, respectively, was payable toSutherland.

 

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Oakowns in excess of 10% of Vesta Corporation (“Vesta”), one of the Company’svendors. Oak is a beneficial owner of more than five percent of the Company’soutstanding class A common stock. The Company incurred expenses fromtransactions with Vesta of less than $0.1 million during the nine monthsended September 30, 2010. Additionally, the Company earned revenues from transactions with Vestaof less than $0.1 million during the three and nine months endedSeptember 30, 2010.  The Companyincurred no expenses and earned no revenues from transactions with Vesta duringthe nine months ended September 30, 2009.

 

TheCompany leases service hours for an airplane from Birardi Investments, LLC, acompany that is partially owned by the Company’s current CEO. The airplane isleased for business use on a per-flight-hour basis with no minimum usagerequirement. The Company incurred less than $0.1 million of expensesduring each of the three months ended September 30, 2009 and 2010 and$0.2 million during each of the nine months ended September 30, 2009and 2010 for the use of this airplane.

 

**Note 17: Subsequent Events**

 

**MetaBank**

OnOctober 12, 2010, MetaBank, the issuing bank that holds the majority ofour cardholder funds, publicly disclosed that the Office of Thrift Supervision(“OTS”) issued a Supervisory Directive requiring MetaBank to discontinueoffering its iAdvance product, based on a determination by OTS that MetaBankengaged in unfair or deceptive acts or practices in connection with itsoperation of the iAdvance program.

 

Inaccordance with the Supervisory Directive, NetSpend will not, without MetaBankobtaining the prior written approval of OTS, be able to enter into newagreements or amend existing agreements with distributors that are also partiesto a third party agency relationship with MetaBank, which would include anydistributors that have the capability to issue cards and accept cash depositson those cards. MetaBank expects to be able to continue to service its existingthird party relationship agreements, which would include the Company’s cardprogram management agreement and the existing agency agreements it has enteredinto with its distributors, consistent with their terms and the OTS Directives.

 

TheCompany plans to diversify its GPR card volumes to one or more additionalissuing banks. In furtherance of its diversification strategy, onOctober 14, 2010, the Company executed a non-binding letter of intent withThe Bancorp Bank for it to become an additional issuing bank for the Company’s GPRcards. In addition, on October 17, 2010, the Company entered into anothernon-binding letter of intent with H&R Block Bank for it to become anadditional issuing bank for its GPR cards. The Company intends to work toreach definitive agreements with The Bancorp Bank and H&R Block Bank.

 

Subsequentto the announcement by Meta of the Supervisory Directive on October 12,2010, the fair value of the Company’s investment in the common stock of MetaFinancial Group, Inc. has decreased by approximately 50% to 60%.  Such decrease implies a reduction in the fairvalue of the Company’s investment in Meta of between $2.4 and $2.9 million.

 

**EquityIncentive Plan**

InOctober 2010, the compensation committee of the Company’s board ofdirectors adopted a new equity incentive plan (“2010 Equity Incentive Plan”).  The 2010 Equity Incentive Plan replaces theCompany’s 2004 Stock Option Plan. The Company reserved 22,459,980 shares of itscommon stock for issuance under the 2010 Equity Incentive Plan. The number ofshares reserved for issuance under the 2010 Equity Incentive Plan will increaseautomatically annually by a number of shares equal to the lesser of (1) 3%of the total outstanding shares of the Company’s capital stock as ofimmediately prior to the increase, (2) 3,000,000 and (3) such lesseramount as determined by the Company’s board of directors. The 2010 EquityIncentive Plan authorizes the award of stock options, stock appreciationrights, restricted stock awards, performance units and other awards.  In October 2010, the Company grantedunder the 2010 Equity Incentive Plan options to purchase 571,874 shares ofcommon stock to certain employees and directors at the price of $11.00 pershare.

 

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**InitialPublic Offering**

OnOctober 22, 2010, the Company completed an initial public offering of18,536,043 shares of common stock at an initial public offering of $11.00 pershare, of which 2,272,727 shares were sold by the Company and 16,263,316 shareswere sold by existing stockholders. The Company generated net proceeds ofapproximately $21.3 million after deducting underwriting discounts andcommissions and $2.1 million in total expenses incurred in connection with theoffering. Effective with the completion of the initial public offering, certainselling stockholders exercised warrants to purchase 662,743 shares of class Acommon stock with a weighted-average exercise price of $1.69 per share andvested options to purchase 920,594 shares of class A common stock with aweighted-average exercise price of $2.97 per share in order to sell theunderlying shares of class A common stock in the offering.

 

Uponthe completion of the offering, the Company’s certificate of incorporation wasamended and restated to reflect the reclassification of the Company’s class Acommon stock into common stock, to increase the total number of authorizedshares to 250,000,000 and to provide that all shares of the Company’s class Bcommon stock will automatically convert into shares of common stock on aone-for-one basis upon the earlier of (1) approval by certain state moneytransmitter regulators of the acquisition by Skylight Holdings I, LLC, JLLPartners Fund IV, L.P., JLL Partners Fund V, L.P. and their affiliates of 25%or more of the direct or indirect voting control of the Company’s subsidiary,NetSpend Corporation, and (2) the date on which Skylight Holdings, JLLPartners, or any of JLL Partners’ affiliates cease to own or control 25% ormore of our voting securities (assuming conversion of the class B common stockinto common stock). In addition, each share of class B common stock willautomatically convert into one share of common stock upon the sale, dispositionor transfer to a person other than Skylight Holdings, JLL Partners or any ofJLL Partners’ affiliates.

 

**Conversionof Class B Common Stock**

Immediatelyfollowing completion of the initial public offering, Skylight Holdings I, LLCtransferred all of the shares of the Company’s class B common stock held bySkylight Holdings to its members.  As aresult of the transfer, Skylight Holdings I, LLC, JLL Partners Fund IV, L.P.,JLL Partners Fund V, L.P. and their affiliates ceased to own or control 25% ormore of the Company’s voting securities and, pursuant to the terms of theCompany’s amended and restated certificate of incorporation, all shares of theCompany’s class B common stock automatically converted into shares of commonstock on a one-for-one basis.

 

**AcceleratedVesting of Stock-Based Compensation**

Uponcompletion of the Company’s initial public offering, the vesting of certainoutstanding options and shares of restricted stock accelerated according to theterms of the underlying agreements.

 

Certainrestricted shares accelerated to vest on the date six months following thecompletion of the initial public offering, as opposed to on the date threeyears from the initial grant date. In connection with the acceleration, theCompany will recognize the unamortized restricted stock expense on astraight-line basis over the 0.5 year future service period as opposed to overthe 2.3 years that remained under the original service period.

 

Allevent-based options were triggered to vest on the date two years after thecompletion of the initial public offering. Prior to the completion of theinitial public offering, the Company had not recognized any expense related toevent-based options because the vesting was completely contingent upon futureevents.  The Company will recognize the unamortizedevent-based option expense on a straight-line basis over the 2.0 year serviceperiod.

 

Theremaining service period associated with the CEO’s standard options wasshortened by one year. The Company will recognize the unamortized stock optionexpense on a straight-line basis over the remaining 0.4 year service period.

 

Theremaining service period associated with a portion of the CEO’sperformance-based options granted in February 2008 was shortened based onthe Company’s achievement of performance targets based on the Company’s equityvaluation.  Prior to the achievement ofthe performance targets, the expense associated with these options was beingrecognized over a six-year period.  Ifthe Company continues to achieve performance targets or if performance targetsare deemed probable of achievement, the vesting of these options will continueto accelerate.  If the Company achievesthe maximum performance target specified in the option agreement, all of theoptions will become completely vested in February 2012.  As such, the Company has shortened therecognition period of the expense associated with portions of these options andwill continue to adjust the recognition period related to the remaining optionsas better estimates of the timeline for achievement of the performance targetscan be made.

 

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**Item 2.****                                                        ****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*ThisQuarterly Report on Form 10-Q and the documents incorporated into thisQuarterly Report on Form 10-Q by reference contain forward-lookingstatements that are based on our current expectations, assumptions, estimatesand projections about our company and our industry. The forward-lookingstatements are subject to various risks and uncertainties. Generally, theseforward-looking statements can be identified by the use of forward-lookingterminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,”“project,” “seek,” “should,” “may,” “could,” “would,” “plans,” “predicts,” “potential”and similar expressions, as well as other words or expressions referencingfuture events, conditions or circumstances. Those statements include, amongother things, the discussions of our business strategy and expectationsconcerning our market position, future operations, financial position, revenue,costs, prospects, margins, profitability, liquidity and capital resources, aswell as management’s plans and objectives. We caution you that reliance on anyforward-looking statement involves risks and uncertainties and that although webelieve that the assumptions on which our forward-looking statements are basedare reasonable, any of those assumptions could prove to be inaccurate, and, asa result, the forward-looking statements based on those assumptions could bematerially incorrect. These factors include but are not limited to:*

 

·*increasing competition in the prepaid debit cardindustry;*

 

·*our dependence on a limited number of retaildistributors of our products;*

 

·*exposure to cardholder and other losses;*

 

·*our reliance on our relationships with our issuingbanks;*

 

·*regulatory, legislative and judicial developmentsin our operations area;*

 

·*changes in regulations impacting interchange fees;*

 

·*changes in card association or networkorganization rules;*

 

·*our ability to protect against unauthorizeddisclosure of cardholder data;*

 

·*fluctuations in customer retention rates;*

 

·*general economic conditions;*

 

·*our ability to promote our brand;*

 

·*our reliance on outsourced customer serviceproviders; and*

 

·*our ability to protect our intellectual propertyrights.*

 

*Theseand other factors are more fully discussed in “Risk Factors” and elsewhere inthis Quarterly Report on Form 10-Q. In light of these and otheruncertainties, you should not conclude that we will necessarily achieve anyplans, objectives or projected financial results referred to in any of theforward-looking statements. Except as required by law, we do not intend toupdate any of these forward-looking statements to reflect future events orcircumstances.*

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and related notes included elsewhere in this Quarterly Report on Form 10-Qand our audited consolidated financial statements and related notes to auditedconsolidated financial statements included in our prospectus filed pursuant to Rule 424(b)(4) underthe Securities Act with the Securities and Exchange Commission (“SEC”) on October 19,2010.  In this Quarterly Report, unlessotherwise specified, “NetSpend,” “we,” “us,” and “our” refer to NetSpendHoldings, Inc. and its consolidated subsidiaries.*

 

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**Overview**

 

NetSpendis a leading provider of general-purpose reloadable prepaid debit cards, or GPRcards, and related alternative financial services to underbanked consumers inthe U.S. We empower underbanked consumers by providing innovative andaffordable financial products and services tailored to meet their particularfinancial services needs and preferences in a manner that traditional bankinginstitutions have historically not met. In addition, our products and servicesprovide our retail distributors an opportunity to enhance their customerrelationships and generate incremental, ongoing revenue streams.

 

Wehave built an extensive and diverse distribution and reload network in the U.S.to support the marketing and ongoing use of our GPR cards. We market our cardsthrough multiple channels, including retail distributors, direct-to-consumerand online marketing programs, and corporate employers as an alternative methodof wage payment for their employees. Beginning in 2008, we decided to focusprimarily on our GPR cards, and we ceased marketing gift cards entirely as of August 21,2010.

 

Wehave developed a proprietary, fully-integrated operational and technologyplatform. Our in-house platform is end-to-end in that it encompasses thecritical functions required for us to acquire cardholders, processtransactions, maintain account-level data, communicate with cardholders, managerisk, ensure regulatory compliance and connect to our issuing banks anddistributors. These integrated capabilities allow us to customize our productsand services for different markets, distribution channels and customersegments. Further, by processing transactions on our own platform, we gainunique and extensive insight into the attitudes, characteristics and purchasingbehavior of underbanked consumers. Our processing platform is scalable, whichwill allow us to increase our profitability as our number of active cards andthe volume of the transactions we process increase.

 

Wehave agreements with FDIC-insured depository institutions that serve as theissuers of our MasterCard- and Visa-branded GPR cards. Our cardholders may usetheir GPR cards to make purchase transactions at any merchant that participatesin the MasterCard, Visa or PULSE networks and to withdraw funds fromparticipating automated teller machines, or ATMs. MetaBank, which has beenone of our issuing banks since 2005, holds a majority of our cardholder funds.In January 2010, we acquired approximately 4.9% of the outstanding equityinterests in Meta Financial Group, Inc., MetaBank’s holding company.

 

Ouroperating company and predecessor, NetSpend Corporation, was incorporated inTexas in 1999. In May 2004, Oak Investment Partners acquired a controllingequity interest in our operating company through a recapitalization transactionpursuant to which we, as a newly-formed holding company incorporated inDelaware, acquired all of the capital stock of NetSpend Corporation. In 2008 weacquired Skylight Financial, Inc., or Skylight, a payroll card provider,in a stock-for-stock merger.

 

**RecentDevelopments**

 

*InitialPublic Offering*

 

OnOctober 18, 2010, the registration statement for our initial publicoffering became effective and our common stock began trading on the NASDAQStock Market under the symbol “NTSP” on October 19, 2010. We consummatedour initial public offering on October 22, 2010, and received net proceedsof $21.3 million after deducting underwriting discounts and commissions and $2.1million in total expenses incurred in connection with the offering.

 

*Conversion of Class B CommonStock*

 

Immediately followingcompletion of the initial public offering, Skylight Holdings I, LLC transferredall of the shares of Class B common stock held by Skylight Holdings to itsmembers.  As a result of the transfer,Skylight Holdings I, LLC, JLL Partners Fund IV, L.P., JLL Partners Fund V, L.P.and their affiliates ceased to own or control 25% or more of our votingsecurities and, pursuant to the terms of our third amended and restatedcertificate of incorporation, all shares of Class B common stockautomatically converted into shares of common stock on a one-for-one basis.

 

*MetaBankAnnouncement*

 

OnOctober 12, 2010, MetaBank publicly disclosed that the Office of ThriftSupervision (“OTS”) issued a Supervisory Directive on October 6, 2010,which clarified and supplemented an initial Supervisory Directive issued toMetaBank on August 31, 2010 (collectively, the “OTS Directives”). The OTSDirectives require MetaBank to discontinue offering its iAdvance product, basedon a determination by OTS that MetaBank engaged in unfair or deceptive acts orpractices in connection with its operation of the iAdvance program. Inaddition, MetaBank announced that the OTS Directives will require MetaBank toobtain prior written approval of OTS to, among other things, enter into any newthird party

 

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relationshipagreements concerning any credit or deposit product (including prepaid access),or materially amend any such existing agreements or publicly announce any newthird party relationship agreements or material amendments to existingagreements. MetaBank further indicated that it cannot predict whether OTS willaddress other compliance and supervisory matters, or the effect on MetaBank’sresults of operations or financial condition of any such OTS actions, althoughOTS has informed MetaBank that it will address in the future OTS’s expectationswith respect to reimbursement of borrowers under the iAdvance program. Futureactions by OTS could seek to address other concerns that MetaBank indicatedwere factors leading to the OTS Directives, including MetaBank’s third-partyrelationship risk, enterprise risk management and rapid growth. We are not incommunication with OTS on these matters, and our information is limited to theinformation that is publicly disclosed and provided to us by MetaBank.

 

Basedon further communications between MetaBank and OTS, we understand that the OTSDirectives will require MetaBank to obtain OTS approval prior to MetaBankexecuting new third party agency agreements with new distributor relationshipsestablished by existing program managers such as NetSpend. This means thatNetSpend will not, without MetaBank obtaining the prior written approval ofOTS, be able to enter into new agreements with distributors that are alsoparties to a third party agency relationship with MetaBank (or amend any suchexisting three-party agency agreements), which would include any distributorsthat have the capability to issue cards and accept cash deposits on thosecards. Our distributors that do not accept cash deposits, such as ourdirect-to-consumer and non-standard auto insurance distributors, do not enterinto third party agency relationship agreements with our issuing banks.Similarly, as a general matter extensions or renewals of our existingdistributor agreements do not require execution of new or amended agencyagreements with our issuing banks, including MetaBank. Therefore, MetaBankexpects to be able to continue to service its existing third party relationshipagreements, which would include our card program management agreement and theexisting agency agreements it has entered into with our distributors,consistent with their terms and the OTS Directives.

 

Wecurrently have signed agreements with potential new distributors that have beensubmitted to MetaBank for execution. As described above, we understand thatMetaBank cannot execute these new agreements without the prior written approvalof OTS, which the OTS has indicated to MetaBank it is not in a position to giveat this time. Therefore, if MetaBank is unable to secure OTS approval or we areunable to establish these distributor relationships through an alternativeissuing bank, we estimate that we would miss the opportunity for approximately$1.0 million of annualized revenue from these potential relationships. MetaBankhas informed us that OTS has indicated that it will not review new agreementsfor approval until OTS completes its review of MetaBank’s operations, whichreview MetaBank generally does not expect to occur for up to several months.

 

MetaBankis our preferred issuing bank, and as of September 30, 2010, approximately72% of our active cards were issued through MetaBank. While we look forward toour continued relationship with MetaBank, we also believe it is prudent to haveadditional, active relationships in place as part of a diversificationstrategy. As part of this strategy, we are implementing a plan to proactivelydiversify our GPR card volumes among additional issuing banks and transition atleast 15% of our non-corporate employer issued GPR card volumes, either fromexisting or new cardholder accounts, to one or more additional issuing bankswithin 90 days. Under this plan, on a go-forward basis, we intend to maintainat least three active issuing bank relationships. We also intend to enter intoletters of intent or similar arrangements with two additional issuing banksthat would provide us an opportunity to establish a definitive issuing bankrelationship in a relatively short period of time. Finally, our board ofdirectors will continue to review the adequacy and status of all of our issuingbank relationships on a regular basis.

 

Infurtherance of our diversification strategy, on October 14, 2010, weexecuted a non-binding letter of intent with The Bancorp Bank for it to becomean additional issuing bank for our GPR cards. In addition, on October 17,2010, we entered into another non-binding letter of intent with H&R BlockBank for it to become an additional issuing bank for our GPR cards. We intendto work expeditiously to reach definitive agreements with The Bancorp Bank andH&R Block Bank.

 

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Theimpact on our financial condition and results of operations of ourdiversification strategy will depend upon a number of factors, including thepace of growth in new card volume, the timing and size of existing accountstransferred to new sponsor bank relationships, and the financial terms andconditions of any new bank sponsorship agreements we execute. We do not expectthere to be significant capital requirements or expense associated withtransitioning approximately 15% of our existing volume to one or moreadditional banks. However, the transition would require a change to certaincardholder terms and conditions for existing accounts and would consume IT andmanagement attention and resources during the transition period. If we wereforced to move all of MetaBank’s current volume and card accounts to one ormore new sponsor banks, we estimate that we would incur total one-time costs ofbetween approximately $2.5 million to $3.5 million, approximately one-third ofwhich would represent a non-cash write-off of existing card inventory. We wouldexpect under any of these scenarios that we would leverage our past experiencein moving large customer portfolios between sponsor banks to strive to limitthe amount of disruption to our customers and the resulting impact to ourfinancial condition and results of operations. For a discussion of the risksassociated with moving these banking services to another provider, see “RiskFactors—Risks Relating to Our Business—The loss of, or change to, ourrelationships with MetaBank or our other issuing banks could adversely affectour business, results of operations and financial position.”

 

Wedo not expect that the discontinuation of the iAdvance product will have a materialimpact on our financial condition or results of operations.

 

**Key Business Metrics**

 

Asa leading provider of GPR cards and related alternative financial services tounderbanked consumers, we evaluate a number of business metrics to monitor ourperformance and manage our business. We believe the following metrics are theprimary indicators of our performance.

 

*Numberof Active Cards* — represents thetotal number of our GPR cards that have had a personal identification number,or PIN, or signature-based purchase transaction, a load transaction at aretailer location or an ATM withdrawal within the previous 90 days. We hadapproximately 1.7 million and 2.1 million active cards as of September 30,2009 and 2010, respectively.

 

*Percentageof Active Cards with Direct Deposit*— represents the percentage of our active cards that have had a direct depositload within the previous 90 days. The percentage of our active cards that weredirect deposit active cards as of September 30, 2009 and September 30,2010 was 25.9% and 31.7%, respectively.

 

*Gross**Dollar Volume (GDV)* — represents thetotal dollar volume of debit transactions and cash withdrawals made using ourGPR cards. Our gross dollar volume was $1.8 billion and $2.4 billion for thethree months ended September 30, 2009 and 2010, respectively, and $5.5billion and $7.3 billion for the nine months ended September 30, 2009 and2010, respectively.

 

**KeyComponents of Our Results of Operations**

 

**OperatingRevenues**

 

Ouroperating revenues primarily consist of compensation for the services weprovide to our issuing banks resulting from service fees and interchangerevenue.

 

Ourcardholders are charged fees in connection with the products and services weprovide, as follows:

 

· Transactions — Cardholders are typically charged a fee for each PINand signature-based purchase transaction made using their GPR cards, unless thecardholder is on a monthly or annual service plan, in which case the cardholderis instead charged a monthly or annual subscription fee, as applicable. Cardholdersare also charged fees for ATM withdrawals and other transactions conducted atATMs.

 

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· Customer Service and Maintenance — Cardholders are typically chargedfees for balance inquiries made through our customer service. Cardholders arealso charged a monthly maintenance fee after a specified period of inactivity.

 

· Additional Products and Services — Cardholders are charged feesassociated with additional products and services offered in connection withcertain of our GPR cards, including overdraft protection through our issuingbanks, a variety of bill payment options, and card-to-card transfers of fundsthrough our customer service.

 

· Other — Cardholders are charged fees in connection with the purchaseand reload of our GPR cards and the purchase of our gift cards at retailers.

 

Ouroperating revenues also include fees charged in connection with a third partyprocessing services agreement with a large national bank that we terminatedeffective 2009, as well as interest earned, if any, on cardholder fundsmaintained at certain of our issuing banks. Under our current arrangements withour issuing banks, we would only be entitled to receive interest on cardholderfunds if market interest rates rose significantly above current levels.

 

Weearn interchange revenues from a portion of the interchange fees remitted bymerchants when cardholders make purchase transactions using our prepaid debitcards. Interchange fees are fixed by the card associations and networkorganizations. Interchange revenues are recognized net of sponsorship,licensing and processing fees charged by the card associations and networkorganizations for services they provide in processing purchase transactionsrouted through their networks.

 

Our quarterly operating revenues fluctuate asa result of certain seasonal factors affecting our GDV and the number of ouractive cards. For example, the most significant increases in the number of ouractive cards and our GDV typically occur in our first fiscal quarter as aresult of consumers acquiring new cards and loading federal tax refunds ontotheir cards during tax season. In addition, the number of our active cards andour GDV typically increase from our third to fourth fiscal quarters as a resultof increases in holiday employment and holiday-associated consumer spending.

 

**Operating Expenses**

 

Weclassify our operating expenses into the following categories:

 

*DirectOperating Costs* — Direct operatingcosts consist primarily of the commissions we pay to members of ourdistribution and reload network for their services, ATM processing fees, cardsupply costs, cardholder and other losses related to our card programs,customer verification costs, customer service costs and fees paid to ourissuing banks. These costs are driven by transaction volumes and the number ofactive cards.

 

*Salaries,Benefits and Other Personnel Costs*— Salaries, benefits, and other personnel costs consist of the compensationcosts associated with our employees, including base salaries, benefits, bonuscompensation and stock-based compensation. This excludes any personnel costsassociated with customer service, which are included in direct operating costs.

 

*Advertising,Marketing and Promotion Costs*— Advertising, marketing, and promotion costs primarily consist of the costs ofmarketing programs including direct-to-consumer and internet advertising topotential cardholders, promotional events run in conjunction with ourdistributors, conferences, trade shows and marketing materials.

 

*OtherGeneral and Administrative Costs*— Other general and administrative costs primarily consist of costs for legal,accounting, information technology, travel, facility and other corporateexpenses.

 

*Depreciationand Amortization* — Depreciation andamortization consists of depreciation of our long-lived assets and amortizationof finite-lived intangibles.

 

**OtherIncome (Expense)**

 

Otherincome (expense) primarily consists of interest income and interest expense.Interest income represents interest we receive on our cash and cashequivalents. Interest expense is associated with debt and capital leases.

 

**IncomeTax Expense**

 

Incometax expense primarily consists of corporate income taxes related to profitsresulting from our ongoing operations.

 

 

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**Consolidated Statements of Operations Data**

 
| ** **                                      | ** ** | **Three Months Ended ** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**                 | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **(unaudited)**                        | ** ** |
| ** **                                      | ** ** | **2009**                               | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                | ** ** |
| ** **                                      | ** ** | ** **                             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating Revenues**                          |       | $                                      | 55,962     |                            | $          | 68,208 |   | $ | 165,598 |   | $ | 205,175 |   |
|                                            |       |                                   |       |                            |       |   |   |   |   |
| **Operating Expenses**                          |       |                                   |       |                            |       |   |   |   |   |
| Direct operating costs                     |       | 25,754                                 |       | 32,364                          |       | 77,580 |   | 95,381 |   |
| Salaries, benefits and other personnel expenses |       | 11,862                                 |       | 13,149                          |       | 35,419 |   | 39,732 |   |
| Advertising, marketing and promotion costs      |       | 3,617                                  |       | 3,369                           |       | 9,790 |   | 10,738 |   |
| Other general and administrative costs          |       | 5,234                                  |       | 4,777                           |       | 17,209 |   | 13,865 |   |
| Depreciation and amortization                   |       | 2,537                                  |       | 3,223                           |       | 7,681 |   | 9,298 |   |
| Settlement (gains) and other losses             |       | —                                 |       | —                          |       | (10,229 | ) | 4,300 |   |
| Total operating expenses                        |       | 49,004                                 |       | 56,882                          |       | 137,450 |   | 173,314 |   |
| Operating income                                |       | 6,958                                  |       | 11,326                          |       | 28,148 |   | 31,861 |   |
|                                            |       |                                   |       |                            |       |   |   |   |   |
| **Other Income (Expense)**                      |       |                                   |       |                            |       |   |   |   |   |
| Interest income                                 |       | 4                                      |       | 20                              |       | 31 |   | 66 |   |
| Interest expense                                |       | (1,312                                 | )          | (926                            | )          | (4,065 | ) | (2,983 | ) |
| Loss on extinguishment of debt                  |       | —                                 |       | (734                            | )          | — |   | (734 | ) |
| Total other expense                             |       | (1,308                                 | )          | (1,640                          | )          | (4,034 | ) | (3,651 | ) |
| Income before income taxes                      |       | 5,650                                  |       | 9,686                           |       | 24,114 |   | 28,210 |   |
| Provision for income taxes                      |       | 2,070                                  |       | 3,306                           |       | 9,456 |   | 10,766 |   |
| Net income                                      |       | $                                      | 3,580      |                            | $          | 6,380 |   | $ | 14,658 |   | $ | 17,444 |   |

 

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**Consolidated Statements of Operations Data as aPercentage of Total Revenues**

** **
| ** **                                      | ** ** | **Three Months Ended ** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**                 | ** ** | **September 30,**          | ** ** |
| ** **                                      | ** ** | **2009**                               | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2010** | ** ** |
| ** **                                      |       |                                   |       |                            |       |   |   |   |   |
| **Operating Revenue**                           |       | 100.0                                  | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
|                                            |       |                                   |       |                            |       |   |   |   |   |
| **Operating Expenses**                          |       |                                   |       |                            |       |   |   |   |   |
| Direct operating costs                     |       | 46.0                                   |       | 47.4                            |       | 46.8 |   | 46.5 |   |
| Salaries, benefits and other personnel expenses |       | 21.2                                   |       | 19.3                            |       | 21.4 |   | 19.4 |   |
| Advertising, marketing and promotion costs      |       | 6.5                                    |       | 4.9                             |       | 5.9 |   | 5.2 |   |
| Other general and administrative costs          |       | 9.4                                    |       | 7.0                             |       | 10.4 |   | 6.8 |   |
| Depreciation and amortization                   |       | 4.5                                    |       | 4.8                             |       | 4.7 |   | 4.5 |   |
| Settlement (gains) and other losses             |       | —                                 |       | —                          |       | (6.2 | ) | 2.1 |   |
| Total operating expenses                        |       | 87.6                                   |       | 83.4                            |       | 83.0 |   | 84.5 |   |
| Operating income                                |       | 12.4                                   |       | 16.6                            |       | 17.0 |   | 15.5 |   |
|                                            |       |                                   |       |                            |       |   |   |   |   |
| **Other Income (Expense)**                      |       |                                   |       |                            |       |   |   |   |   |
| Interest income                                 |       | —                                 |       | 0.1                             |       | 0.1 |   | — |   |
| Interest expense                                |       | (2.3                                   | )          | (1.4                            | )          | (2.5 | ) | (1.5 | ) |
| Loss on extinguishment of debt                  |       | —                                 |       | (1.1                            | )          | — |   | (0.4 | ) |
| Total other expense                             |       | (2.3                                   | )          | (2.4                            | )          | (2.4 | ) | (1.9 | ) |
| Income before income taxes                      |       | 10.1                                   |       | 14.2                            |       | 14.6 |   | 13.6 |   |
| Provision for income taxes                      |       | 3.7                                    |       | 4.8                             |       | 5.7 |   | 5.2 |   |
| Net income                                      |       | 6.4                                    | %          | 9.4                             | %          | 8.9 | % | 8.4 | % |

 

**Comparison of Three Months Ended September 30,2009 and 2010 (unaudited)**

 

***Operating Revenues***

 

*OperatingRevenues* — Our operatingrevenues totaled $68.2 million in the three months ended September 30,2010, an increase of $12.2 million, or 21.9%, from the comparable period in2009. Service fee revenue represented approximately 78.6% of our revenue forthe three months ended September 30, 2010 with the balance of our revenueconsisting of interchange. Service fee revenue increased $8.1 million, or17.9%, from $45.5 million in the three months ended September 30, 2009 to$53.6 million in the comparable period in 2010. The substantial portion of theincrease in service fee revenue was driven by an increase in transaction volumeresulting from a 24.6% increase in the average number of active cardsoutstanding during the three months ended September 30, 2010 compared tothe same period in the prior year. To a lesser extent, service fee revenueincreased due to the introduction of new products to our cardholder base andincreased use of the overdraft feature offered to some of our cardholdersthrough our issuing banks. These increases in service fee revenue were offsetby modest declines in revenue generated by customer service activities andother revenue.

 

Interchangerevenue represented approximately 21.4% of our operating revenues for the threemonths ended September 30, 2010. Interchange revenue increased $4.1 million, or 39.0%, from $10.5 millionin the three months ended September 30, 2009 to $14.6 million in thecomparable period in 2010. The increase in interchange revenue was drivenprimarily by the increase in transaction volume.

 

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Ourtotal operating revenues of $68.2 million in the three months ended September 30,2010 were comprised of $66.8 million related to our GPR cards and the remaining$1.4 million related to our gift cards. Our GPR card related revenues increasedby $14.0 million, or 26.4%, from the comparable period in 2009. Our gift cardrelated revenues decreased by $1.7 million, or 54.9%, from the comparableperiod in 2009 as a result of our decision in 2008 to focus primarily on ourcore GPR card product and to cease marketing gift cards entirely by August 2010.

 

***Operating Expenses***

 

The following table presents the breakdown ofoperating expenses among direct operating costs, personnel costs, other generaland administrative costs, advertising and marketing costs, depreciation andamortization, and other components of operating expenses:

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**                   | ** ** | ** **              | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **September 30, 2009** | ** ** | **September 30, 2010**                   | ** ** | ** **              | ** ** |
| ** **                                          | ** ** | **Amount**                       | ** ** | **Percentage  of Total  Operating  Revenues** | ** ** | **Amount**              | ** ** | **Percentage  of Total  Operating  Revenues** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**          | ** ** | ** **                                         | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| **Operating Expenses**                              |       |                             |       |                                               |       |                    |       |   |   |   |   |
| Direct operating costs                              |       | $                                | 25,754     |                                               | 46.0       | %                       | $          | 32,364 |   | 47.4 | % | $ | 6,610 |   |
| Salaries, benefits, and other personnel  costs |       | 11,862                           |       | 21.2                                               |       | 13,149                  |       | 19.3 |   | 1,287 |   |
| Advertising, marketing, and promotion costs         |       | 3,617                            |       | 6.5                                                |       | 3,369                   |       | 4.9 |   | (248 | ) |
| Other general and administrative costs              |       | 5,234                            |       | 9.4                                                |       | 4,777                   |       | 7.0 |   | (457 | ) |
| Depreciation and amortization                       |       | 2,537                            |       | 4.5                                                |       | 3,223                   |       | 4.8 |   | 686 |   |
| Total operating expenses                            |       | $                                | 49,004     |                                               | 87.6  | %                       | $          | 56,882 |   | 83.4  | % | $ | 7,878 |   |

 

*DirectOperating Costs* — Our directoperating costs were $32.4 million in the three months ended September 30,2010, an increase of $6.6 million, or 25.7%, from the comparable period in2009. This increase was primarily the result of an increase in commissions wepaid to our distributors, an increase in ATM processing fees, and an increasein customer service costs. These costs increased primarily as a result of anincreased number of active cards and an increase in GDV in the current periodcompared to the same period in the prior year.

 

*Salaries,Benefits, and Other Personnel Costs*— Our salaries, benefits, and other personnel costs were $13.1 million in thethree months ended September 30, 2010, an increase of $1.3 million, or10.8%, from the comparable period in 2009. This increase was primarily theresult of a 4.9% increase in the average non-customer service headcount, a $0.5million increase in annual bonus expense resulting from our 2010 performance,and a $0.3 million increase in stock-based compensation. Upon completion of ourinitial public offering, we granted approximately 0.6 million stock options andthe vesting of certain outstanding options and shares of restricted stock waseither triggered or accelerated according to the terms of the underlyingagreements.  As a result, we expect stock-basedcompensation to increase in future periods as we begin to recognize expenseassociated with the option grants and triggered vesting, and recognize theexpense impact of the accelerated options and awards over a shorter period oftime.

 

*Advertising,Marketing, and Promotion Costs*— Our advertising, marketing, and promotion costs were $3.4 million in thethree months ended September 30, 2010, a decrease of $0.2 million, or6.9%, from the comparable period in 2009. This decrease was primarily the resultof a decrease in online marketing costs.

 

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*Other General and Administrative Costs* — Our other general and administrative costs were $4.8 million in thethree months ended September 30, 2010, a decrease of $0.5 million, or8.7%, from the comparable period in 2009. This decrease was primarily theresult of a $0.5 million decline in legal and other professional expenses.

 

*Depreciationand Amortization* — Our depreciationand amortization costs were $3.2 million in the three months ended September 30,2010, an increase of $0.7 million, or 27.0% from the comparable period in 2009.This increase was primarily the result of significant investments inoperational and financial infrastructure software that were placed in servicein the second half of 2009 and first half of 2010.

 

***Other Income (Expense)***

 

Our other expense was $1.6 million in thethree months ended September 30, 2010, an increase of $0.3 million, or25.4% from the comparable period in 2009. This increase was the result of a $0.7 million loss on the earlyextinguishment of our prior credit facility, which was partially offset by a$0.3 million decrease in interest expense resulting from decreasingaverage-debt balances as we continued to pay down our existing debt. In September 2010,we extinguished our prior credit facility and entered into a new creditfacility with a syndicate of banks with SunTrust Bank as administrative agent.The initial borrowings under the new credit facility of $58.5 million were usedto repay in full the outstanding indebtedness under our prior credit facilityand $1.5 million of debt issuance costs associated with the new creditfacility, which are being amortized over the 5-year term of the new creditfacility. The $0.7 million loss recognized in the three months ended September 30,2010 was related to our write-off of the remaining capitalized debt issuancecosts associated with the prior credit facility. See “Note 10 —Debt” to the condensed consolidatedfinancial statements included in this report for a discussion of the terms ofour new credit facility.

 

***Income Tax Expense***

 

The following table presents the breakdown ofour effective tax rate among federal, state, and other:

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                             | ** ** | **2010** | ** ** |
| ** **                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| U.S. federal income tax                    |       | 35.0                                                 | %          | 35.0 | % |
| State income taxes, net of federal benefit |       | 4.6                                                  |       | 3.6 |   |
| Other                                      |       | (3.0                                                 | )          | (4.5 | ) |
| Income tax expense                         |       | 36.6                                                 | %          | 34.1 | % |

 

Ourtotal income tax expense was $3.3 million during the three months ended September 30,2010, an increase of $1.2 million from the same period in 2009, which wasprimarily the result of a period-over-period increase in our taxableincome.  Our effective tax rate decreasedby approximately 2.5% from the 3 months ended September 30, 2009 to the comparableperiod in 2010 primarily due to discrete items recorded in the three monthsended September 30, 2010 including the benefit for a research anddevelopment tax credit claimed on our 2009 U.S. Corporation Income Tax Return.

 

**Comparison of Nine Months Ended September 30,2009 and 2010 (unaudited)**

 

***Operating Revenues***

 

Ouroperating revenues totaled $205.2 million in the nine months ended September 30,2010, an increase of $39.6 million, or 23.9%, from the comparable period in2009. Service fee revenue represented approximately 78.6% of our revenue forthe nine months ended September 30, 2010 with the balance of our revenueconsisting of interchange.  Service feerevenue increased $27.1 million, or 20.2%, from $134.1 million in the ninemonths ended September 30, 2009 to $161.2 million in the comparable periodin 2010.  The substantial portion of theincrease in service fee revenue was driven by an increase in transaction volumeresulting from a 24.4% increase in the average number of active cards outstandingduring the nine months ended September 30, 2010 compared to the sameperiod in the prior year.  To a lesserextent, service fee

 

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revenueincreased due to the introduction of new products to our cardholder base andincreased use of the overdraft feature offered to some of our cardholdersthrough our issuing banks.  Theseincreases in service fee revenue were offset by modest declines in revenuegenerated by customer service activities and other revenue.

 

Interchangerevenue represented approximately 21.4% of our operating revenues for the ninemonths ended September 30, 2010. Interchange revenue increased $12.5 million, or 39.7%, from $31.5million in the nine months ended September 30, 2009 to $44.0 million inthe comparable period in 2010. The increase in interchange revenue was drivenprimarily by the increase in transaction volume.

 

Ourtotal operating revenues of $205.2 million in the nine months ended September 30,2010 were comprised of $199.7 million related to our GPR cards and theremaining $5.5 million related to our gift cards. Our GPR card related revenuesincreased by $44.7 million, or 28.9%, from the comparable period in 2009. Ourgift card related revenues decreased by $5.2 million, or 48.4%, from thecomparable period in 2009 as a result of our decision in 2008 to focusprimarily on our core GPR card product and to cease marketing gift cards entirelyby August 2010.

 

***Operating Expenses***

 

The following table presents the breakdown ofoperating expenses among direct operating costs, personnel costs, other generaland administrative costs, advertising and marketing costs, depreciation andamortization, and other components of operating expenses:

 
| ** **                                    | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**                    | ** ** | ** **              | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **September 30, 2009** | ** ** | **September 30, 2010**                   | ** ** | ** **              | ** ** |
| ** **                                    | ** ** | **Amount**                       | ** ** | **Percentage  of Total  Operating  Revenues** | ** ** | **Amount**              | ** ** | **Percentage  of Total  Operating  Revenues** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **(in thousands)**          | ** ** | ** **                                         | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|                                          |       |                             |       |                                               |       |                    |       |   |   |   |   |
| **Operating Expenses**                        |       |                             |       |                                               |       |                    |       |   |   |   |   |
| Direct operating costs                        |       | $                                | 77,580     |                                               | 46.8       | %                       | $          | 95,381 |   | 46.5 | % | $ | 17,801 |   |
| Salaries, benefits, and other personnel costs |       | 35,419                           |       | 21.4                                               |       | 39,732                  |       | 19.4 |   | 4,313 |   |
| Advertising, marketing, and promotion costs   |       | 9,790                            |       | 5.9                                                |       | 10,738                  |       | 5.2 |   | 948 |   |
| Other general and administrative costs        |       | 17,209                           |       | 10.4                                               |       | 13,865                  |       | 6.8 |   | (3,344 | ) |
| Depreciation and amortization                 |       | 7,681                            |       | 4.7                                                |       | 9,298                   |       | 4.5 |   | 1,617 |   |
| Settlement (gains) and other losses           |       | (10,229                          | )          | (6.2                                               | )          | 4,300                   |       | 2.1 |   | 14,529 |   |
| Total operating expenses                      |       | $                                | 137,450    |                                               | 83.0       | %                       | $          | 173,314 |   | 84.5 | % | $ | 35,864 |   |

 

*DirectOperating Costs* — Our directoperating costs were $95.4 million in the nine months ended September 30,2010, an increase of $17.8 million, or 22.9%, from the comparable period in2009. This increase was primarily the result of an increase in commissions wepaid to our distributors, an increase in ATM processing fees, and an increasein customer service costs. These costs increased primarily as a result of anincreased number of active cards and an increase in GDV in the current periodcompared to the same period in the prior year.

 

*Salaries,Benefits, and Other Personnel Costs*— Our salaries, benefits, and other personnel costs were $39.7 million in thenine months ended September 30, 2010, an increase of $4.3 million, or12.2%, from the comparable period in 2009. This increase was primarily theresult of a 5.8% increase in non-customer service headcount, a $1.6 millionincrease in annual bonus expense resulting from our 2010 performance and a $1.0million increase in stock-based compensation. Upon completion of our initialpublic offering, we granted approximately 0.6 million stock options and thevesting of

 

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certainoutstanding options and shares of restricted stock was either triggered oraccelerated according to the terms of the underlying agreements.  As a result, we expect stock-basedcompensation to increase in future periods as we begin to recognize expenseassociated with the option grants and triggered vesting, and recognize theexpense impact of the accelerated options and awards over a shorter period oftime.

 

*Advertising,Marketing, and Promotion Costs*— Our advertising, marketing, and promotion costs were $10.7 million in thenine months ended September 30, 2010, an increase of $0.9 million, or9.7%, from the comparable period in 2009. This period-over-period increase wasprimarily the result of a $0.2 million increase in marketing costs related toour direct-to-consumer and online marketing programs, as well as an increase inamounts paid for sales incentives programs with our retail distributors andother advertising expenses.

 

*OtherGeneral and Administrative Costs*— Our other general and administrative costs were $13.9 million in the ninemonths ended September 30, 2010, a decrease of $3.3 million, or 19.4%,from the comparable period in 2009. This decrease was primarily the result of a$1.6 million decline in legal and other professional expenses as well as a $1.4million decline in non-capitalizable IT professional service expenses resultingfrom the completion of significant financial infrastructure softwaredevelopment in 2009.

 

*Depreciationand Amortization* — Our depreciationand amortization costs were $9.3 million in the nine months ended September 30,2010, an increase of $1.6 million, or 21.1% from the comparable period in 2009.This increase was primarily the result of significant investments inoperational and financial infrastructure software that were placed in servicein the second half of 2009 and first half of 2010.

 

*Settlement(Gains) and Other Losses* — Werecognized $10.2 million of settlement gains in the nine months ended September 30,2009, which related to $9.0 million of recoveries of excess funds from ourissuing banks for fee and chargeback recoveries and $1.2 million resulting fromthe MPower litigation settlement. During the nine months ended September 30,2010, we recognized a $3.5 million loss related to a patent infringementdispute and a $0.8 million contingent loss related to a contractual dispute with a vendor.

 

***Other Income (Expense)***

 

Our other expense was $3.7 million in the ninemonths ended September 30, 2010, a decrease of $0.4 million, or 9.5% fromthe comparable period in 2009.  Thisdecrease was primarily the result of a $1.1 million decrease in net interestexpense, which was primarily the result of decreasing average-debt balances aswe continued to pay down our existing debt, partially offset by a $0.7 millionloss on the early extinguishment of our prior credit facility. In September 2010,we extinguished our prior credit facility and entered into a new creditfacility with a syndicate of banks with SunTrust Bank as administrative agent.The initial borrowings under the new credit facility of $58.5 million were usedto repay in full the outstanding indebtedness under our prior credit facilityand $1.5 million of debt issuance costs associated with the new creditfacility, which are being amortized over the 5-year term of the new creditfacility. The $0.7 million loss recognized in the nine months ended September 30,2010 was related to our write-off of the remaining capitalized debt issuancecosts associated with the prior credit facility. See “Note 10 —Debt” to the condensed consolidatedfinancial statements included in this report for a discussion of the terms ofour new credit facility.

 

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***Income Tax Expense***

 

The following table presents the breakdown ofour effective tax rate among federal, state, and other:

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                            | ** ** | **2010** | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| U.S. federal income tax                    |       | 35.0                                                | %          | 35.0 | % |
| State income taxes, net of federal benefit |       | 3.1                                                 |       | 4.0 |   |
| Other                                      |       | 1.1                                                 |       | (0.8 | ) |
| Income tax expense                         |       | 39.2                                                | %          | 38.2 | % |

 

Our total income tax expense was $10.8 millionduring the nine months ended September 30, 2010, an increase of $1.3million from the same period in 2009, which was primarily the result of aperiod-over-period increase in our taxable income. Our effective tax ratedecreased by approximately 1% from the nine months ended September 30,2009 to the comparable period in 2010 primarily due to discrete items recordedin the nine months ended September 30, 2010 including the benefit for aresearch and development tax credit claimed on our 2009 U.S. Corporation IncomeTax Return.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cash flowfrom our operating activities and access to borrowings under our revolvingcredit facility.

 
| ** **                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**          | ** ** |
| ** **                                | ** ** | **2009**                        | ** ** | **2010** | ** ** |
| ** **                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net cash provided by operating activities |       | $                               | 26,529     |   | $ | 34,272 |   |
| Net cash used by investing activities     |       | (10,501                         | )          | (8,291 | ) |
| Net cash used by financing activities     |       | (22,687                         | )          | (20,058 | ) |
| Net change in cash and cash equivalents   |       | $                               | (6,659     | ) | $ | 5,923 |   |

 

***Cash Flows from OperatingActivities***

 

During the nine months ended September 30,2010, our operating activities provided $34.3 million of cash resulting from$17.4 million of net income, increased by $18.7 million of non-cash adjustmentsto net income and decreased by $1.8 million in cash used by changes inoperating assets and liabilities. The $18.7 million adjustment to net incomefor non-cash items primarily relates to $9.3 million of depreciation andamortization expense, $5.9 million of provision for cardholder losses, $4.4million of stock-based compensation expense, $0.3 million of debt issuance costamortization, and a $0.7 million loss related to the write-off of capitalizeddebt issuance costs in connection with the early extinguishment of our priorcredit facility, offset by a $2.0 million increase in deferred income taxes.The $1.8 million in cash used by changes in operating assets and liabilitieswas primarily the result of $4.7 million of write-offs flowing through ourcardholders’ reserve, a $0.6 million increase in other long-term assets, a $1.1million increase in accounts receivable, and a $1.0 million increase in othercurrent assets. These items were offset by a $3.6 million decrease in accountspayable and accrued expenses and a $2.5 million decrease in income tax payable.

 

The $7.7 million year-over-year increase inoperating cash flows from the nine months ended September 30, 2009 to thenine months ended September 30, 2010 relates to a $2.8 million increase innet income, a $4.6 million increase in non-cash adjustments, and a $0.4 milliondecrease in cash used by changes in operating assets and liabilities.

 

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***Cash Flows from InvestingActivities***

 

Investing activities used $8.3 million of cashfor the nine months ended September 30, 2010, which primarily related to$5.1 million of cash used for investing activities related to purchases ofproperty and equipment.  In addition, wemade a $3.2 million investment in Meta Financial Group, Inc., the holdingcompany of one of our issuing banks, MetaBank. Cash used by investing activities for the nine months ended September 30,2009 was $10.5 million, which was exclusively caused by additions to propertyand equipment.

 

***Cash Flows from FinancingActivities***

 

Financing activities used $20.1 million ofcash for the nine months ended September 30, 2010, primarily related to $6.5 millionin scheduled debt payments and a $9.0 million revolving debt payment. In September 2010we entered into a new credit facility with a syndicate of banks with SunTrustBank as administrative agent. The initial borrowings under this new creditfacility of $58.5 million were used to repay in full the $56.3 millionoutstanding indebtedness under our prior credit facility, $0.7 million ofaccrued interest, and $1.5 million of debt issuance costs associated with thenew credit facility. See “Note 10 — Debt” to thecondensed consolidated financial statements included in this report for adiscussion of the terms of our new credit facility.

 

The remainder of the cash used in financingactivities for the nine months ended September 30, 2010 was comprised of a$5.7 million repurchase of treasury stock, and $0.5 million of cash from theexercise of common stock options. For the nine months ended September 30,2009, financing activities used $22.7 million of cash primarily for payment ofthe remaining $5.0 million portion of the $30.0 million dividend declared in2008 and $17.0 million in term loan and revolving debt payments.

 

**Off-Balance Sheet Arrangements**

 

Ouroff-balance sheet arrangements are comprised of settlement indemnifications andoverdraft guarantees with our issuing banks. We enter into operating leases,purchase orders, and other commitments in the ordinary course of business asdiscussed below and reflected in our contractual obligations and commitments table.

 

Asignificant portion of our business is conducted through our retaildistributors that provide load and reload services to our cardholders at theirretail locations. Members of our distribution and reload network collect ourcardholders’ funds and remit them by electronic transfer directly to ourissuing banks for deposit in the cardholder accounts. We do not take possessionof our cardholders’ funds at any time during the settlement process. Ourissuing banks typically receive our cardholders’ funds no earlier than threebusiness days after they are collected by the retailer. If any retailer failsto remit our cardholders’ funds to our issuing banks, we typically reimburseour issuing banks for such funds. We manage the settlement risk associated withthis process through a formalized set of credit standards, limiting loadvolumes for certain retailers and requiring certain retailers to maintaindeposits on account, and by typically maintaining a right of offset ofcardholders’ funds against commissions payable to retailers. As of September 30,2010, our estimated gross settlement exposure was $12.2 million.

 

Ourcardholders can in some circumstances incur charges in excess of the fundsavailable in their card accounts, and are liable for the resulting overdrawnaccount balance. While we generally decline authorization attempts for amountsthat exceed the available balance in a cardholder’s account, the application ofcard association and network organization rules and regulations, thetiming of the settlement of transactions and the assessment of subscription,maintenance or other fees, among other things, can result in overdrawn cardaccounts. We also provide, as a courtesy and at our discretion, certaincardholders with a ‘‘cushion’’ which allows them to overdraw their cardaccounts. In addition, eligible cardholders may enroll in our issuing banks’overdraft protection programs pursuant to which our issuing banks fundtransactions that exceed the available balance in their card accounts. We areresponsible to our issuing banks for any losses associated with these overdrawnaccount balances. As of September 30, 2010, our reserve intended to coverthe risk that we may not recover our cardholders’ overdrawn account balanceswas approximately $2.8 million. As of September 30, 2010, our cardholders’overdrawn account balances totaled $6.1 million.

 

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**Contractual Obligations and Commitments**

 

In September 2010, we entered into a newcredit facility with a syndicate of banks with SunTrust Bank as administrativeagent. The initial borrowings under this new credit facility of $58.5 millionwere used to repay in full the $56.3 million outstanding indebtedness under ourprior credit facility and $1.5 million of debt issuance costs associated withthe new credit facility. See “Note 10 — Debt” to the condensed consolidatedfinancial statements included in this report for a discussion of the terms ofour new credit facility.

 

There were no other significant changes to ourcontractual obligations and commitments during the three months ended September 30,2010.

 

**Significant Accounting Policies and CriticalEstimates**

 

We prepare our consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America, or U.S. GAAP. In many cases, the accounting treatmentof a particular transaction is specifically dictated by U.S. GAAP and does notrequire management’s judgment in its application, while in other casesmanagement’s judgment is required in selecting among available alternativeaccounting standards that allow different accounting treatment for similartransactions. The preparation of consolidated financial statements alsorequires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenue, costs and expenses and related disclosures. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. Accordingly, actualresults could differ significantly from the estimates made by our management.To the extent that there are differences between our estimates and actual results,our future financial statement presentation, financial condition, results ofoperations and cash flows will be affected. We believe that the accountingpolicies discussed below are critical to understanding our historical andfuture performance, as these policies relate to the more significant areasinvolving management’s judgments and estimates.

 

***Revenue Recognition***

 

We generate revenue from compensation for theservices we provide to our issuing banks resulting from service fees andinterchange revenue. Revenue is recognized when there is persuasive evidence ofan arrangement, services have been rendered, the price is fixed or determinableand collectability is reasonably assured.

 

Our cardholders are charged fees in connection withthe products and services we provide, as follows:

 

·                  Transactions — Cardholders are typicallycharged a fee for each PIN and signature-based purchase transaction made usingtheir GPR cards, unless the cardholder is on a monthly or annual service plan,in which case the cardholder is instead charged a monthly or annualsubscription fee, as applicable. Cardholders are also charged fees for ATMwithdrawals and other transactions conducted at ATMs.

 

·                  Customer Service and Maintenance —Cardholders are typically charged fees for balance inquiries made through ourcustomer service. Cardholders are also charged a monthly maintenance fee aftera specified period of inactivity.

 

·                  Additional Products and Services —Cardholders are charged fees associated with additional products and servicesoffered in connection with certain of our GPR cards, including overdraftprotection through our issuing banks, a variety of bill payment options andcard-to-card transfers of funds through our customer service.

 

·                  Other — Cardholders are charged fees inconnection with the activation of our GPR cards and gift cards at retailers.

 

Revenue resulting fromthe service fees charged to our cardholders described above is recognized whenthe fees are charged because the earnings process is substantially complete,except for revenue resulting from the activation of our cards and annualsubscription fees. Revenue resulting from the activation of our cards isrecognized ratably, net of commissions paid to our distributors, over theaverage account life, which is approximately one year for our GPR cards andthree months for our gift cards. Revenue resulting from annual subscriptionfees is recognized ratably over the annual period to which the fees relate.

 

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Our revenues also include fees charged toretail distributors in connection with the reload of our GPR cards. Revenueresulting from the reload of our GPR cards is recognized when the fee ischarged.

 

Our revenues also include fees charged inconnection with program management and processing services we provide forprivate-label programs, as well as fees charged to one of our issuing banksbased on interest earned on cardholder funds. Under our current arrangementwith such issuing bank, we would only be entitled to receive interest oncardholder funds if market interest rates rose significantly above certainspecified levels. Revenue resulting from these fees is recognized when we havefulfilled our obligations under the underlying service agreements.

 

We earn interchange revenues from a portion ofthe interchange fees remitted by merchants when cardholders make purchasetransactions using our prepaid debit cards. Interchange fees are fixed by thecard associations and network organizations. Interchange revenues arerecognized net of sponsorship, licensing and processing fees charged by thecard associations and network organizations for services they provide inprocessing purchase transactions routed through their networks. Interchangerevenue is recognized during the period that the purchase transactions occur.

 

***Stock-Based Compensation***

 

We have one stock-based employee compensationplan. Through December 31, 2007, we used the Black-Scholes option pricingmodel for determining the estimated fair value for stock-based awards.Beginning in January 2008, we have used the Binomial Lattice model fordetermining the estimated fair value for stock-based awards. We determined thismodel better reflects the characteristics of the employee share option inestimating fair value, particularly in light of the complexity of performanceawards granted in 2008 and 2009. We measure the fair value of restricted stockawards at the estimated fair value of the common stock on the date of grant. Werecognize compensation expense for both types of awards on a straight-linebasis over the requisite service period, net of estimated forfeitures. Weconsider many factors when estimating expected forfeitures, including types ofawards, employee class and historical experience. We present excess taxbenefits from the exercise of stock options, if any, as financing cash flows.

*** ***

***Goodwill***

 

Goodwill represents the excess of the purchaseprice of an acquired company over the fair value of assets acquired andliabilities assumed. We evaluate goodwill and intangible assets with indefinitelives for impairment annually or at an interim period if events occur orcircumstances indicate it is more likely than not that the carrying valueexceeds the fair value of the associated reporting unit. We assign goodwill toour reporting units for the purpose of impairment testing. The first step ofthe impairment test is to compare the estimated fair value of the respectivereporting unit with its carrying value. If the carrying value is less than fairvalue, no indication of impairment exists. If the carrying value is greaterthan fair value, a second step in the impairment test is performed to determinethe implied fair value of goodwill and the amount of the impairment loss, ifany.

 

***Cardholders’ Reserve***

 

We are exposed to transaction losses due tocardholder and other losses resulting from cardholder activity, as well asnon-performance of third parties. We have established a cardholders’ reservefor estimated losses arising from processing customer transactions, debit cardoverdrafts, chargebacks for unauthorized card use, and merchant-relatedchargebacks due to non-delivery of goods or services. We establish thesereserves based upon historical loss and recovery rates, and cardholder activityfor which specific losses can be identified. We charge off the balance of thesereceivables at 90 or 180 days, depending on the nature of the receivable andtype of loss. Establishing the reserve for transaction losses is an inherentlyuncertain process, and ultimate losses may vary from the current estimates. Weregularly update our reserve estimate as new facts become known and eventsoccur that may impact the settlement or recovery of losses.

 

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***Income Taxes***

 

We recognize tax benefits or expenses on thetemporary difference between the financial reporting and tax bases of ourassets and liabilities. We measure deferred tax assets and liabilities usingstatutory based tax rates expected to apply to taxable income in the years inwhich we expect those temporary differences to be recovered or settled. We arerequired to adjust our deferred tax assets and liabilities in the period inwhich tax rates or the provisions of the income tax laws change. Valuationallowances are established when necessary to reduce deferred tax assets to theamount for which we believe recovery is more likely than not. We classifyinterest and penalties associated with uncertain tax positions as a componentof income tax expense.

 

***Recent Accounting Pronouncements***

 

InJanuary 2010, the FASB issued guidance on fair value measurements anddisclosures to require new disclosures related to transfers into and out ofLevels 1 and 2 of the fair value hierarchy and additional disclosurerequirements related to Level 3 measurements. The guidance also clarifiesexisting fair value measurement disclosures about the level of disaggregationand about inputs and valuation techniques used to measure fair value. Theadditional disclosure requirements are effective for the first reporting periodbeginning after December 15, 2009, except for the additional disclosurerequirements related to Level 3 measurements, which are effective for fiscalyears beginning after December 15, 2010. The adoption of the additionalrequirements is not expected to have a material impact on the consolidatedfinancial statements.

 

InFebruary 2010, the FASB issued an amendment to the guidelines onaccounting for subsequent events. The amendment clarifies that an SEC filer isrequired to evaluate subsequent events through the date that the financialstatements are issued, but that SEC filers are not required to disclose thedate through which subsequent events have been evaluated. The amendment waseffective upon issuance and did not have an impact on the consolidatedfinancial statements.

 

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**Item 3.****        ****Quantitative and Qualitative Disclosures about Market Risk**

 

Weare exposed to certain market risks as part of our ongoing business operations,primarily risks associated with fluctuating interest rates for borrowings underour new revolving credit facility entered in September 2010. Borrowingsunder our new revolving credit facility incur interest based on current marketinterest rates. We have not historically used derivative financial instrumentsto manage these market risks. As of September 30, 2010, outstandingborrowings under our new revolving credit facility were $58.5 million. A 1.0%increase or decrease in interest rates would have a $0.4 million impact on ouroperating results and cash flows for the nine months ended September 30,2010.

 

The table below presents principal amounts andrelated weighted average interest rates as of September 30, 2010 for ourrevolving credit facility:

 
| ** **                     | ** ** | **(dollars in thousands)** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| Revolving credit facility      |       | $                                    | 58,500     |   |
| Weighted average interest rate |       | 3.04                                 | %          |
|                                |            |                                      |            |  |

 

**Item 4.   Controls and Procedures**

 

***Evaluation of Disclosure Controlsand Procedures***

 

Our management, with the participation of ourChief Executive Officer and our Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as ofSeptember 30, 2010. The term “disclosure controls and procedures,” asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,means controls and other procedures of a company that are designed to ensurethat information required to be disclosed by a company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act is accumulatedand communicated to the company’s management, including its principal executiveand principal financial officers, as appropriate to allow timely decisionsregarding required disclosure. Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based on the evaluation of our disclosure controls andprocedures as of September 30, 2010, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of such date, our disclosure controls andprocedures were effective at the reasonable assurance level.

 

***Changes in Internal Control overFinancial Reporting***

 

TheSEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiringevery company that files reports with the SEC to include a management report onsuch company’s internal control over financial reporting in its annual report.In addition, our independent registered public accounting firm must attest toour internal control over financial reporting. Our first Annual Report on Form 10-Kwill not include a report of management’s assessment regarding internal controlover financial reporting or an attestation report of our independent registeredpublic accounting firm due to a transition period established by SEC rules applicableto newly public companies. Management will be required to provide an assessmentof the effectiveness of our internal control over financial reporting as ofDecember 31, 2011. We believe we will have adequate resources andexpertise, both internal and external, in place to meet this requirement.However, there is no guarantee that our efforts will result in management’sability to conclude, or our independent registered public accounting firm toattest, that our internal control over financial reporting is effective as ofDecember 31, 2011.

 

Therewere no changes in our internal control over financial reporting that occurredduring the three months ended September 30, 2010 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II.               OTHERINFORMATION**

 

**Item1.   Legal Proceedings**

 

Weare involved from time to time in various litigation and regulatory mattersarising in the ordinary course of business. The amount, if any, of our ultimateliability with respect to these matters cannot be determined, but we do notexpect the resolution of any pending matters to have a material adverse effecton our business or financial condition.

 

InOctober 2007, Alexsam, Inc. (‘‘Alexsam’’) filed suit against theCompany in the District Court of Travis County, Texas, 419th Judicial District,asserting breach of a license agreement entered into between the Company andAlexsam in 2004. The license agreement was entered into by the partiesfollowing Alexsam’s assertion and subsequent dismissal without prejudice of aclaim of patent infringement filed by Alexsam against the Company in 2003.Pursuant to the license agreement, NetSpend agreed to pay Alexsam certainroyalty payments if NetSpend changed its business process to allow NetSpendcards to be activated or recharged in a manner allegedly covered by the patentsheld by Alexsam. The parties mediated the case in both 2008 and 2010 withoutreaching a settlement. In April 2010, NetSpend filed a motion for summaryjudgment, and following a hearing, the Court denied the motion without comment.The Company is evaluating the possible outcomes related to the litigation andhas not recorded a contingent loss because it is currently unable to estimateits loss exposure, if any. The Company plans to vigorously contest Alexsam’sclaims. In November2010, the case was removed to the United States District Court — WesternDistrict of Texas.

 

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**Item 1A.                Risk Factors**

 

*Our financial condition and results of operations aresubject to various risks, uncertainties and other factors. These risks anduncertainties include, but are not limited to, the risk factors set forthbelow. The risks and uncertainties described in this report are not the onlyones we face. Additional risks and uncertainties not presently known to us orthat we currently believe are immaterial may also affect our business. If anyof the following risks, as well as other risks and uncertainties that are notyet identified or that we currently think are immaterial, actually occur, ourbusiness, financial condition and results of operations could be materially andadversely affected.*

 

***The market for prepaid debit cards andalternative financial services is highly competitive, and competition is increasingas more companies, many that are larger and have greater resources than we do,endeavor to address the needs of underbanked consumers.***

 

Themarket for prepaid debit cards and related alternative financial services ishighly competitive. We directly compete with a number of companies that marketand serve as program managers for open-loop prepaid debit cards through retailand online distribution, such as Green Dot Corporation, AccountNow, Inc.and Blackhawk Network Inc. Open-loop prepaid debit cards are those that can beused for transactions at any merchant participating in the relevant cardassociation, such as MasterCard or Visa, or network organization, such asPULSE, as opposed to a single merchant. Many of the arrangements that ourcompetitors have with large distributors are long-term and exclusive, whichwould prevent these distributors from offering our GPR cards during the termsof the arrangements. Many transaction processors, such as First DataCorporation, Total System Services, Inc., and Galileo Processing, Inc.,have prepaid platform capability and increasingly compete directly with us forprepaid program management and processing opportunities with largedistributors. We also compete with traditional providers of financial services,such as banks that offer demand deposit accounts and card issuers. Similarly,we anticipate increased competition from large retailers seeking to integratemore profitable financial services into their product offerings. For example,Wal-Mart currently offers a prepaid debit card and related services through itsstores with our direct competitors Green Dot and Total System Services as theprogram manager and the processor, respectively. We also anticipate increasedcompetition from alternative financial services providers, who are oftenwell-positioned to service the underbanked and who may wish to develop andmanage their own prepaid debit card programs. For example, in the past year,our retail distributors Pay-O-Matic and Checksmart have both introduced theirown GPR cards through their stores. While the increased desire of banks,retailers and alternative financial services providers to develop prepaid debitcard programs frequently creates new business opportunities for us, it couldalso have an adverse effect on our business, including through increased pricecompetition and loss of distributor relationships.

 

Ourability to grow our business is dependent on our ability to compete effectivelyagainst other providers of GPR cards and alternative financial services. Manyexisting and potential competitors have longer operating histories and greatername recognition than we do. In addition, many of our existing and potentialcompetitors are substantially larger than we are and may already have or coulddevelop substantially greater financial and other resources than we have. Wemay also face price competition that results in decreases in the purchase anduse of our products and services. To stay competitive, we may have to increasethe incentives that we offer to our retail distributors and decrease the pricesof our products and services, which could adversely affect our operatingresults.

 

***The majority of our revenues result fromGPR cards marketed pursuant to agreements we have entered into with a smallnumber of retail distributors. If we are unable to maintain relationships withour retail distributors on terms that are favorable to us, our business,financial condition and operating results may be materially adversely affected.***

 

Ourbusiness model substantially depends on establishing agreements with our retaildistributors, which primarily consist of alternative financial servicesproviders, as well as grocery and convenience stores and other traditionalretailers. While we continually seek to diversify the sources of our revenuesand card distribution, the majority of our revenue streams have historicallydepended on cards distributed through these retail distributors. In 2009, GPRcards distributed through our largest retail distributor, ACE Cash Express, Inc.,or ACE, accounted for approximately 37% of our revenues. In June 2010,during the course of negotiations with ACE regarding possible modifications toour distribution agreement, ACE initiated arbitration against us allegingbreach of our agreement based on certain activities of our direct-to-consumerand online marketing programs and seeking, among other things, termination ofour agreement. We filed a response setting

 

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forththe reasons we believed the claims to be without merit, as well as acounterclaim. We have resolved the dispute and entered into a mutual agreementto release and dismiss with prejudice all claims in the arbitration, andreached an agreement on the terms of certain modifications to our existingdistribution agreement. In September 2010, we entered into an amendment toour distribution agreement to reflect these modifications, which we do notexpect to have a material impact on our business, financial condition oroperating results. However, ACE, or other of our retail distributors, may inthe future object to competition from our direct-to-consumer and onlinemarketing programs, and may seek modifications to our agreements or make claimsagainst us, which could have a material adverse effect on our business,financial condition and operating results.

 

Thesuccess of our business depends substantially on our ability to attract andretain retailers with a large number of locations that are convenient for ourcardholders to purchase and reload our GPR cards. In the future, some of ourretail distributors may endeavor to internally develop their own prepaid debitcard programs or enter into exclusive relationships with our competitors todistribute their products. The loss of, or a substantial decrease in revenuesfrom, one or more of our top retail distributors could have a material adverseeffect on our business and operating results. Most of our retail distributionagreements have terms ranging from three to five years and are typicallyrenewable automatically for subsequent terms of at least one year unless we orthe distributor affirmatively elect to discontinue the agreement within therequired notice period. If we want to continue a contractual relationship witha retail distributor after the expiration of the agreement, we are typicallyrequired to renegotiate the terms of the agreement upon its expiration, and insome circumstances we may be forced to modify the terms of the agreement beforeit expires. Our negotiations to renew some distribution agreements haveresulted in, and in the future may result in, financial and other terms thatare less favorable to us than the terms of the prior agreements, such as termsthat permit the distributors to market prepaid debit cards that compete withour GPR cards. We may not succeed in renewing these agreements when theyexpire, which would result in a complete loss of revenue from thesedistributors. If we are required to pay higher revenue-sharing amounts or agreeto other less favorable terms to retain our retail distributors, or we are notable to renew our relationships with our retail distributors upon theexpiration of our agreements, our business, financial condition and operatingresults would be harmed.

 

***We depend on our distributors’ sale andpromotion of our products and services, but their interests and operationaldecisions might not always align with our interests.***

 

Asignificant portion of our operating revenues are derived from our products andservices sold at the stores of our retail distributors. Our reliance on theseretail distributors means that we do not have direct control over the sales ofour cards and, as a result, our future growth is inherently unpredictable.Because we often compete with many other providers of consumer and financialproducts for placement and promotion of products in the stores of our retaildistributors, our success depends on our retail distributors and theirwillingness to promote our products and services successfully. In general, ourcontracts with these third parties allow them to exercise significantdiscretion over the placement and promotion of our products in their stores,and they could give higher priority to the products and services of otherprepaid debit card providers. In many instances, our retail distributors havegreater incentives to promote other products or services to consumers. If ourretailers do not actively and effectively promote the sale of our cards, ourgrowth will be limited and our operating results will suffer.

 

***We are subject to extensive and complexfederal and state regulation and new regulations and/or changes to existingregulations could adversely affect our business.***

 

Asan agent of, and third-party service provider to, our issuing banks, we aresubject to indirect regulation and direct audit and examination by the Officeof Thrift Supervision, or the OTS, the Office of the Comptroller of theCurrency, or the OCC, the Board of Governors of the Federal Reserve System, orthe FRB, the Georgia Department of Banking and Finance, or the GDBF, and theFederal Deposit Insurance Corporation, or the FDIC. We are also subject todirect regulation by those states in which we are licensed as a moneytransmitter.

 

Wehave historically taken the position that state money transmitter statutes donot apply to our business for a number of reasons. In the event that a stateregulatory authority were to disagree with our position that we are notrequired to be licensed in any of the states in which we are not currentlylicensed, it is possible that we, our distributors or our issuing banks couldbecome subject to regulatory enforcement or other proceedings, which could inturn have a significant

 

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adverseimpact on our business, even if we were to ultimately prevail in suchproceedings. In such event, we may have additional arguments available to usthat we should not be subject to the licensing requirements under the relevantstate money transmitter statutes, and may utilize one or more of thesearguments at such time. However, it is possible that we could be unsuccessfulin making a persuasive argument that we should not be subject to such licensingrequirements, and could be deemed to be in violation of one or more of thestate money transmitter statutes. Such failure to comply could result in the impositionof fines, the suspension of our ability to offer some or all of our prepaiddebit cards in the relevant jurisdiction, civil liability and criminalliability, each of which would likely have material adverse impact on ourrevenues.

 

OnMarch 23, 2010, the FRB issued a final rule implementingTitle IV of the Credit Card Accountability, Responsibility, and DisclosureAct of 2009, or CARD Act, which imposes requirements relating to disclosures,fees and expiration dates that are generally applicable to gift certificates,store gift cards and general-use prepaid cards. We believe that our GPR cards,and the maintenance fees charged on our GPR cards, are exempt from therequirements under this rule, as they fall within an express exclusion forcards which are reloadable and not marketed or labeled as a gift card or giftcertificate. However, this exclusion is not available if the issuer, theretailer selling the card to a consumer or the program manager promotes, evenif occasionally, the use of the card as a gift card or gift certificate. As aresult, we provide retailers with instructions and policies regarding thedisplay and promotion of our GPR cards. It is possible, however, that despiteour instructions and policies to the contrary, a retailer engaged in offeringour GPR cards to consumers could take an action with respect to one or more ofthe cards that would cause each similar card to be viewed as being marketed orlabeled as a gift card, such as by placing our GPR cards on a display whichprominently features the availability of gift cards and does not separate orotherwise distinguish our GPR cards from the gift cards. In such event, it ispossible that such GPR cards would lose their eligibility for such exclusion tothe CARD Act and the rule’s requirements, and therefore could be deemed to bein violation of the CARD Act and the rule, which could result in the impositionof fines, the suspension of our ability to offer our GPR cards, civilliability, criminal liability, and the inability of our issuing banks to applycertain fees to our GPR cards, each of which would likely have a materialadverse impact on our revenues.

 

Asthe laws applicable to our business, and those of our distributors and issuingbanks, change frequently, are often unclear and may differ or conflict betweenjurisdictions, ensuring compliance has become more difficult and costly. Anyfailure, or perceived failure, by us, our issuing banks or our distributors tocomply with all applicable statutes and regulations could result in fines,penalties, regulatory enforcement actions, civil liability, criminal liability,and/or limitations on our ability to operate our business, each of which couldsignificantly harm our reputation and have a material adverse impact on ourbusiness, results of operations and financial condition.

 

***Our retail distributors are subject toextensive and complex federal and state regulations and new regulations and/orchanges to existing regulations could adversely affect our ability to offer ourGPR cards through their locations, which in turn could have an adverse impacton our business.***

 

Aseach of our retail distributors offering prepaid cards and related servicesconducts such activity either as an agent of our issuing banks or, whereapplicable, of NetSpend in its capacity as a licensed money transmitter, we donot believe that our distributors would be required to become licensed as moneytransmitters in order to engage in such activity. However, there is a risk thata federal or state regulator will take a contrary position and initiateenforcement or other proceedings against a distributor, us or our issuingbanks, which in turn could have an adverse impact on our business, even if therelevant party were to ultimately prevail in such proceedings. In such event,the relevant party may have additional arguments available to it that theretail distributor should not be subject to the licensing requirements underthe relevant state money transmitter statutes, and may utilize one or more ofthese arguments at such time. However, it is possible that the relevant partycould be unsuccessful in making a persuasive argument that the retaildistributor should not be subject to such licensing requirements, and thereforecould be deemed to be in violation of one or more of the state moneytransmitter statutes. Such failure to comply could result in the imposition offines, the suspension of the distributor’s ability to offer some or all of ourGPR cards and related services in the relevant jurisdiction, civil liabilityand criminal liability, each of which would likely have a material adverseimpact on our revenues.

 

Ourretail distributors include a large number of companies in industries that arehighly regulated, such as alternative financial services providers. It ispossible that changes in the legal regime governing such businesses could limitthe ability of some of our retail distributors to distribute our products oradversely impact their business, and thereby have an

 

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indirectadverse impact on our business. For example, a large number of states haveeither prohibited, or imposed substantial restrictions upon, the offering of “paydayloans,” and this activity continues to draw substantial scrutiny from federaland state legislatures, regulatory authorities and various consumer groups.Furthermore, the federal financial reform legislation enacted in July 2010grants supervisory authority over entities engaged in this activity to a newConsumer Financial Protection Bureau, which is directed to promulgateregulations which may significantly impact the operations and/or viability ofvarious entities, including those engaged in the business of offering paydayloans. As a number of our retail distributors, including our largestdistributor, ACE Cash Express, are engaged in offering payday loans, furtherlegislative and regulatory restrictions which negatively impact their abilityto continue their operations could have a corresponding negative impact on ourability to offer our GPR cards through their locations, potentially resultingin a significant decline in our revenue. In addition, various states havestatutes that limit the ability of check cashers to charge a fee for cashinggovernment-issued checks.

 

***We are subject to extensive and complexfederal and state regulation relating to the distribution of our GPR cardsthrough corporate employers and new regulations and/or changes to existingregulations could adversely affect our business.***

 

Weunderstand that state banking departments, which are charged with regulatingthe business of money transmission, have traditionally taken the position thatthe offering of payroll cards does not constitute money transmission, such thatwe would not be required to obtain a state money transmission license in orderto engage in such activity. We believe that our marketing, distribution andservicing of GPR cards through corporate employers as a program manager andthird-party service provider to our issuing banks is not subject to regulationunder state money transmitter statutes as we do not handle any related consumerfunds at any time. However, there is a risk that a federal or state regulatorwill take a contrary position and initiate enforcement or other proceedingsagainst us or our issuing banks, which in turn could have an adverse impact onour business, even if we were to ultimately prevail in such proceedings. Insuch event, we may have arguments other than those described above that weshould not be subject to the licensing requirements under the relevant statemoney transmitter statutes, and may utilize one or more of these arguments atsuch time. However, it is possible that we could be unsuccessful in making apersuasive argument that we should not be subject to such licensingrequirements, and could be deemed to be in violation of one or more of thestate money transmitter statutes. Such failure to comply could result in theimposition of fines, the suspension of our ability to offer our GPR cardsthrough corporate employers in the relevant jurisdiction, civil liability andcriminal liability, each of which would likely have a material adverse impacton our revenues.

 

Theuse of payroll cards as a means for an employer to remit wages or othercompensation to its employees or independent contractors is also governed bystate labor laws related to wage payments. Most states permit the use ofpayroll cards as a method of paying wages to employees, either throughstatutory provisions allowing such use, or, in the absence of specificstatutory guidance, the adoption by state labor departments of formal orinformal policies allowing for the use of such cards. There are a few states,specifically Georgia, New Mexico and Rhode Island, which do not have statutesand regulations that specifically provide for the use of payroll cards, andhave taken the position, through the state labor department, that state lawprohibits the use of payroll cards for the purpose of remitting wages or othercompensation. Nearly every state allowing payroll cards places certainrequirements and/or restrictions on their use as a wage payment method, themost common of which involve obtaining the prior written consent of therelevant employee, limitations on payroll card fees, and disclosurerequirements. There is a risk that one or more states or state labordepartments that currently permit the use of payroll cards as a wage paymentmethod will take a contrary position, either through revised legislation,regulation or policies, as applicable, or will impose additional requirementson the provision and use of such cards, each of which could have an adverseimpact on our business.

 

OnNovember 12, 2009, the FRB amended its Regulation E, which implementsthe Electronic Fund Transfers Act, to require that financial institutionsobtain an accountholder’s consent prior to assessing any fees or charges inconnection with the payment of any consumer overdraft for any ATM or one-timedebit transaction. This amendment applies to all accounts subject toRegulation E, including payroll cards, and became effective onJuly 1, 2010. A significant amount of the revenue generated from the GPRcards we market through corporate employers historically has been attributableto overdraft fees charged on these cards. The application of these requirementsmay result in a significant decrease in our revenues attributable to our GPRcards marketed through corporate employers, as it is possible that a largenumber of our cardholders that have historically incurred overdraft chargeswill not provide their consent to continue participating in the overdraftservice.

 

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***Limitations on the amount of interchangefees that may be charged to merchants which are fixed by the card associationsand network organizations could decrease our revenues and negatively impact ourbusiness and financial performance.***

 

Amaterial portion of our operating revenues is derived from our share of thefees charged to merchants for services provided in settling transactions routedthrough the networks of the card associations and network organizations,commonly known as “interchange fees.” For the year ended December 31,2009, revenues from interchange fees represented approximately 19% of our totaloperating revenues, and we expect interchange revenues to continue to representa material percentage of our total operating revenues in the near term. Theamounts of these interchange fees are currently fixed by the card associationsand network organizations in their sole discretion. In July 2010, the U.S.Congress adopted legislation which requires the amount of interchange feescharged to merchants in connection with transactions utilizing traditionaldebit cards and certain prepaid cards issued by financial institutions that,together with their affiliates, have assets of $10 billion or more, to bereasonable and proportionate to the costs of the underlying transactions. Thenew legislation also generally gives the FRB the power to regulate the amountof such interchange fees and require FRB to promulgate regulations establishingstandards for determining when interchange fees are reasonable andproportionate to the costs of the underlying transactions. While general useprepaid debit cards are expressly covered by the legislation, general purposereloadable prepaid cards are expressly exempted using a definition that webelieve applies to our GPR cards. While we believe that the law’s exemption ofGPR cards and small issuing banks, such as MetaBank and Inter National Bank,will apply to our GPR card programs, it remains possible that if the FRBexercises its powers and sets the limits below the current rates of interchangefees, the interchange rates applicable to transactions conducted by ourcardholders could be impacted through action of the card associations, networkorganizations and banks that set interchange rates, which would decrease ourrevenues and profit and could have a material adverse effect on our financialcondition and results of operations. In addition, the exemption of GPR cardsfrom the legislation is not available if, after the one year anniversary of thelaw’s effective date, the GPR card can be charged an overdraft fee or a fee forthe first ATM withdrawal per month at a designated ATM network. Depending onthe manner in which these limitations are clarified in the implementingregulations, and whether we elect after the effectiveness of such rules tocharge such fees, these limitations may in the future limit our ability tobenefit from interchange regulation exemptions for GPR cards, or decrease theopportunity to earn additional revenue from overdraft or ATM fees we mightotherwise elect to charge. Additionally, even if some or all of our GPR cardswere exempt from any such interchange fee restrictions, it is possible thatsuch an exemption may be difficult to preserve if the relevant cardassociations or network organizations do not provide any mechanism that enablesthe recognition of the exemption in processing transactions, which could resultin a material adverse impact on our revenues.

 

***Changes in applicable laws and regulationsmay increase our costs of operation, decrease our operating revenues andconstrain the terms and conditions of our products and services.***

 

Stateand federal legislatures and regulatory authorities have become increasinglyfocused upon the regulation of the financial services industry, and continue toadopt new legislation which could result in significant changes in theregulatory landscape for financial institutions (such as our issuing banks) andother financial services companies (including our business). For example,changes in the way we or our issuing banks are regulated, such as the changesunder the federal financial reform legislation enacted in July 2010related to the consolidation of the OTS into the OCC and the establishment of afederal Consumer Financial Protection Bureau with oversight over us and ourproducts and services, could expose us to increased regulatory oversight andmore burdensome regulation of our business and therefore have an adverse impacton our revenue. Additionally, changes to the disclosures which must be providedwith our products and services, or limitations placed on the fees that may beapplied to our products and services or the interchange rates charged inconnection with the use of our prepaid debit cards, could negatively impact ourfinancial position by increasing our costs and reducing our revenue.Furthermore, states may adopt statutes which could limit the application ofcertain fees or otherwise increase the costs incurred, or negatively impact therevenue received, by our issuing banks in connection with the provision of ourprepaid debit cards, which would have an indirect adverse impact on ourrevenue. Finally, if the federal or a state government imposes additionallegislative or regulatory requirements on us, our issuing

 

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banksor our distributors, or prohibits or limits our activities as currently conducted,we may be required to modify or terminate some or all of our products andservices offered in the relevant jurisdiction or certain of our issuing banksmay terminate their relationship with us, which in turn could adversely affectour business. For example, we were recently informed by MetaBank that OTS hadissued a supervisory directive directing MetaBank to discontinue offering itsiAdvance product based on a determination by OTS that MetaBank engaged inunfair or deceptive acts or practices in connection with its operation of theiAdvance program.

 

***Our card programs are subject to strictregulation under federal law regarding anti-money laundering and anti-terroristfinancing. Failure to comply with such laws, or abuse of our card programs forpurposes of money laundering or terrorist financing, could have a materialadverse impact on our business.***

 

Provisionsof the USA PATRIOT Act, the Bank Secrecy Act and other federal law imposesubstantial regulation of financial institutions designed to prevent use offinancial services for purposes of money laundering or terrorist financing.Increasing regulatory scrutiny of our industry with respect to money launderingand terrorist financing matters could result in more aggressive enforcement ofsuch laws or more onerous regulation, which could have a material adverseimpact on our business. In addition, abuse of our prepaid card programs forpurposes of money laundering or terrorist financing, notwithstanding ourefforts to prevent such abuse through our regulatory compliance and riskmanagement programs, could cause reputational or other harm that would have amaterial adverse impact on our business.

 

OnJune 21, 2010, the Financial Crimes Enforcement Network of the U.S.Department of the Treasury, or FinCEN, issued a notice of proposed rulemakingregarding the applicability of the Bank Secrecy Act’s anti-money launderingprovisions to prepaid products and other matters related to the regulation ofmoney services businesses. This rulemaking would create additional obligationsfor entities, including our distributors, engaged in the provision and sale ofcertain prepaid products, including our prepaid debit cards, such as theobligation for sellers of prepaid debit cards to obtain identificationinformation from the purchaser at the point-of-sale. Compliance with theseobligations may result in increased compliance costs for us, our issuing banksand our distributors, and may therefore have a negative impact on theprofitability of our business. Additionally, the imposition of such obligationsupon sellers of prepaid debit cards may cause some of our distributors todetermine that they do not wish to continue offering our prepaid debit cardsfor sale or reload, which could also have a significant negative impact on ourbusiness. However, as the proposed rulemaking is subject to further comment andrevision, it is difficult to determine with any certainty what obligations thefinal rulemaking might impose or what impact they might have on our business orthat of our issuing banks or distributors.

 

Atcertain times in our history we have been registered with FinCEN as a “moneyservices business,” and therefore have been subject to certain anti-moneylaundering compliance obligations arising under the Bank Secrecy Act and itsimplementing regulations. However, we subsequently concluded that we were notrequired to be registered as a money services business, did not renew ourregistration and have requested, but not yet received, a formal written opinionfrom FinCEN to confirm our conclusion. Accordingly, while we do have certainanti-money laundering compliance obligations, these obligations arisecontractually under the agreements that we have with each of our issuing banks.It is possible that we may at some future date be required to re-register as amoney services business, whether due to a notification from FinCEN that we arerequired to register under the current requirements or new regulatoryrequirements such as those contained in the proposed rulemaking describedabove. In the event that we are required to become registered as a moneyservices business, we may become subject to additional compliance obligationsnot currently undertaken, which could result in increased costs and acorresponding decrease in our revenue.

 

***The loss of, or changes to, ourrelationships with MetaBank or our other issuing banks could adversely affectour business, results of operations and financial position.***

 

Werely on the arrangements we have with our issuing banks to provide us withcritical products and services, including the FDIC-insured depository accountstied to our GPR cards, access to the ATM networks, membership in the cardassociations and network organizations and other banking services. As ofSeptember 30, 2010, approximately 72% of our active cards were issuedthrough MetaBank. MetaBank is our preferred issuing bank and has designated usas a preferred program manager for prepaid debit cards. If our relationshipwith MetaBank deteriorates or if we lose our position as a preferred programmanager of MetaBank, it could hinder our ability to grow our business and havean adverse impact on our operating results. If any material adverse event wereto affect MetaBank or one or more of our other issuing banks,

 

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includingas a result of the recent directives issued by OTS against MetaBank, asignificant decline in their financial condition, a decline in the quality oftheir services, loss of deposits, their inability to comply with applicablebanking and financial service regulatory requirements, systems failure or theirinability to pay us fees, or if we were to lose MetaBank or one or more of ourother issuing banks as an issuing bank, we would be forced to find analternative provider of these critical banking services. Furthermore, as ourissuing banks have appointed us and our distributors as their agents forpurposes of providing services in connection with our prepaid debit cards invarious states, the termination of our relationship with one or more of ourissuing banks would force us and our distributors to cease offering prepaiddebit cards and related services to the extent that we rely on our status as anagent of our issuing banks in order to do so. We may not be able to find areplacement bank on terms that are acceptable to us or at all. Any change inour issuing banks could disrupt our business or result in arrangements with newbanks that are less favorable to us than those we have with our existingissuing banks, either of which could have a material adverse impact on ourresults of operations and our financial condition. In addition, under ourarrangements with our issuing banks, we have agreed upon sharing of certainrevenues, costs and expenses. Changes in these arrangements could have amaterial adverse impact on our results of operations.

 

***Our future growth and financial successwill be harmed if there is a decline in the use of prepaid debit cards as apayment mechanism or if there is a decrease in demand for alternative financialservices.***

 

Wefocus on the marketing and sale of GPR cards and related alternative financialservices to the underbanked consumer market. Our strategic focus is dependentupon general growth in the demand for prepaid services. As the prepaidfinancial services industry matures, consumers may find prepaid financialservices to be less attractive than traditional bank solutions. Further, otheralternatives to prepaid services may develop and limit the growth of, or causea decline in the demand for, prepaid debit cards. In addition, negativepublicity in the prepaid industry may drive consumers to other financialservices providers. If the growth in demand does not increase at the rate weexpect or as some industry analysts are predicting, our ability to grow couldbe limited and our results of operations could be materially adverselyimpacted.

 

***Our profitability is substantiallydependent on the transaction, subscription and maintenance fees charged to ourcardholders, which may be negatively affected by various factors.***

 

Ourprofit margin is largely a function of the transaction, subscription andmaintenance fees charged to our cardholders. These fees are affected by anumber of factors, including:

 

·              our cardholders’perception of our ability to add value through our services;

·              the introduction ofnew products or services by us or our competitors;

·              changes in cardassociation and network organization fees;

·              the pricing policiesof our competitors; and

·              general economicconditions.

 

Ifthese fees are not maintained, our revenue will decline and we will not be ableto sustain our profit margin, which could have a material adverse effect on ourprofitability.

 

***Our business is dependent on our continuedparticipation in the card associations and network organizations, and thetermination of our participation in the card associations or networkorganizations or changes in the card association or network organization rules couldmaterially adversely affect our business.***

 

Wederive substantially all of our revenue from the compensation paid by ourissuing banks for the program management and processing services that weprovide in support of our prepaid debit cards. Because we are not a bank, weare not eligible for membership in the card associations or networkorganizations. The rules and regulations of the card associations andnetwork organizations require us to be sponsored by a bank in order to processprepaid debit card transactions and serve as a program manager or memberservice provider of our issuing banks’ prepaid debit card programs. Wecurrently participate in the card associations and network organizations as aprogram manager and third-party processor of our card programs throughsponsorship by our issuing banks. If we or one of our issuing banks fails tocomply with the rules and regulations of the card associations or networkorganizations, or we fail to comply with the applicable program requirements ofour issuing banks, the card associations and network organizations could limit,suspend or terminate our participation in the card associations and networkorganizations or levy fines against us. The 

 

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cardassociations and network organizations frequently amend their rules andregulations. If we were unable to comply with any such amended rules orregulations, or our issuing banks were unable to comply with such rules orregulations, the card associations or network organizations could limit,suspend or terminate our participation.

 

Wepay sponsorship, licensing and processing fees to card associations and networkorganizations for services they provide in processing transactions routedthrough their networks. The amounts of these fees are currently fixed by thecard associations and network organizations in their sole discretion, and aresubject to increase at any time. We may pass through to our cardholdersincreases in these fees, but competitive pressures might prevent us frompassing all or some of such increases through to our cardholders in the future.To the extent that we are unable to do so, our cost of revenues would increaseand our net income would decrease, assuming no change in transaction volumes.Any such decrease in net income could have a material adverse effect on ourfinancial condition and operating results.

 

Thetermination of our participation in the card associations and networkorganizations, or any changes in their rules and regulations or ourissuing banks’ program requirements that would impair our participation in thecard associations and network organizations, could require us to alter orsuspend processing services that we provide to the issuing banks with respectto our prepaid debit cards, which would adversely affect our business. Further,if any of our issuing banks loses its sponsorship in the card associations andnetwork organizations, and we are unable to secure another bank to sponsor usas a program manager and third-party processor with such card association ornetwork organization, we will not be able to process transactions with respectto our prepaid debit cards and our business would be adversely affected.

 

***Unauthorized disclosure of cardholder data,whether through breach of our computer systems or otherwise, could expose us toliability and protracted and costly litigation.***

 

Wecollect and store personally identifiable information about our cardholders,including names, addresses, social security numbers, driver’s license numbersand account numbers, and maintain a database of cardholder data relating tospecific transactions, including account numbers, in order to processtransactions and prevent fraud. As a result, we are required to comply with theprivacy provisions of the Gramm-Leach-Bliley Act, various other federal andstate privacy statutes and regulations, and the Payment Card Industry DataSecurity Standard, each of which is subject to change at any time. Compliancewith these requirements is often difficult and costly, and our failure, or ourdistributors’ failure, to comply may result in significant fines or civilpenalties, regulatory enforcement action, liability to our issuing banks andtermination of our agreements with one or more of our issuing banks, each ofwhich could have a material adverse effect on our financial position and/oroperations. In addition, a significant breach could result in our being prohibitedfrom processing transactions for any of the relevant card associations ornetwork organizations, including Visa, MasterCard or PULSE, which would alsohave a significant material adverse impact on our financial position and/oroperations.

 

Furthermore,if our computer systems are breached by unauthorized users, we may be subjectto liability, including claims for unauthorized purchases with misappropriatedbank card information, impersonation or similar fraud claims. We could also besubject to liability for claims relating to misuse of personal information,such as unauthorized marketing purposes, or failure to comply with lawsgoverning notification of such breaches. These claims also could result inprotracted and costly litigation. In addition, we could be subject to penaltiesor sanctions from the relevant card associations or network organizations.

 

Finally,any data breach or failure to comply with any applicable privacy requirementscould result in damage to our reputation, which could reduce the use andacceptance of our prepaid cards, cause our issuing banks or distributors tocease doing business with us, or lead to greater regulation, each of whichcould have a significant material adverse impact on our business, results ofoperations, financial position or potential for growth.

 

***The information technology systems andnetworks maintained by us and the third parties on whom we rely could fail dueto factors, including those beyond our control, which could negatively impactour existing customer relationships and our business reputation.***

 

Wedepend on the efficient and uninterrupted operation of our end-to-endoperational and technology platform, which is comprised of a complex system ofcomputers, software, data centers and networks, as well as the systems of awide variety of third parties, including our issuing banks, distributors, cardassociations, network organizations and processors,

 

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inwhich we have limited control. These systems may be prone to periodic failureand outages. Our end-to-end operational and technology platform, and the thirdparty networks and systems on which it relies, could be exposed to damage orinterruption from, among other things, fire, natural disaster, power loss,telecommunications failure, unauthorized entry and computer viruses. Ourproperty and business interruption insurance may not be adequate to compensate forall losses or failures that may occur. These failures could negatively impactour existing customer relationships and our business reputation.

 

***We and our distributors may be subject toclaims of infringement.***

 

Thetechnologies used in the payments industry are protected by a wide array ofpatents and other intellectual property rights. As a result, third parties mayassert infringement and misappropriation claims against us from time to timebased on our general business operations or the equipment, software or serviceswe use or provide. In the past, certain third parties have asserted orsuggested the possibility of asserting patent infringement claims against us.In two instances, we have entered into patent license agreements with suchthird parties. In 2003, Alexsam, Inc. asserted a claim of patentinfringement against us. Alexsam dismissed the claim without prejudice lessthan one month later pursuant to the parties’ agreement to negotiate a patentlicense agreement. We subsequently entered into a license agreement withAlexsam that gave us the option to begin using Alexsam’s patents (if we sochose) in exchange for royalties, but provided that we would not owe Alexsamroyalties for the use of our existing systems. In 2008, we received a letterfrom Ronald A. Katz Technology Licensing, L.P., or RAKTL, which containedan offer for us to acquire a license under the RAKTL portfolio of patentsrelated to certain interactive voice response technologies. In 2010, we enteredinto a release and contingent license agreement with RAKTL relating to theRAKTL portfolio of patents. Whether or not an infringement or misappropriationclaim is valid or successful, it could adversely affect our business bydiverting management’s attention and involving us in costly and time-consuminglitigation. In the event a claim of infringement against us is successful, wemay be required to pay past and future royalties to use technology or otherintellectual property rights then in use, we may be required to enter into alicense agreement and pay license fees or we may be required to stop using thetechnology or other intellectual property rights then in use. We may be unableto obtain necessary licenses from third parties at a reasonable cost or withina reasonable time. In addition, our distributors may be subject to infringementor misappropriation claims that if successful could preclude the distributorfrom distributing our products and services or cause the distributor toincrease the fees they charge us. In addition, if claims made against ourdistributors arise out of their distribution of our products and services, weare required to indemnify them against any losses. We may not be fullyprotected against all losses associated with an infringement ormisappropriation claim involving our licensors and suppliers who provide uswith the software and technology that we use in our business. In addition, anysuch suppliers may refuse to, or may be unable to, pay any damages or honortheir defense and indemnification obligations to us, which may result in ushaving to bear such losses.

 

***We have entered into outsourcing and otheragreements related to certain business operations, and any difficultiesexperienced in these arrangements could result in additional expense, loss ofcardholders and revenue or an interruption of our services.***

 

Wehave entered into outsourcing agreements with third parties to provide certaincustomer service and related support functions to our cardholder, including theoutsourcing of customer service through facilities located in Texas, Mexico andthe Philippines. As a result, we must rely on third parties over which we havelimited control to perform certain of our operations and, in certaincircumstances, interface with our cardholders. In addition, it may be difficultto continue to outsource customer support services to facilities outside of theU.S. If these third parties are unable to perform to our requirements, we maybe forced to pursue alternative strategies to provide these services, whichcould result in delays, interruptions, additional expenses and loss ofcardholders.

 

Wehave also entered into contracts with third-party vendors to provide certainservices, technology and software. In the event that these service providersfail to maintain adequate levels of support, do not provide high qualityservice, discontinue their lines of business, terminate our contractualarrangements or cease or reduce operations, we may be required to pursue newthird-party relationships, which could disrupt our operations, increase thecosts of these services, technology or software and divert management’s timeand resources. If we are unable to complete a transition to a new

 

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provideron a timely basis, or at all, we could be forced to temporarily or permanentlydiscontinue certain services, which could disrupt services to our customers andadversely affect our business, financial condition and results of operations.

 

***We are subject to risks and write-offsresulting from fraudulent activities and losses from overdrawn cardholderaccounts, which could adversely impact our financial performance and results ofoperations.***

 

Ourprepaid cards expose us to counterfeit threats through the misuse of suchcards, collusion, fraud, identity theft and systemic attacks on our systems. Anadditional threat is the theft of cards in a retail environment. Although thesestolen cards are not active and thus not able to be used, theft or attemptedmisuse of our prepaid debit cards could nonetheless cause reputational harm.While a large portion of fraudulent activity is addressed through thechargeback systems and procedures maintained by the card associations andnetwork organizations, we are often responsible for losses that result fromtransactions in small amounts that are fraudulently forced by merchants throughthe settlement systems maintained by the card associations and networkorganizations without prior authorization for which it is not economicallyfeasible to pursue chargebacks. The systems and procedures we have establishedto detect and reduce the impact of fraud may not be entirely effective and, asa result, incidents of fraud could increase in the future. Failure toeffectively manage risk and prevent fraud would increase our write-offliability and could harm our reputation, which could have an adverse effect onour operating results and financial condition.

 

Inaddition, from time to time, certain of our cardholders may attempt to utilizetheir prepaid debit cards for purchase transactions which exceed the amount offunds available in their card accounts. While we generally declineauthorization attempts for such transactions in accordance with the policiesand procedures established by our issuing banks, card accounts may becomeoverdrawn through the application of card association and network organization rules andregulations, the timing of the settlement of card transactions and theassessment of subscription, maintenance or other fees charged by our issuingbanks. We also provide certain cardholders with a “cushion” which allows themto overdraw their card accounts. In any such event, we may be liable to ourissuing banks for the resulting overdrawn account balance.

 

Finally,eligible cardholders may enroll in overdraft programs offered by certain of ourissuing banks, pursuant to which the issuing bank, in its sole discretion,funds certain prepaid debit card transactions that exceed the available balancein the relevant card account. While this is a discretionary service offered bythe issuing bank to eligible cardholders, we are responsible to our issuingbanks for any losses associated with these overdrawn account balances.

 

Wemaintain reserves intended to cover the risk that we may not recover lossesresulting from fraudulent activities and from our cardholders’ overdrawnaccount balances. The provision for these cardholder related losses resulted in$2.6 million, $2.4 million and $4.9 million of expense duringthe years ended December 31, 2007, 2008 and 2009, respectively, but ourexposure may increase above these levels for a variety of reasons, includingour failure to predict the actual recovery rate, failure to effectively managerisk, and failure to prevent fraud. Accordingly, our business, results ofoperations and financial condition could be materially and adversely affectedto the extent that we incur losses resulting from overdrawn cardholder accountsand fraudulent activity which exceed our designated reserves, or we determinethat it is necessary to increase our reserves substantially in order to addressany increased recovery risk.

 

***If any of the large retailers in ourdistribution and reload network fails to remit the cardholders’ funds theycollect in connection with the load or reload of cards to our issuing banks, wemay reimburse our issuing banks for such funds, which could have a materialadverse effect on our financial position and results of operations.***

 

Asignificant portion of our business is conducted through retailers that provideload and reload services to our cardholders at their retail locations. Membersof our distribution and reload network collect our cardholders’ funds and arecontractually required to remit them by electronic transfer directly to ourissuing banks for deposit in the cardholder accounts. Our issuing bankstypically receive our cardholders’ funds no earlier than three business daysafter they are collected by the retailer. If a retailer becomes insolvent,files for bankruptcy, commits fraud or otherwise fails to remit funds to ourissuing banks, we typically reimburse our issuing banks for such funds. Giventhe unprecedented volatility in global financial markets and the economic challengesfacing the U.S., the approaches we use to assess and monitor thecreditworthiness of our retail distributors may be inadequate, and we may beunable to detect and take steps to mitigate an increased credit risk in atimely manner. If in the future any of the large retailers in our reloadnetwork for any reason fails

 

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toremit funds to our issuing banks and we reimburse our issuing banks for suchfunds, it could have a material adverse effect on our financial position andresults of operations.

 

***The lack of a strong brand name orinability to maintain or strengthen our brand may reduce our ability to retainand attract customers, which could adversely affect our business, financialcondition and operating results.***

 

Manyof our cards are principally branded with the trademarks of our distributors.Accordingly, many of our customers do not have a strong awareness of theNetSpend brand and may not associate our products and services with us.Increasing brand awareness among distributors and ultimate consumers is animportant part of our strategy to grow our business. Developing, promoting andmaintaining our brand and image requires a consistent capital investment andexpense, and this investment in our brand and image may not be successful. Ifwe fail to develop, promote and maintain our brand and image, we may not beable to grow our customer base and our financial and operational results maysuffer.

 

***If we lose key personnel or are unable toattract additional qualified personnel as we grow, our business could beadversely affected.***

 

Wedepend on the ability and experience of a number of our key personnel who have substantialexperience with our operations, the rapidly changing payment processingindustry, other public companies and the selected markets in which we offer ourproducts and services. It is possible that the loss of the services of one or acombination of our senior executives or key managers would have an adverseeffect on our operations. Our success also depends on our ability to continueto attract, manage and retain other qualified management and technicalpersonnel as we grow, and we may be unable to attract, manage or retain suchpersonnel. Due to the competitive nature of our industry, we may also bevulnerable to successful attempts by our competitors to hire our employees.

 

***We may not increase cardholder directdeposit participation and therefore may not achieve all of our strategic growthobjectives.***

 

Productfeatures such as direct deposit loading onto reloadable prepaid debit cardshave increased the attractiveness of such cards and increased their utility tounderbanked consumers. Because direct deposit active cardholders on averageinitiate more debit transactions and generate more revenues for us than activecardholders without direct deposit, increasing cardholder adoption of directdeposit is an important part of our strategy. We are devoting significantresources to the further development of our direct deposit programs, and ourgrowth profile depends on a resulting increase in direct deposit participationby our cardholders. Some of our existing contracts with our retail distributorsprohibit us from directly promoting direct deposit to their customers. It ispossible that other distributors will in the future insist on similarrestrictions, which could limit our ability to grow direct depositparticipation. If we are unable to increase direct deposit participation asprojected, we will be unable to meet our growth projections, and our businessand results of operations will be adversely affected.

 

***Business, political and economic factorsmay affect our operations, the manner in which we conduct our business and ourrate of growth.***

 

TheU.S. economy has deteriorated significantly over the last two years andunemployment rates have risen. If economic conditions and unemployment ratescontinue to deteriorate or do not improve, our target consumer base may bedisproportionately affected due to the generally lower incomes of the consumersof our products. In addition, a large proportion of our target customers workin industries that may be disproportionately affected by a downturn in the U.S.economy. Stagnant economic growth and high unemployment are likely tonegatively affect our customers’ ability to purchase new services from us andthe use of our GPR cards to purchase good and services. We believe risingunemployment rates contributed significantly to cardholder attrition in 2008and 2009. The resulting impact of such economic conditions on our customers andon consumer spending could have a material adverse effect on demand for ourservices and on our business, financial condition and operating results.

 

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***We have engaged, and may engage in thefuture, in mergers, acquisitions or strategic transactions that could disruptour business and harm our financial condition.***

 

Weacquired Skylight Financial, Inc., or Skylight, in 2008 to add itsemployer distribution network to our retail distribution and direct-to-consumerand online marketing efforts. We may in the future further expand ourdistribution channels, technology platform or other aspects of our businessthrough the acquisition of other businesses, assets or technologies. Any suchtransactions can entail risk, may require a disproportionate amount of ourmanagement and financial resources, and may create operating and financialchallenges, including:

 

·                  difficulty integrating the acquiredtechnologies, services, products, operations and personnel of the acquiredbusiness;

·                  disruption to our existing business;

·                  increased regulatory and compliancerequirements;

·                  negative impact on our cash and availablecredit lines for use in financing future growth and working capital;

·                  inability to achieve projected synergies;

·                  increasing costs and complexity associatedwith the maintenance of adequate internal control and disclosure controls andprocedures; and

·                  loss of key personnel.

 

Theanticipated benefit to us of any strategic transactions, acquisitions ormergers may never materialize. For example, in 2008 we recorded an impairmentof goodwill and acquired intangible assets related to our acquisition ofSkylight in the amount of $26.3 million. Future investments, acquisitionsor dispositions could result in dilutive issuances of our equity securities, areduction in our cash reserves, the incurrence of additional debt, contingentliabilities or amortization expenses, or write-offs of goodwill, any of whichcould have an adverse effect on our business, financial condition and operatingresults.

 

***If we are unable to adequately protect ourintellectual property and other proprietary rights, we may lose a valuablecompetitive advantage or be forced to incur costly litigation to protect ourrights.***

 

Oursuccess depends in part on developing and protecting our intellectual propertyand other proprietary rights. We rely on a combination of patent, trade secret,copyright and trademark laws, as well as licenses of intellectual property fromthird parties, to protect our intellectual property and conduct our business ina manner that does not infringe or misappropriate the intellectual property ofthird parties. We also rely on other confidentiality and contractual agreementsand arrangements with our employees, affiliates, business partners andcustomers to establish and protect our intellectual property and similarproprietary rights. We have five patent applications pending with the UnitedStates Patent and Trademark Office, including applications related to ourpayment processing platform and business methods. These patent applications maynot become issued patents. If they do not become issued patents, ourcompetitors would not be prevented from using these inventions.

 

Existinglaws afford only limited protection for our intellectual property rights.Intellectual property rights or registrations granted to us may provide aninadequate competitive advantage to us or be too narrow to protect our productsand services. The protections outlined above may not be sufficient to preventunauthorized use, misappropriation or disclosure of our intellectual propertyor technology and may not prevent our competitors from copying, infringing, ormisappropriating our products and services. It is possible that others willindependently develop, design around or otherwise acquire equivalent orsuperior technology or intellectual property rights. If we are unable toadequately protect our intellectual property rights, our business and growthprospects could be materially and adversely affected.

 

***Our failure to anticipate rapid changes intechnology may negatively affect demand for our services in the marketplace.***

 

Theelectronic payments industry is subject to rapid and significant technologicalchanges. We expect that new services and technologies applicable to ourindustry will continue to emerge, and these new services and technologies maybe superior to, or render obsolete, the technologies we currently utilize inour products and services. Additionally, we may make future investments in, orenter into strategic alliances to develop, new technologies and services or toimplement changes to our operating platform to further our growth prospects,strengthen our existing businesses and remain competitive. However, our abilityto transition to new services and technologies that we develop may be inhibitedby a lack of industry-wide standards, by resistance from our distributors,network acceptance members, third-party network

 

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processorsor consumers to these changes, or by the intellectual property rights of thirdparties. Our future success will depend, in part, on our ability to develop newtechnologies and adapt to technological changes and evolving industrystandards. These initiatives are inherently risky, and they may not besuccessful or may have an adverse effect on our business, financial conditionand results of operations.

 

***We and some of our third-party suppliersare susceptible to the occurrence of catastrophic events, which could impairour ability to operate our business.***

 

Weand some of the third-party services providers on which we rely are vulnerableto damage from catastrophic events, such as power loss, natural disasters,terrorism and similar events beyond our control. Some of the third-partyproviders we rely on to provide customer service and related support functionsto our customers are located in developing nations such as Mexico and thePhilippines, which may make our products and services more susceptible tocertain events, including political upheavals, war, terrorist attacks, strikes,natural disasters and pandemics. If we or our suppliers experience any of theseevents, our systems and networks may not function properly, we may losecustomers and revenues, and we may have difficulty attracting new customers,any of which could have a material adverse impact on our business, financialcondition and results of operations. In addition, the business interruptioninsurance we carry may not cover any or all of the losses we may experience asa result of such events. Any significant losses that are not covered byinsurance could negatively affect our financial condition and results ofoperations.

 

***The terms of our new credit agreement andthe maximum amounts we are contractually permitted to borrow may restrict ourcurrent and future operations and limit our flexibility in obtaining additionalfinancing and in pursuing other business opportunities.***

 

InSeptember 2010, we entered into a new revolving credit agreement with asyndicate of banks with SunTrust Bank as administrative agent. This new creditagreement provides a revolving credit facility of $135.0 million. The newcredit agreement is unconditionally guaranteed and secured by virtually all ofthe assets of our existing and future subsidiaries.

 

Thenew credit agreement contains, and any future indebtedness of ours would likelycontain, a number of restrictive financial and non-financial covenants thatimpose significant operating and financial restrictions on us, includingrequirements that we maintain certain liquidity levels and financial ratios andcertain restrictions on our ability to make investments, pay dividends or sellassets. A failure by us to comply with the covenants or financial ratioscontained in our new credit agreement could result in an event of default whichcould adversely affect our ability to respond to changes in our business andmanage our operations. Upon the occurrence of any event of default under ournew credit agreement, the lender could elect to declare all amounts outstandingto be due and payable and require us to apply all of our available cash torepay these amounts. The acceleration of indebtedness under our new creditagreement could have a material adverse effect on our business, financialcondition and results of operations.

 

Inaddition to the current restrictions and requirements contained in this newcredit agreement, the maximum amounts we are contractually permitted to borrowunder the new credit agreement could limit our flexibility in obtainingadditional financing and in pursuing other business opportunities. Theserestrictions and requirements could have negative consequences for us,including the following:

 

·                  our ability to obtain additional financingfor working capital, capital expenditures, acquisitions or other purposes maybe impaired or financing may not be available to us on favorable terms;

·                  we would need a substantial portion of ourcash flows to pay the interest and, at maturity in September 2015, theprincipal on our indebtedness, including indebtedness that we may incur in thefuture, which would reduce the funds that would otherwise be available foroperations and future business opportunities;

·                  a substantial decrease in net operating cashflows could make it difficult for us to repay our indebtedness at maturity andforce us to modify our operations and to comply with the financial covenantscontained in the new credit agreement;

·                  our debt level could make us more vulnerablethan our competitors to an increasingly competitive environment, and to adownturn in either our business or the economy generally; and

·                  because our debt has a variable rate ofinterest, it exposes us to the risk of increased interest rates.

 

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***As a public company, we are subject toreporting and corporate governance requirements that we have not historicallybeen subject to and that may be difficult for us to satisfy, will raise ourcosts and may divert resources and management attention from operating ourbusiness.***

 

Weoperated as a private company until consummation of our initial public offeringin October 2010. As a result of becoming a public company, we are nowsubject to certain reporting and corporate governance requirements, includingthe rules of the Nasdaq Stock Market, and the provisions of theSarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the regulationspromulgated thereunder, which will impose significant new complianceobligations upon us. As a public company, we are required, among other things,to evaluate and maintain our system of internal control over financialreporting, and report on management’s assessment thereof, in compliance withthe requirements of Section 404 of the Sarbanes-Oxley Act and related rules andregulations of the SEC and the Public Company Accounting Oversight Board.

 

Theadequacy of our internal control over financial reporting must be assessed bymanagement each year commencing with the year ending December 31, 2011. Wehave not historically maintained comprehensive documentation of our internalcontrol over financial reporting, nor have we documented our compliance withthese controls on a periodic basis in accordance with Section 404 of theSarbanes-Oxley Act. Furthermore, we have not tested our internal control overfinancial reporting in accordance with Section 404 and, due to our lack ofdocumentation, this testing is not currently possible. If we are unable toimplement the controls and procedures required by Section 404 in a timelymanner or otherwise to comply with Section 404, management might not beable to certify, and our independent registered public accounting firm mightnot be able to report on, the adequacy of our internal control over financialreporting. If we are unable to maintain adequate internal control overfinancial reporting, we might be unable to report our financial information ona timely basis and might suffer adverse regulatory consequences or violateNasdaq Stock Market listing standards. There could also be a negative reactionin the financial markets due to a loss of investor confidence in us and thereliability of our financial statements. In addition, if we are unable toimplement the controls and procedures required by Section 404 effectivelyor efficiently, it could harm our operations, financial reporting or financialresults and could result in an adverse opinion on internal controls from ourindependent registered public accounting firm.

 

Thechanges necessitated by having become a public company require a significantcommitment of additional resources and management oversight that will increaseour costs and might place a strain on our systems and resources. As a result,our management’s attention might be diverted from other business concerns. Inaddition, we might not be successful in implementing and maintaining controlsand procedures that comply with these requirements. If we fail to maintain aneffective internal control environment or to comply with the numerous legal andregulatory requirements imposed on public companies, we could make materialerrors in, and be required to restate, our financial statements. Any suchrestatement could result in a loss of public confidence in the reliability ofour financial statements and sanctions imposed on us by the SEC.

 

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**Item2.        Unregistered Sales of EquitySecurities and Use of Proceeds**

 

***Unregistered Sales of EquitySecurities***

 

Forthe three months ended September 30, 2010, we issued and sold 97,161shares of common stock to certain of our employees and consultants upon the exerciseof options to purchase common stock granted pursuant to our Amended andRestated 2004 Equity Incentive Plan (the “2004 Plan”) at exercise pricesranging from $0.80 per share to $3.53 per share.  The issuance of such shares was exempt fromthe registration requirements of the Securities Act of 1933 in reliance on Section 4(2) thereof,and the rules and regulations promulgated thereunder, or Rule 701promulgated under Section 3(b) of the Securities Act, as transactionsby an issuer not involving a public offering or transactions pursuant tocompensatory benefit plans and contracts relating to compensation as providedunder such Rule 701.

 

Forthe three months ended September 30, 2010, we granted options to purchasean aggregate of 350,000 shares of class A common stock to certain employees ofNetSpend Corporation pursuant to the 2004 Plan at an exercise price of $3.78per share.  The issuance of such optionswas exempt from the registration requirements of the Securities Act of 1933 inreliance on Section 4(2) thereof, and the rules and regulationspromulgated thereunder, or Rule 701 promulgated under Section 3(b) ofthe Securities Act, as transactions by an issuer not involving a publicoffering or transactions pursuant to compensatory benefit plans and contractsrelating to compensation as provided under such Rule 701.

 

***Use of Proceeds***

 

The Form S-1 Registration Statement (File No. 333-168127)relating to our initial public offering was declared effective by the SEC on October 18,2010, and the offering was completed on October 22, 2010. Goldman, Sachs &Co. and BofA Merrill Lynch acted as book-running managers, William Blair &Company acted as lead manager, and SunTrust Robinson Humphrey, Wells FargoSecurities, Duncan-Williams, Inc., and Knight/Houlihan Lokey acted asco-managers for the offering.

 

We registered the offering and sale of 2,272,727 shares of common stockby us and the associated sale of 19,043,722 shares of common stock by theselling stockholders, which included 2,780,406 shares sold by the sellingstockholders pursuant to the underwriters’ over-allotment option, in each caseat a public offering price of $11.00 per share. The underwriters completed theexercise of the over-allotment option in full on October 22, 2010. Theaggregate public offering price of the offering amount registered, includingshares to cover the underwriters’ over-allotment option, was $234.5 million andthe offering did not terminate before all of the shares registered in theregistration statement were sold. We received net proceeds of $21.3 millionafter deducting underwriting discounts and commissions and $2.1 million intotal expenses incurred by us in connection with the offering. The sellingstockholders received net proceeds of $195.9 million after deductingunderwriting discounts and commissions. We did not receive any of the proceedsfrom the sale of shares by the selling stockholders.

 

The proceeds from the initial public offering were allocated to cashand cash equivalents to fund working capital. There have been no materialchanges in our planned use of proceeds from the initial public offering asdescribed in our final prospectus filed with the SEC on October 19, 2010pursuant to Rule 424(b).

 

**Item 6.    Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                           |
| 3.1                 |       | Third Amended and Restated Certificate of  Incorporation                                                       |
|                |       |                                                                                                           |
| 3.2                 |       | Amended and Restated Bylaws                                                                                    |
|                |       |                                                                                                           |
| 4.1                 |       | Registration Rights Agreement by and among  NetSpend Holdings, Inc. and certain stockholders              |
|                |       |                                                                                                           |
| 10.1*               |       | Credit Agreement, dated as of September 24,  2010, by and among NetSpend Holdings, Inc., the lenders |

 

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|        |   | party thereto and SunTrust Bank, as Administrative  Agent (incorporated by reference to Exhibit 10.1 of Amendment No. 4  to the Registration Statement on Form S-1, filed on September 28,  2010)                                                                                                                                                                                                                       |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2*       |   | Pledge and Security Agreement, dated as of  September 24, 2010, by and among NetSpend Holdings, Inc., NetSpend  Corporation, Skylight Acquisition I, Inc., Skylight  Financial, Inc., NetSpend Payment Services and SunTrust Bank, as  Administrative Agent (incorporated by reference to Exhibit 10.2 of  Amendment No. 4 to the Registration Statement on Form S-1, filed on  September 28, 2010) |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3*       |   | Guaranty, dated as of September 24,  2010, by and among NetSpend Corporation, Skylight Acquisition I, Inc.,  Skylight Financial, Inc., NetSpend Payment Services, Inc. and  SunTrust Bank, as Administrative Agent (incorporated by reference to  Exhibit 10.3 of Amendment No. 4 to the Registration Statement on  Form S-1, filed on September 28, 2010)                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4*       |   | Amended and Restated Employment Agreement,  dated as of September 20, 2010, by and among Daniel Henry, NetSpend  Corporation and NetSpend Holdings, Inc. (incorporated by reference to  Exhibit 10.4 of Amendment No. 3 to the Registration Statement on  Form S-1, filed on September 20, 2010)                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5*       |   | Amended and Restated Employment Agreement,  dated as of September 20, 2010, by and among Christopher T. Brown,  NetSpend Corporation and NetSpend Holdings, Inc. (incorporated by  reference to Exhibit 10.10 of Amendment No. 3 to the Registration  Statement on Form S-1, filed on September 20, 2010)                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6*       |   | Stock Option Award Agreement between  NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010  (incorporated by reference to Exhibit 10.24 of Amendment No. 1 to  the Registration Statement on Form S-1, filed on August 31, 2010)                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7*       |   | Restricted Stock Agreement between NetSpend  Holdings, Inc. and Charles Harris, dated July 1, 2010 (incorporated  by reference to Exhibit 10.25 of Amendment No. 1 to the  Registration Statement on Form S-1, filed on August 31, 2010)                                                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8*† |   | Memorandum of Understanding, dated as of  September 9, 2010, by and between ACE Cash Express, Inc. and  NetSpend Corporation (incorporated by reference to Exhibit 10.32 of  Amendment No. 2 to the Registration Statement on Form S-1, filed on  September 17, 2010)                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1        |   | Certification by principal executive officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2        |   | Certification by principal financial officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1        |   | Certification by principal executive officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2        |   | Certification by principal financial officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           |

 

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*              Incorporatedby reference.

 

†                                          Certain portions of this exhibit have been omitted pursuant to anorder granting confidential treatment.

 

55

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Table ofContents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | NETSPEND HOLDINGS, INC. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | /s/  Daniel R. Henry |
|   |                         | Daniel R. Henry |
|   |                         | Chief Executive Officer |

 

November 10, 2010

 

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Table ofContents

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |       | Third Amended and Restated Certificate of  Incorporation                                                                                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2                 |       | Amended and Restated Bylaws                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 |       | Registration Rights Agreement by and among  NetSpend Holdings, Inc. and certain stockholders                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1*               |       | Credit Agreement, dated as of  September 24, 2010, by and among NetSpend Holdings, Inc., the  lenders party thereto and SunTrust Bank, as Administrative Agent  (incorporated by reference to Exhibit 10.1 of Amendment No. 4 to  the Registration Statement on Form S-1, filed on September 28,  2010)                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2*               |       | Pledge and Security Agreement, dated as of  September 24, 2010, by and among NetSpend Holdings, Inc., NetSpend  Corporation, Skylight Acquisition I, Inc., Skylight  Financial, Inc., NetSpend Payment Services and SunTrust Bank, as  Administrative Agent (incorporated by reference to Exhibit 10.2 of  Amendment No. 4 to the Registration Statement on Form S-1, filed on  September 28, 2010) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3*               |       | Guaranty, dated as of September 24,  2010, by and among NetSpend Corporation, Skylight Acquisition I, Inc.,  Skylight Financial, Inc., NetSpend Payment Services, Inc. and  SunTrust Bank, as Administrative Agent (incorporated by reference to  Exhibit 10.3 of Amendment No. 4 to the Registration Statement on  Form S-1, filed on September 28, 2010)                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4*               |       | Amended and Restated Employment Agreement,  dated as of September 20, 2010, by and among Daniel Henry, NetSpend  Corporation and NetSpend Holdings, Inc. (incorporated by reference to  Exhibit 10.4 of Amendment No. 3 to the Registration Statement on  Form S-1, filed on September 20, 2010)                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5*               |       | Amended and Restated Employment Agreement,  dated as of September 20, 2010, by and among Christopher T. Brown,  NetSpend Corporation and NetSpend Holdings, Inc. (incorporated by  reference to Exhibit 10.10 of Amendment No. 3 to the Registration  Statement on Form S-1, filed on September 20, 2010)                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6*               |       | Stock Option Award Agreement between  NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010  (incorporated by reference to Exhibit 10.24 of Amendment No. 1 to  the Registration Statement on Form S-1, filed on August 31, 2010)                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7*               |       | Restricted Stock Agreement between NetSpend  Holdings, Inc. and Charles Harris, dated July 1, 2010 (incorporated  by reference to Exhibit 10.25 of Amendment No. 1 to the  Registration Statement on Form S-1, filed on August 31, 2010)                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8*†         |       | Memorandum of Understanding, dated as of  September 9, 2010, by and between ACE Cash Express, Inc. and  NetSpend Corporation (incorporated by reference to Exhibit 10.32 of  Amendment No. 2 to the Registration Statement on Form S-1, filed on  September 17, 2010)                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1                |       | Certification by principal executive officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2                |       | Certification by principal financial officer  pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1                |       | Certification by principal executive officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2                |       | Certification by principal financial officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                           |

 

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*              Incorporatedby reference.

 

†                                          Certain portions of this exhibit have been omitted pursuant to anorder granting confidential treatment.

 

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