NetSpend Holdings, Inc. - FORM S-1/A - September 20, 2010
Attached files
Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
As filed with the Securities and Exchange Commission on September 21, 2010
Registration No. 333-168127
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NETSPEND HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization) |
|
6199
(Primary Standard Industrial
Classification Code Number) |
|
20-2306550
(I.R.S. Employer
Identification Number) |
NetSpend Holdings, Inc.
701 Brazos Street, Suite 1300
Austin, Texas 78701-2582
(512) 532-8200
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Christopher T. Brown
General Counsel
NetSpend Holdings, Inc.
701 Brazos Street, Suite 1300
Austin, Texas 78701-2582
(512) 532-8200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
|
|
|
Copies to: |
Michael L. Bengtson
William D. Howell
Baker Botts L.L.P.
1500 San Jacinto Center
98 San Jacinto Blvd.
Austin, Texas 78701-4040
(512) 322-2500 |
|
Robert E. Buckholz, Jr.
Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004
(212) 558-4000 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If
any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box. o
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer o |
|
Accelerated filer o |
|
Non-accelerated filer ý |
|
Smaller reporting company o |
|
|
|
|
(Do not check if a
smaller reporting company)
|
|
|
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
Table of Contents
The information in this preliminary prospectus is not complete and may be changed. These securities may not
be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated September 21, 2010.
Shares
NetSpend Holdings, Inc.
Common Stock
This is an initial public offering of shares of common stock of NetSpend Holdings, Inc.
We
are offering shares of our common stock to be sold in this offering. The selling stockholders identified in this prospectus are offering an
additional
shares. We will not receive any of the proceeds from the sale of shares being sold by the selling stockholders.
Prior
to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $
and $ . We have applied to list our common stock on the Nasdaq Stock Market, LLC under the symbol "NTSP".
See "Risk Factors" beginning on page 11 to read about factors you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal offense.
|
|
|
|
|
|
|
|
Per Share |
|
Total |
|
Initial public offering price |
|
$ |
|
$ |
|
Underwriting discounts and commissions |
|
$ |
|
$ |
|
Proceeds, before expenses, to us |
|
$ |
|
$ |
|
Proceeds, before expenses, to the selling stockholders |
|
$ |
|
$ |
|
To
the extent that the underwriters sell more than shares of common stock, the underwriters have
the option to purchase up to an additional shares from
us and the selling stockholders at the initial public offering price less the underwriting discount.
The
underwriters expect to deliver the shares against payment in New York, New York on , 2010.
|
|
|
|
|
Goldman, Sachs & Co. |
|
BofA Merrill Lynch |
|
William Blair & Company |
|
|
|
|
|
|
|
SunTrust Robinson Humphrey |
|
Wells Fargo Securities |
|
Duncan-Williams, Inc. |
|
Knight/Houlihan Lokey |
Prospectus
dated , 2010.
TABLE OF CONTENTS
Through and including , 2010 (the 25th day after the date of this
prospectus), all dealers effecting
transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or subscription.
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
i
Table of Contents
PROSPECTUS SUMMARY
The following summary contains a brief overview of the key aspects of the offering that are the most
significant. You should read this entire prospectus carefully, including "Risk Factors," beginning on page 11, and our consolidated financial statements and related notes beginning on
page F-1, before making an investment decision. Unless the context otherwise requires, we use the terms "we," "our" and "us" and similar references in this prospectus to refer to
NetSpend Holdings, Inc. and its wholly-owned subsidiaries.
NetSpend Holdings
Overview
NetSpend is a leading provider of general-purpose reloadable prepaid debit cards, or GPR cards, and related alternative
financial services to underbanked consumers in the U.S. We believe we are one of the largest dedicated providers of GPR cards in the U.S., with approximately 2.0 million active cards as
of June 30, 2010 and a gross dollar volume of debit transactions and cash withdrawals of $8.8 billion for the twelve months ended June 30, 2010. We primarily focus on the
estimated 60 million underbanked consumers in the U.S. who do not have a traditional bank deposit account or who rely on alternative financial services. We empower underbanked consumers by
providing innovative and affordable financial products and services tailored to meet their particular financial services needs and preferences in a manner that traditional banking institutions have
historically not met. In addition, our products and services provide our retail distributors an opportunity to enhance their customer relationships and generate incremental, ongoing revenue streams.
We believe that by providing value to both underbanked consumers and our retail distributors we are well-positioned to continue to take advantage of the significant opportunities within
two large, fast-growing markets the prepaid card market and the market for financial services targeting underbanked consumers.
According
to Mercator Advisory Group, the GPR card market is forecasted to grow at a compound annual growth rate of 92% from 2008-2012 and is expected to reach
$118.5 billion in annual funds loaded by 2012. A December 2009 study by the Federal Deposit Insurance Corporation, or the FDIC, estimates that more than 25% of U.S. households are unbanked or
underbanked, which we collectively refer to as underbanked. According to the FDIC, underbanked households in the U.S. represent approximately 60 million adults who receive approximately $1.1
trillion annually in payments from employers and government entities. This consumer segment represents a large and underpenetrated market for alternative financial services solutions. According to the
FDIC, only 16% of underbanked households have used a GPR card and only 4% of underbanked households currently receive their income through a payroll card.
We
have been focused on serving underbanked consumers since 2001, which has given us unique and extensive knowledge regarding their attitudes, characteristics and purchasing behavior.
We have leveraged this knowledge to develop a robust portfolio of products and services designed to meet the financial needs of these consumers. Our GPR cards are tied to
FDIC-insured depository accounts and can be used to make purchase transactions at any merchant that participates in the MasterCard, Visa or PULSE networks and to withdraw funds at
participating ATMs. The additional features we offer to our cardholders include direct deposit, interest-bearing savings accounts, bill pay and card-to-card transfer
functionality, personal financial management tools and online and mobile phone card account access. We believe that the depth and breadth of our portfolio of products and services, including direct
deposit, not only attracts new cardholders, but also drives longer cardholder retention. The number of our direct deposit active card accounts has increased from approximately 130,000 as of
December 31, 2007 to approximately 500,000 as of June 30, 2010. As of June 30, 2010, the average lifetime of a card account was approximately 11 months
1
Table of Contents
and
the average lifetime of a direct deposit card account was approximately 20 months. We measure the lifetime of a card account as the period of time between the date the card is initially
loaded with funds and the last date the card account is considered active.
We
have built an extensive and diverse distribution and reload network throughout the U.S. to support the marketing and ongoing use of our GPR cards. We market our cards through
multiple distribution channels, including contractual relationships with retail distributors, direct-to-consumer and online marketing programs, and contractual relationships
with corporate employers. As of June 30, 2010, we marketed our GPR cards through approximately 500 retail distributors at over 39,000 locations in the U.S. and offered our
cardholders the ability to reload funds onto their cards at over 100,000 locations in the U.S. Our extensive retail distribution and reload network provides underbanked consumers the ability to
acquire and load cards at retailers that service their primary financial services needs, as well as non-financial retailers that are convenient to consumers, such as grocery and
convenience stores. Our direct-to-consumer and online marketing programs allow us to broaden our market reach to underbanked consumers beyond our retail distributors. We have
developed a direct marketing platform that we believe is among the largest and most sophisticated in the industry, incorporating a database that includes information regarding a significant portion of
the underbanked consumer population in the U.S. In addition, we have contractual relationships with approximately 800 employers that offer our GPR card to their employees as a direct deposit
alternative to paper checks. We believe that the breadth and diversity of our distribution and reload network allows us to reach a larger number of underbanked consumers and reduce our dependency on
any single channel or distributor.
We
have developed a proprietary, fully-integrated operational and technology platform. Our in-house platform is "end-to-end" in that it encompasses
the critical functions required for us to acquire cardholders, process transactions, maintain account-level data, communicate with cardholders, manage risk, ensure regulatory compliance and connect to
our issuing banks and distributors. These integrated capabilities allow us to customize our products and services for different markets, distribution channels and customer segments. Further, by
processing transactions on our own platform, we gain unique and extensive
insight into the attitudes, characteristics and purchasing behavior of underbanked consumers. Our processing platform is scalable, which will allow us to increase our profitability as our number of
active cards and the volume of the transactions we process increase.
We
have experienced significant growth since our inception in 1999. From 2005 through 2009, our revenues grew from $45.7 million to $225.0 million and our net income grew
from $0.7 million to $18.2 million, representing a compound annual growth rate of 49% and 124%, respectively.
Competitive Strengths
We believe that our competitive strengths include the following:
-
- Extensive Knowledge of Underbanked Consumers. Since 2001,
we have served more than six million underbanked consumers and have developed a database of more than 28 million consumers who we believe are underbanked. The experience we have gained and data
we have gathered have allowed us to develop extensive knowledge regarding the attitudes, characteristics and purchasing behavior of underbanked consumers. We have utilized this knowledge to develop a
robust portfolio of products and services that we believe not only attracts underbanked consumers as new cardholders, but also drives longer cardholder retention.
-
- Valuable and Loyal Customer Base. We believe we have
achieved one of the highest average cardholder retention rates among GPR card providers. Our promotion of direct deposit and our comprehensive product suite provide consumers a consistent and
2
Table of Contents
Business Strategy
We aim to be the leading provider of GPR cards and related alternative financial services to underbanked consumers. To achieve
this goal, we have developed a multi-pronged growth strategy that leverages our core capabilities to address expanding market opportunities for our services.
-
- Increase Cardholder Usage and Retention. We plan to
increase cardholder usage and retention by increasing the number of our cardholders who direct deposit their payroll, government benefits or tax refunds onto their cards, as well as through marketing
programs, product development, customer support and joint marketing efforts with our distributors. We plan to continue to provide competitive pricing while adding functionality and complementary
products and services that will encourage underbanked consumers to use our cards in the same manner as a traditional bank account over a longer period of time.
-
- Increase Penetration of the Underbanked Consumer
Market. We plan to focus on further penetrating the existing underbanked consumer market and attracting new categories of consumers who
are dissatisfied with the traditional banking system by:
-
- increasing our retail card sales by providing superior product offerings and pricing for underbanked consumers seeking
cash or bank alternatives;
3
Table of Contents
-
- developing new distribution relationships with leading national retailers and corporate employers;
-
- continuing to grow and diversify our reload network; and
-
- improving the effectiveness and efficiency of our direct-to-consumer and online marketing
programs.
-
- Leverage Our Technology Platform to Increase
Profitability. Our end-to-end, proprietary technology platform provides us with attractive economies of scale,
flexible product development capabilities and speed to market with differentiated product offerings. As we continue to increase our number of active cards and the volume of transactions we process, we
believe we will be able to increase our profitability.
Risk Factors
We face risks in our business, including risks that may prevent us from achieving our business objectives or that may materially and
adversely affect our business, financial condition and operating results. You should carefully consider these risks, including the risks discussed in the section entitled "Risk Factors" beginning on
page 11, before investing in us. Risks relating to our business and our ability to execute our business strategy include:
-
- we face substantial and increasing competition in our business from a number of competitors, many of which have
substantially greater resources than we do;
-
- our revenues are highly dependent on cards distributed through a limited number of retail distributors, including ACE Cash
Express, with cards distributed through ACE accounting for approximately 37% of our revenues in 2009;
-
- our business is highly regulated and subject to increasing direct regulation;
-
- we rely on MetaBank and our other issuing banks to issue our prepaid debit cards and to provide us with critical products
and services;
-
- our future growth is dependent upon the continued acceptance and use of GPR cards and related financial services as
an alternative to traditional banking solutions; and
-
- our ability to maintain continued operation of our processing platform without material service interruptions or security
breaches.
Our Corporate Information
Our operating company and predecessor, NetSpend Corporation, was incorporated in Texas in 1999. In May 2004, Oak Investment Partners
acquired a controlling equity interest in our operating company through a recapitalization transaction pursuant to which we, as a newly-formed holding company incorporated in Delaware, acquired all of
the capital stock of NetSpend Corporation. In 2008, we acquired Skylight Financial, Inc., a payroll card provider.
Our
principal executive offices are located at 701 Brazos Street, Austin, Texas 78701, and our telephone number at this location is (512) 532-8200. Our website
address is www.netspend.com. The information on, or that can be accessed through, our website is not part of this prospectus.
4
Table of Contents
The Offering
|
|
|
Common stock we are offering |
|
shares |
Common stock offered by the selling stockholders(1) |
|
shares |
Common stock to be outstanding after this offering |
|
shares |
Class B common stock to be outstanding after this offering |
|
shares |
Option to purchase additional shares |
|
We and the selling stockholders have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up
to additional shares of common stock. |
Voting rights |
|
We currently have two classes of common stock Class A common stock and Class B common stock. Upon consummation of this offering, our certificate of incorporation will be amended
to reflect the reclassification of our Class A Common Stock into common stock. The rights of the holders of our common stock and our Class B common stock will be identical, except that the holders of our Class B common stock will not
have the right to vote, unless otherwise required by law. All shares of our Class B common stock will automatically convert into shares of common stock on a one-for-one basis upon the earlier of (1) approval by certain state money
transmitter regulators of the acquisition by Skylight Holdings I, LLC, JLL Partners 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 our subsidiary,
NetSpend Corporation, or (2) the date on which Skylight Holdings, JLL Partners, or any of JLL Partners' affiliates cease to own or control 25% or more of our voting securities (assuming conversion of the Class B common stock into
common stock). In addition, each share of Class B common stock will automatically convert into one share of common stock upon the sale, disposition or transfer to a person other than Skylight Holdings, JLL Partners or any of
JLL Partners' affiliates. Unless otherwise noted, references in this prospectus to common stock shall include both common stock and Class B common stock. See "Description of Capital Stock". |
5
Table of Contents
|
|
|
Use of proceeds |
|
We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering expenses, will be approximately
$ million (or approximately $ million if the underwriters exercise their option to purchase additional shares in full), assuming an initial offering price of
$ , the mid-point of the range of prices set forth on the cover of this prospectus. We will not receive any of the net proceeds from the sale of shares by the selling stockholders. We may use a portion of the
net proceeds from this offering to repay outstanding borrowings under our revolving credit and term loan facilities. We intend to use the remainder of the net proceeds from this offering for general corporate purposes, including to fund working
capital, and possible expansion of our current business through strategic alliances or acquisitions. See "Use of Proceeds." |
Dividend policy |
|
We do not intend to declare or pay regular dividends on our common stock in the foreseeable future. |
Risk factors |
|
See "Risk Factors" and other information in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. |
Proposed Nasdaq symbol |
|
"NTSP" |
- (1)
- Although
the shares being offered by Skylight Holdings are shares of Class B common stock, they will automatically convert into shares of common
stock upon sale to any person other than Skylight Holdings, JLL Partners or any of JLL Partners' affiliates. See "Principal and Selling Stockholders" and "Description of Capital Stock".
The
number of shares of our common stock to be outstanding after this offering is based on 84,411,040 shares outstanding as of June 30, 2010 and
excludes:
-
- 11,168,708 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010
under the Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock Plan, or the 2004 Plan, at a weighted average exercise price of $3.38 per share;
-
- 315,511 shares of restricted common stock outstanding as of June 30, 2010;
-
- 1,843,479 additional shares of common stock reserved as of June 30, 2010 for future issuance under our 2004 Plan;
and
-
- 722,597 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2010 at a
weighted average exercise price of $1.69 per share, all of which have been exercised or expire upon the consummation of this offering.
Unless
otherwise noted, the information in this prospectus reflects and assumes:
-
- no exercise of the outstanding options or warrants described above since June 30, 2010;
-
- no exercise of the underwriters' option to purchase up
to additional shares of common stock from us and
the selling stockholders; and
-
- an initial public offering price of $ per share, the mid-point of the range of prices set forth on
the
cover of this prospectus.
6
Table of Contents
Summary Consolidated Financial Data
The table below sets forth summary financial data for the periods indicated. The consolidated balance sheet
data as of December 31, 2008 and 2009 and statement of operations data for the years ended December 31, 2007, 2008 and 2009 have been derived from the audited consolidated financial
statements of NetSpend Holdings, Inc. for the years ended December 31, 2007, 2008 and 2009 included elsewhere in this prospectus. The consolidated balance sheet data as of
December 31, 2006 and 2007 and statement of operations data for the year ended December 31, 2006 have been derived from the audited consolidated financial statements of NetSpend
Holdings, Inc. for the years ended December 31, 2006 and 2007 not included in this prospectus. The consolidated balance sheet and statement of operations data as of and for the year
ended December 31, 2005 have been derived from the unaudited consolidated financial statements of NetSpend Holdings, Inc. for the year ended December 31, 2005 not included in this
prospectus. The consolidated balance sheet and statement of operations data as of and for the six months ended June 30, 2009 and 2010 have been derived from the unaudited consolidated financial
statements of NetSpend Holdings, Inc. included elsewhere in this prospectus. It is important that you read this information together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 42, and our consolidated financial statements and related notes beginning on page F-1. The unaudited summary
consolidated financial data include, in the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial
position and results of operations for these periods.
Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our
results for any interim period are not necessarily indicative of results for a full fiscal year.
7
Table of Contents
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended
June 30, |
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
|
(in thousands, except per share amounts) |
|
Revenues |
|
$ |
45,703 |
|
$ |
76,526 |
|
$ |
128,597 |
|
$ |
183,170 |
|
$ |
225,000 |
|
$ |
109,636 |
|
$ |
136,967 |
|
Direct operating costs |
|
|
24,185 |
|
|
46,108 |
|
|
57,294 |
|
|
80,216 |
|
|
106,572 |
|
|
51,826 |
|
|
63,017 |
|
Other operating expenses |
|
|
19,957 |
|
|
30,063 |
|
|
46,020 |
|
|
76,983 |
|
|
92,842 |
|
|
46,849 |
|
|
49,115 |
|
Goodwill and intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
Operating income (loss) |
|
|
1,561 |
|
|
355 |
|
|
25,283 |
|
|
(314 |
) |
|
35,815 |
|
|
21,190 |
|
|
20,535 |
|
Income (loss) before income taxes |
|
|
970 |
|
|
773 |
|
|
24,094 |
|
|
(4,338 |
) |
|
30,677 |
|
|
18,464 |
|
|
18,524 |
|
Provision for income taxes |
|
|
251 |
|
|
861 |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
7,386 |
|
|
7,460 |
|
Net income (loss) |
|
|
719 |
|
|
(88 |
) |
|
14,726 |
|
|
(11,645 |
) |
|
18,174 |
|
|
11,078 |
|
|
11,064 |
|
Net income (loss) per share for Class A and Class B Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
$ |
(0.01 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.13 |
|
$ |
0.13 |
|
|
Diluted |
|
$ |
0.01 |
|
$ |
(0.01 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.13 |
|
$ |
0.13 |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
As of June 30, |
|
|
|
(unaudited)
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
(unaudited)
2010 |
|
|
|
|
(in thousands) |
|
Cash and cash equivalents |
|
$ |
11,702 |
|
$ |
20,678 |
|
$ |
30,141 |
|
$ |
21,490 |
|
$ |
21,154 |
|
$ |
15,384 |
|
Total assets |
|
|
82,667 |
|
|
96,909 |
|
|
109,734 |
|
|
216,747 |
|
|
222,285 |
|
|
218,637 |
|
Long-term debt, net of current portion |
|
|
|
|
|
|
|
|
42,000 |
|
|
76,875 |
|
|
51,979 |
|
|
45,694 |
|
Total stockholders' equity |
|
|
66,223 |
|
|
67,870 |
|
|
35,544 |
|
|
88,345 |
|
|
109,352 |
|
|
118,629 |
|
8
Table of Contents
Other Financial and Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended
June 30, |
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
|
(dollars in thousands) |
|
Adjusted EBITDA(1) |
|
$ |
4,188 |
|
$ |
5,200 |
|
$ |
31,288 |
|
$ |
37,343 |
|
$ |
40,367 |
|
$ |
18,442 |
|
$ |
33,920 |
|
Cash net income(2) |
|
$ |
2,496 |
|
$ |
(458 |
) |
$ |
16,644 |
|
$ |
7,800 |
|
$ |
16,854 |
|
$ |
7,509 |
|
$ |
16,370 |
|
Number of active cards (at period end)(3) |
|
|
545,338 |
|
|
861,115 |
|
|
1,188,201 |
|
|
1,577,767 |
|
|
1,868,341 |
|
|
1,640,017 |
|
|
2,037,515 |
|
Gross dollar volume(4) |
|
$ |
1,313,758 |
|
$ |
3,260,281 |
|
$ |
3,686,554 |
|
$ |
5,690,842 |
|
$ |
7,570,339 |
|
$ |
3,703,370 |
|
$ |
4,915,607 |
|
Percentage of active card accounts with direct deposit(5) |
|
|
9.3 |
% |
|
11.2 |
% |
|
14.0 |
% |
|
23.4 |
% |
|
27.5 |
% |
|
24.8 |
% |
|
29.4 |
% |
- (1)
- We
use a non-GAAP financial metric that we label "Adjusted EBITDA" to evaluate our financial performance. We compute Adjusted EBITDA by
adjusting net income or net loss to remove the effect of income and expenses related to interest, taxes, depreciation and amortization, or EBITDA, and then adjusting for stock-based compensation, and
non-recurring gains and losses. We believe that Adjusted EBITDA is an important metric for the following reasons:
-
- It provides a meaningful comparison of our operating results over several periods
because it removes the impact of income and expense items that are not a direct result of our core operations, such as goodwill and intangible impairments, legal settlements and one-time
settlement gains;
-
- We use it as a tool to assist in our planning for the effect of strategic operating
decisions and for the prediction of future operating results;
-
- It functions as a threshold target for our company-wide employee bonus
compensation; and
-
- We use it to evaluate our capacity to incur and service debt, fund capital
expenditures and expand our business.
The
following is a reconciliation of our net income (loss) for the years ended December 31, 2005, 2006, 2007, 2008 and 2009 and the six months ended June 30, 2009 and 2010 to Adjusted
EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended June 30, |
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
|
|
(in thousands) |
|
|
Net income (loss) |
|
$ |
719 |
|
$ |
(88 |
) |
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
|
Interest income |
|
|
(164 |
) |
|
(452 |
) |
|
(876 |
) |
|
(384 |
) |
|
(32 |
) |
|
(27 |
) |
|
(46 |
) |
|
|
Interest expense |
|
|
48 |
|
|
34 |
|
|
2,065 |
|
|
4,408 |
|
|
5,170 |
|
|
2,753 |
|
|
2,057 |
|
|
|
Income tax expense |
|
|
251 |
|
|
861 |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
7,386 |
|
|
7,460 |
|
|
|
Depreciation and amortization |
|
|
3,321 |
|
|
3,988 |
|
|
5,251 |
|
|
8,899 |
|
|
10,297 |
|
|
5,144 |
|
|
6,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
4,175 |
|
|
4,343 |
|
|
30,534 |
|
|
8,585 |
|
|
46,112 |
|
|
26,334 |
|
|
26,610 |
|
|
|
Stock-based compensation expense |
|
|
13 |
|
|
857 |
|
|
754 |
|
|
2,473 |
|
|
4,484 |
|
|
2,337 |
|
|
3,010 |
|
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
4,188 |
|
$ |
5,200 |
|
$ |
31,288 |
|
$ |
37,343 |
|
$ |
40,367 |
|
$ |
18,442 |
|
$ |
33,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Table of Contents
Our
Adjusted EBITDA is not necessarily comparable to what other companies define as Adjusted EBITDA. In addition, Adjusted EBITDA is not a measure defined by U.S. GAAP and should not be
considered as a substitute for or alternative to net income, operating income, cash flows from operating activities or other financial information as determined by U.S. GAAP. Our presentation
of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
-
(2)
- We
also use a non-GAAP financial metric that we label "Cash Net Income" to evaluate our financial performance. We compute Cash Net Income by
adjusting net income or net loss to remove tax-effected amortization expense, stock-based compensation and other non-recurring gains and losses. We believe that Cash Net Income
is an important metric for the following reasons:
-
- It provides a meaningful indicator of our cash flows because it removes the impact
of significant non-cash items from net income;
-
- We use it as a tool to assist in cash forecasting; and
-
- We use it to evaluate our ability to service debt and fund capital expenditures.
The
following is a reconciliation of our net income (loss) for the six months ended June 30, 2009 and 2010, and the years ended December 31, 2005, 2006, 2007, 2008 and 2009 to Cash Net
Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended June 30, |
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
|
|
(in thousands) |
|
|
Net income (loss) |
|
$ |
719 |
|
$ |
(88 |
) |
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
|
Stock-based compensation expense |
|
|
13 |
|
|
857 |
|
|
754 |
|
|
2,473 |
|
|
4,484 |
|
|
2,337 |
|
|
3,010 |
|
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
2,385 |
|
|
2,385 |
|
|
2,385 |
|
|
3,224 |
|
|
3,516 |
|
|
1,944 |
|
|
1,577 |
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments |
|
|
2,398 |
|
|
3,242 |
|
|
3,139 |
|
|
31,982 |
|
|
(2,229 |
) |
|
(5,948 |
) |
|
8,887 |
|
|
|
Tax rate |
|
|
25.9 |
% |
|
111.4 |
% |
|
38.9 |
% |
|
39.2 |
% |
|
40.8 |
% |
|
40.0 |
% |
|
40.3 |
% |
|
|
Tax adjustment |
|
|
621 |
|
|
3,612 |
|
|
1,221 |
|
|
12,537 |
|
|
(909 |
) |
|
(2,379 |
) |
|
3,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash net income |
|
$ |
2,496 |
|
$ |
(458 |
) |
$ |
16,644 |
|
$ |
7,800 |
|
$ |
16,854 |
|
$ |
7,509 |
|
$ |
16,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
2008 tax rate was adjusted to remove the impact of the goodwill impairment charge recorded during 2008 in order to establish the rate used to book taxes in the absence of this impairment
consistent with the pre-tax adjustments used to calculate Cash Net Income.
Our Cash Net Income is not necessarily comparable to what other companies define as Cash Net Income. In addition, Cash Net Income is not a measure defined by U.S. GAAP and should not be
considered as a substitute for or alternative to net income, operating income, cash flows from operating activities or other financial information as determined by U.S. GAAP. Our presentation
of Cash Net Income should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
- (3)
- Number
of active cards represents the total number of our GPR cards that have had a PIN- or signature-based purchase transaction, a load
transaction at a retailer location or an ATM withdrawal within the previous 90 days.
- (4)
- Gross
dollar volume represents the total volume of debit transactions and cash withdrawals made using our GPR cards.
- (5)
- Percentage
of active card accounts with direct deposit represents the percentage of our active card accounts that have had a direct deposit load within the
previous 90 days.
10
Table of Contents
RISK FACTORS
You should carefully consider the risks described below and all other information contained in this prospectus
before making an investment decision. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently think are immaterial, actually occur, our
business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your
investment.
Risks Relating to Our Business
The market for prepaid debit cards and alternative financial services is highly competitive, and competition is increasing as more companies, many that are larger and have
greater resources than we do, endeavor to address the needs of underbanked consumers.
The market for prepaid debit cards and related alternative financial services is highly competitive. We directly compete with a number
of companies that market and serve as program managers for open-loop prepaid debit cards through retail and online distribution, such as Green Dot Corporation, AccountNow, Inc. and
Blackhawk Network Inc. Open-loop prepaid debit cards are those that can be used for transactions at any merchant participating in the relevant card association, such as MasterCard or Visa,
or network organization, such as PULSE, as opposed to a single merchant. Many of the arrangements that our competitors have with large distributors are long-term and exclusive, which would
prevent these distributors from offering our GPR cards during the terms of the arrangements. Many transaction processors, such as First Data Corporation, Total System Services, Inc., and Galileo
Processing, Inc., have prepaid platform capability and increasingly compete directly with us for prepaid program management and processing opportunities with large distributors. 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 integrate
more profitable financial services into their product offerings. For example, Wal-Mart currently offers a prepaid debit card and related services through its stores with our direct
competitors Green Dot and Total System Services as the program manager and the processor, respectively. We also anticipate increased competition from alternative financial services providers, who are
often well-positioned to service the underbanked and who may wish to develop and manage their own prepaid debit card programs. For example, in the past year, our retail distributors
Pay-O-Matic and Checksmart have both introduced their own GPR cards through their stores. While the increased desire of banks, retailers and alternative financial services
providers to develop prepaid debit card programs frequently creates new business opportunities for us, it could also have an adverse effect on our business, including through increased price
competition and loss of distributor relationships.
Our
ability to grow our business is dependent on our ability to compete effectively against other providers of GPR cards and alternative financial services. Many existing and potential
competitors have longer operating histories and greater name recognition than we do. In addition, many of our existing and potential competitors are substantially larger than we are and may already
have or could develop substantially greater financial and other resources than we have. We may also face price competition that results in decreases in the purchase and use of our products and
services. To stay competitive, we may have to increase the incentives that we offer to our retail distributors and decrease the prices of our products and services, which could adversely affect our
operating results.
11
Table of Contents
The majority of our revenues result from GPR cards marketed pursuant to agreements we have entered into with a small number of retail distributors. If we are unable to
maintain relationships with our retail distributors on terms that are favorable to us, our business, financial condition and operating results may be materially adversely affected.
Our business model substantially depends on establishing agreements with our retail distributors, which primarily consist of
alternative financial services providers, as well as grocery and convenience stores and other traditional retailers. While we continually seek to diversify the sources of our revenues and card
distribution, the majority of our revenue streams have historically depended on cards distributed through these retail distributors. In 2009, GPR cards 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 to our
distribution agreement, ACE initiated arbitration against us alleging breach of our agreement based on certain activities of our direct-to-consumer and online marketing
programs and seeking, among other things, termination of our agreement. We filed a response setting forth the reasons we believed the claims to be without merit, as well as a counterclaim. We have
resolved the dispute and entered into a mutual agreement to release and dismiss with prejudice all claims in the arbitration, and reached an agreement on the terms of certain modifications to our
existing distribution agreement. In September 2010 we entered into an amendment to our distribution agreement to reflect these modifications, which we do not expect to have a material impact on our
business, financial condition or operating results. However, ACE, or other of our retail distributors, may in the future object to competition from our direct-to-consumer and
online marketing programs, and may seek modifications to our agreements or make claims against us, which could have a material adverse effect on our business, financial condition and operating
results.
The
success of our business depends substantially on our ability to attract and retain retailers with a large number of locations that are convenient for our cardholders to purchase and
reload our GPR cards. In the future, some of our retail distributors may endeavor to internally develop their own prepaid debit card programs or enter into exclusive relationships with our competitors
to distribute their products. The loss of, or a substantial decrease in revenues from, one or more of our top retail distributors could have a material adverse effect on our business and operating
results. Most of our retail distribution agreements have terms ranging from three to five years and are typically renewable automatically for subsequent terms of at least one year unless we or the
distributor affirmatively elect to discontinue the agreement within the required notice period. If we want to continue a contractual relationship with a retail distributor after the expiration of the
agreement, we are typically required to renegotiate the terms of the agreement upon its expiration, and in some circumstances we may be forced to modify the terms of the agreement before it expires.
Our negotiations to renew some distribution agreements have resulted in, and in the future may result in, financial and other terms that are less favorable to us than the terms of the prior
agreements, such as terms that permit the distributors to market prepaid debit cards that compete with our GPR cards. We may not succeed in renewing these agreements when they expire, which would
result in a complete loss of revenue from these distributors. If we are required to pay higher revenue-sharing amounts or agree to other less favorable terms to retain our retail distributors, or we
are not able to renew our relationships with our retail distributors upon the expiration of our agreements, our business, financial condition and operating results would be harmed.
We depend on our distributors' sale and promotion of our products and services, but their interests and operational decisions might not always align with our interests.
A significant portion of our operating revenues are derived from our products and services sold at the stores of our retail
distributors. Our reliance on these retail distributors means that we
12
Table of Contents
do
not have direct control over the sales of our cards and, as a result, our future growth is inherently unpredictable. Because we often compete with many other providers of consumer and financial
products for placement and promotion of products in the stores of our retail distributors, our success depends on our retail distributors and their willingness to promote our products and services
successfully. In general, our contracts with these third parties allow them to exercise significant discretion over the placement and promotion of our products in their stores, and they could give
higher priority to the products and services of other prepaid debit card providers. In many instances, our retail distributors have greater incentives to promote other products or services to
consumers. If our retailers do not actively and effectively promote the sale of our cards, our growth will be limited and our operating results will suffer.
We are subject to extensive and complex federal and state regulation and new regulations and/or changes to existing regulations could adversely affect our business.
As an agent of, and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and
examination by the Office of Thrift Supervision, or the OTS, the Office of the Comptroller of the Currency, or the OCC, the Board of Governors of the Federal Reserve System, or the FRB, the Georgia
Department of Banking and Finance, or the GDBF, and the Federal Deposit Insurance Corporation, or the FDIC. We are also subject to direct regulation by those states in which we are licensed as a money
transmitter.
We
have historically taken the position that state money transmitter statutes do not apply to our business for a number of reasons. We discuss this in greater detail under
"BusinessRegulationMoney Transmitter and Payment Instrument Laws and Regulations." In the event that a state regulatory authority were to disagree with our position that we
are not required to be licensed in any of the states in which we are not currently licensed, it is possible that we, our distributors or our issuing banks could become subject to regulatory
enforcement or other proceedings, which could in turn have a significant adverse impact on our business, even if we were to ultimately prevail in such proceedings. In such event, we may have
additional arguments available to us that we should not be subject to the licensing
requirements under the relevant state money transmitter statutes, and may utilize one or more of these arguments at such time. However, it is possible that we could be unsuccessful in making a
persuasive argument that we should not be subject to such licensing requirements, and could be deemed to be in violation of one or more of the state money transmitter statutes. Such failure to comply
could result in the imposition of fines, the suspension of our ability to offer some or all of our prepaid debit cards in the relevant jurisdiction, civil liability and criminal liability, each of
which would likely have material adverse impact on our revenues.
On
March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act 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 the requirements under this rule, as they fall within an express exclusion for cards which are reloadable and not
marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager promotes, even if
occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies regarding the display and promotion of our GPR cards. It is
possible, however, that despite our instructions and policies to the contrary, a retailer engaged in offering our GPR cards to consumers could take an action with respect to one or more of the cards
that would cause each similar card to be viewed as being marketed or labeled as a gift card, such as by placing our GPR cards on a display which prominently features the availability of gift cards and
does not separate or otherwise distinguish our GPR cards from the gift cards. In such event, it is possible that such GPR cards
13
Table of Contents
would
lose their eligibility for such exclusion to the CARD Act and the rule's requirements, and therefore could be deemed to be in violation of the CARD Act and the rule, which could result in the
imposition of fines, the suspension of our ability to offer our GPR cards, civil liability, criminal liability, and the inability of our issuing banks to apply certain fees to our GPR cards, each of
which would likely have a material adverse impact on our revenues.
As
the laws applicable to our business, and those of our distributors and issuing banks, change frequently, are often unclear and may differ or conflict between jurisdictions, ensuring
compliance has become more difficult and costly. Any failure, or perceived failure, by us, our issuing banks or our distributors to comply 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 could significantly harm our reputation
and have a material adverse impact on our business, results of operations and financial condition.
Our retail distributors are subject to extensive and complex federal and state regulations and new regulations and/or changes to existing regulations could adversely affect
our ability to offer our GPR cards through their locations, which in turn could have an adverse impact on our business.
As each of our retail distributors offering prepaid cards and related services conducts such activity either as an agent of our
issuing banks or, where applicable, of NetSpend in its capacity as a licensed money transmitter, we do not believe that our distributors would be required to become licensed as money transmitters in
order to engage in such activity. However, there is a risk that a federal or state regulator will take a contrary position and initiate enforcement or other proceedings against a distributor, us or
our issuing banks, which in turn could have an adverse impact on our business, even if the relevant party were to ultimately prevail in such proceedings. In such event, the relevant party may have
additional arguments available to it that the retail distributor should not be subject to the licensing requirements under the relevant state money transmitter statutes, and may utilize one or more of
these arguments at such time. However, it is possible that the relevant party could be unsuccessful in making a persuasive argument that the retail distributor should not be subject to such licensing
requirements, and therefore could be deemed to be in violation of one or more of the state money transmitter statutes. Such failure to comply could result in the imposition of fines, the suspension of
the distributor's ability to offer some or all of our GPR cards and related services in the relevant jurisdiction, civil liability and criminal liability, each of which would likely have a material
adverse impact on our revenues.
Our
retail distributors include a large number of companies in industries that are highly regulated, such as alternative financial services providers. It is possible that changes in the
legal regime governing such businesses could limit the ability of some of our retail distributors to distribute our products or adversely impact their business, and thereby have an indirect adverse
impact on our business. For example, a large number of states have either prohibited, or imposed substantial restrictions upon, the offering of "payday loans," and this activity continues to draw
substantial scrutiny from federal and state legislatures, regulatory authorities and various consumer groups. Furthermore, the federal financial reform legislation enacted in July 2010 grants
supervisory authority over entities engaged in this activity to a new Consumer Financial Protection Bureau, which is directed to promulgate regulations which may significantly impact the operations
and/or viability of various entities, including those engaged in the business of offering payday loans. As a number of our retail distributors, including our largest distributor, ACE Cash Express, are
engaged in offering payday loans, further legislative and regulatory restrictions which negatively impact their ability to continue their operations could have a corresponding negative impact on our
ability to offer our GPR cards through their locations, potentially resulting in a significant decline in our
14
Table of Contents
revenue.
In addition, various states have statutes that limit the ability of check cashers to charge a fee for cashing government-issued checks.
We are subject to extensive and complex federal and state regulation relating to the distribution of our GPR cards through corporate employers and new regulations and/or
changes to existing regulations could adversely affect our business.
We understand that state banking departments, which are charged with regulating the business of money transmission, have traditionally
taken the position that the offering of payroll cards does not constitute money transmission, such that we would not be required to obtain a state money transmission license in order to engage in such
activity. We believe that our marketing, distribution and servicing of GPR cards through corporate employers as a program manager and third-party service provider to our issuing banks is not subject
to regulation under state money transmitter statutes as we do not handle any related consumer funds at any time. However, there is a risk that a federal or state regulator will take a contrary
position and initiate enforcement or other proceedings against us or our issuing banks, which in turn could have an adverse impact on our business, even if we were to ultimately prevail in such
proceedings. In such event, we may have arguments other than those described above that we should not be subject to the licensing requirements under the relevant state money transmitter statutes, and
may utilize one or more of these arguments at such time. However, it is possible that we could be unsuccessful in making a persuasive argument that we should not be subject to such licensing
requirements, and could be deemed to be in violation of one or more of the state money transmitter statutes. Such failure to comply could result in the imposition of fines, the suspension of our
ability to offer our GPR cards through corporate employers in the relevant jurisdiction, civil liability and criminal liability, each of which would likely have a material adverse impact on our
revenues.
The
use of payroll cards as a means for an employer to remit wages or other compensation to its employees or independent contractors is also governed by state labor laws related to wage
payments. Most states permit the use of payroll cards as a method of paying wages to employees, either through statutory provisions allowing such use, or, in the absence of specific statutory
guidance, the adoption by state labor departments of formal or informal policies allowing for the use of such cards. There are a few states, specifically Georgia, New Mexico and Rhode Island, which do
not have statutes and regulations that specifically provide for the use of payroll cards, and have taken the position, through the state labor department, that state law prohibits the use of payroll
cards for the purpose of remitting wages or other compensation. Nearly every state allowing payroll cards places certain requirements and/or restrictions on their use as a wage payment method, the
most common of which involve obtaining the prior written consent of the relevant employee, limitations on payroll card fees, and disclosure requirements. There is a risk that one or more states or
state labor departments that currently permit the use of payroll cards as a wage payment method will take a contrary position, either through revised legislation, regulation or policies, as
applicable, or will impose additional requirements on the provision and use of such cards, each of which could have an adverse impact on our business.
On
November 12, 2009, the FRB amended its Regulation E, which implements the Electronic Fund Transfers Act, to require that financial institutions obtain an
accountholder's consent prior to assessing any fees or charges in connection with the payment of any consumer overdraft for any ATM or one-time debit transaction. This amendment applies to
all accounts subject to Regulation E, including payroll cards, and became effective on July 1, 2010. A significant amount of the revenue generated from the GPR cards we market through
corporate employers historically has been attributable to overdraft fees charged on these cards. The application of these requirements may result in a significant decrease in our revenues attributable
to our GPR cards marketed through corporate employers, as it is possible that a large number of our cardholders that have historically
15
Table of Contents
incurred
overdraft charges will not provide their consent to continue participating in the overdraft service.
Limitations on the amount of interchange fees that may be charged to merchants which are fixed by the card associations and network organizations could decrease our revenues
and negatively impact our business and financial performance.
A material portion of our operating revenues is derived from our share of the fees charged to merchants for services provided in
settling transactions routed through 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 total operating revenues, and we expect interchange revenues to continue to represent a material percentage of our total operating revenues in the
near term. The amounts of these interchange fees are currently fixed by the card associations and network organizations in their sole discretion. In July 2010, the U.S. Congress adopted legislation
which requires the amount of interchange fees charged to merchants in connection with transactions utilizing traditional debit cards and certain prepaid cards issued by financial institutions that,
together with their affiliates, have assets of $10 billion or more, to be reasonable and proportionate to the costs of the underlying transactions. The new legislation also generally gives the
FRB the power to regulate the amount of such interchange fees and require FRB to promulgate regulations establishing standards for determining when interchange fees are reasonable and proportionate to
the costs of the underlying transactions. While general use prepaid debit cards are expressly covered by the legislation, general purpose reloadable prepaid cards are expressly exempted using a
definition that we believe applies to our GPR cards. While we believe that the law's exemption of GPR 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 FRB exercises its powers and sets the limits below the current rates of interchange fees, the interchange rates applicable to transactions conducted by
our cardholders could be impacted through action of the card associations, network organizations and banks that set interchange rates, which would decrease our revenues and profit and could have a
material adverse effect on our financial condition and results of operations. In addition, the exemption of GPR cards from the legislation is not available if, after the one year anniversary of the
law's effective date, the GPR card can be charged an overdraft fee or a fee for the first ATM withdrawal per month at a designated ATM network. Depending on the manner in which these limitations are
clarified in the implementing regulations, and whether we elect after the
effectiveness of such rules to charge such fees, these limitations may in the future limit our ability to benefit from interchange regulation exemptions for GPR cards, or decrease the opportunity to
earn additional revenue from overdraft or ATM fees we might otherwise elect to charge. Additionally, even if some or all of our GPR cards were exempt from any such interchange fee restrictions, it is
possible that such an exemption may be difficult to preserve if the relevant card associations or network organizations do not provide any mechanism that enables the recognition of the exemption in
processing transactions, which could result in a material adverse impact on our revenues.
Changes in applicable laws and regulations may increase our costs of operation, decrease our operating revenues and constrain the terms and conditions of our products and
services.
State and federal legislatures and regulatory authorities have become increasingly focused upon the regulation of the financial
services industry, and continue to adopt new legislation which could result in significant changes in the regulatory landscape for financial institutions (such as our issuing banks) and other
financial services companies (including our business). For example, changes in the way we or our issuing banks are regulated, such as the changes under the federal financial reform legislation enacted
in July 2010 related to the consolidation of the OTS into the OCC and the establishment of a federal Consumer Financial Protection Bureau with oversight over
16
Table of Contents
us
and our products and services, could expose us to increased regulatory oversight and more burdensome regulation of our business and therefore have an adverse impact on our revenue. Additionally,
changes to the disclosures which must be provided with our products and services, or limitations placed on the fees that may be applied to our products and services or the interchange rates charged in
connection with the use of our prepaid debit cards, could negatively impact our financial position by increasing our costs and reducing our revenue. Furthermore, states may adopt statutes which could
limit the application of certain fees or otherwise increase the costs incurred, or negatively impact the revenue received, by our issuing banks in connection with the provision of our prepaid debit
cards, which would have an indirect adverse impact on our revenue. Finally, if the federal or a state government imposes additional legislative or regulatory requirements on us, our issuing banks or
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 and services offered in the relevant jurisdiction
or certain of our issuing banks may terminate their relationship with us, which in turn could adversely affect our business.
Our card programs are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply
with such laws, or abuse of our card programs for purposes of money laundering or terrorist financing, could have a material adverse impact on our business.
Provisions of the USA PATRIOT Act, the Bank Secrecy Act and other federal law impose substantial regulation of financial institutions
designed to prevent use of financial services for purposes of money laundering or terrorist financing. Increasing regulatory scrutiny of our industry with respect to money laundering and terrorist
financing matters could result in more aggressive enforcement of such laws or more onerous regulation, which could have a material adverse impact on our business. In addition, abuse of our prepaid
card programs for purposes of money laundering or terrorist financing, notwithstanding our efforts to prevent such abuse through our regulatory compliance and risk management programs, could cause
reputational or other harm that would have a material adverse impact on our business.
On
June 21, 2010, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN, issued a notice of proposed rulemaking regarding the applicability
of the Bank Secrecy Act's anti-money laundering provisions to prepaid products and other matters related to the regulation of money services businesses. This rulemaking would create
additional obligations for entities, including our distributors, engaged in the provision and sale of certain prepaid products, including our prepaid debit cards, such as the obligation for sellers of
prepaid debit cards to obtain identification information from the purchaser at the point-of-sale. Compliance with these obligations may result in increased compliance costs for
us, our issuing banks and our distributors, and may therefore have a negative impact on the profitability of our business. Additionally, the imposition of such obligations upon sellers of prepaid
debit cards may cause some of our distributors to determine that they do not wish to continue offering our prepaid debit cards for sale or reload, which could also have a significant negative impact
on our business. However, as the proposed rulemaking is subject to further comment and revision, it is difficult to determine with any certainty what obligations the final rulemaking might impose or
what impact they might have on our business or that of our issuing banks or distributors.
At
certain times in our history we have been registered with FinCEN as a "money services business," and therefore have been subject to certain anti-money laundering
compliance obligations arising under the Bank Secrecy Act and its implementing regulations. However, we subsequently concluded that we were not required to be registered as a money services business,
did not renew our registration and have requested, but not yet received, a formal written opinion from FinCEN to confirm our conclusion. Accordingly, while we do have certain anti-money
17
Table of Contents
laundering
compliance obligations, these obligations arise contractually 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 a money services business, whether due to a notification from
FinCEN that we are required to register under the current requirements or new regulatory requirements such as those contained in the proposed rulemaking described above. In the event that we are
required to become registered as a money services business, we may become subject to additional compliance obligations not currently undertaken, which could result in increased costs and a
corresponding decrease in our revenue.
The loss of, or changes to, our relationships with MetaBank or our other issuing banks could adversely affect our business, results of operations and financial position.
We rely on the arrangements we have with our issuing banks to provide us with critical products and services, including the
FDIC-insured depository accounts tied to our GPR cards, access to the ATM networks, membership in the card associations and network organizations and other banking services. As of
June 30, 2010, approximately 71% of our active cards were issued through MetaBank. MetaBank is our preferred issuing bank and has designated us as a preferred program manager for prepaid debit
cards. If our relationship with MetaBank deteriorates or if we lose our position as a preferred program manager of MetaBank, it could hinder our ability to grow our business and have an adverse impact
on our operating results. If any material adverse event were to affect MetaBank or one or more of our other issuing banks, including a significant decline in their financial condition, a decline in
the quality of their services, loss of deposits, their inability to comply with applicable banking and financial service regulatory requirements, systems failure or their inability to pay us fees, or
if we were to lose MetaBank or one or more of our other issuing banks as an issuing bank, we would be forced to find an alternative provider of these critical banking services. Furthermore, as our
issuing banks have appointed us and our distributors as their agents for purposes of providing services in connection with our prepaid debit cards in various states, the termination of our
relationship with one or more of our issuing banks would force us and our distributors to cease offering prepaid debit cards and related services to the extent that we rely on our status as an agent
of our issuing banks in order to do so. We may not be able to find a replacement bank on terms that are acceptable to us or at all. Any change in our issuing banks could disrupt our business or result
in arrangements with new banks that are less favorable to us than those we have with our existing issuing banks, either of which could have a material adverse impact on our results of operations and
our financial condition. In addition, under our arrangements with our issuing banks, we have agreed upon sharing of certain revenues, costs and expenses. Changes in these arrangements could have a
material adverse impact on our results of operations.
Our future growth and financial success will be harmed if there is a decline in the use of prepaid debit cards as a payment mechanism or if there is a decrease in demand for
alternative financial services.
We focus on the marketing and sale of GPR cards and related alternative financial services to the underbanked consumer market. Our
strategic focus is dependent upon general growth in the demand for prepaid services, which has been forecasted by a number of third party industry analysts, some of whom are cited in this prospectus.
As the prepaid financial services industry matures, consumers may find prepaid financial services to be less attractive than traditional bank solutions. Further, other alternatives to prepaid services
may develop and limit the growth of, or cause a decline in the demand for, prepaid debit cards. In addition, negative publicity in the prepaid industry may drive consumers to other financial services
providers. If the growth in demand does not increase at the rate we expect or as some industry analysts are predicting, our ability to grow could be limited and our results of operations could be
materially adversely impacted.
18
Table of Contents
Our profitability is substantially dependent on the transaction, subscription and maintenance fees charged to our cardholders, which may be negatively affected by various
factors.
Our profit margin is largely a function of the transaction, subscription and maintenance fees charged to our cardholders. These fees
are affected by a number of factors, including:
-
- our cardholders' perception of our ability to add value through our services;
-
- the introduction of new products or services by us or our competitors;
-
- changes in card association and network organization fees;
-
- the pricing policies of our competitors; and
-
- general economic conditions.
If
these fees are not maintained, our revenue will decline and we will not be able to sustain our profit margin, which could have a material adverse effect on our profitability.
Our business is dependent on our continued participation in the card associations and network organizations, and the termination of our participation in the card
associations or network organizations or changes in the card association or network organization rules could materially adversely affect our business.
We derive substantially all of our revenue from the compensation paid by our issuing banks for the program management and processing
services that we provide in support of our prepaid debit cards. Because we are not a bank, we are not eligible for membership in the card associations or network organizations. The rules and
regulations of the card associations and network organizations require us to be sponsored by a bank in order to process prepaid debit card transactions and serve as a program manager or member service
provider of our issuing banks' prepaid debit card programs. We currently participate in the card associations and network organizations as a program manager and third-party processor of our card
programs through sponsorship by our issuing banks. If we or one of our issuing banks fails to comply with the rules and regulations of the card associations or network organizations, or we fail to
comply with the applicable program requirements of our issuing banks, the card associations and network organizations could limit, suspend or terminate our participation in the card associations and
network organizations or levy fines against us. The card associations and network organizations frequently amend their rules and regulations. If we were unable to comply with any such amended rules or
regulations, or our issuing banks were unable to comply with such rules or regulations, the card associations or network organizations could limit, suspend or terminate our participation.
We
pay sponsorship, licensing and processing fees to card associations and network organizations for services they provide in processing transactions routed through their networks. The
amounts of these fees are currently fixed by the card associations and network organizations in their sole discretion, and are subject to increase at any time. We may pass through to our cardholders
increases in these fees, but competitive pressures might prevent us from passing 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 increase and our net income would decrease, assuming no change in
transaction volumes. Any such decrease in net income could have a material adverse effect on our financial condition and operating results.
The
termination of our participation in the card associations and network organizations, or any changes in their rules and regulations or our issuing banks' program requirements that
would impair our participation in the card associations and network organizations, could require us to alter or suspend processing services that we provide to the issuing banks with respect to our
prepaid debit cards, which would adversely affect our business. Further, if any of our issuing banks loses its
19
Table of Contents
sponsorship
in the card associations and network organizations, and we are unable to secure another bank to sponsor us as a program manager and third-party processor with such card association or
network organization, we will not be able to process transactions with respect to 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 to liability and protracted and costly litigation.
We collect and store personally identifiable information about our cardholders, including names, addresses, social security numbers,
driver's license numbers and account numbers, and maintain a database of cardholder data relating to specific transactions, including account numbers, in order to process transactions and prevent
fraud. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act, various other federal and state privacy statutes and regulations, and the Payment Card Industry
Data Security Standard, each of which is subject to change at any time. Compliance with these requirements is often difficult and costly, and our failure, or our distributors' failure, to comply may
result in significant fines or civil penalties, regulatory enforcement action, liability to our issuing banks and termination of our agreements with one or more of our issuing banks, each of which
could have a material adverse effect on our financial position and/or operations. In addition, a significant breach could result in our being prohibited from processing transactions for any of the
relevant card associations or network organizations, including Visa, MasterCard or PULSE, which would also have a significant material adverse impact on our financial position and/or operations.
Furthermore,
if our computer systems are breached by unauthorized users, we may be subject to liability, including claims for unauthorized purchases with misappropriated bank card
information, impersonation or similar fraud claims. We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes, or failure to
comply with laws governing notification of such breaches. These claims also could result in protracted and costly litigation. In addition, we could be subject to penalties or sanctions from the
relevant card associations or network organizations.
Finally,
any data breach or failure to comply with any applicable privacy requirements could result in damage to our reputation, which could reduce the use and acceptance of our prepaid
cards, cause our issuing banks or distributors to cease doing business with us, or lead to greater regulation, each of which could have a significant material adverse impact on our business, results
of operations, financial position or potential for growth.
The information technology systems and networks maintained by us and the third parties on whom we rely could fail due to factors, including those beyond our control, which
could negatively impact our existing customer relationships and our business reputation.
We depend on the efficient and uninterrupted operation of our end-to-end operational and technology platform,
which is comprised of a complex system of computers, software, data centers and networks, as well as the systems of a wide variety of third parties, including our issuing banks, distributors, card
associations, network organizations and processors, in which we have limited control. These systems may be prone to periodic failure and outages. Our end-to-end operational and
technology platform, and the third party networks and systems on which it relies, could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss,
telecommunications failure, unauthorized entry and computer viruses. Our property and business interruption insurance may not be adequate to compensate for all losses or failures that may occur. These
failures could negatively impact our existing customer relationships and our business reputation.
20
Table of Contents
We and our distributors may be subject to claims of infringement.
The technologies used in the payments industry are protected by a wide array of patents and other intellectual property rights. As a
result, third parties may assert infringement and misappropriation claims against us from time to time based on our general business operations or the equipment, software or services we use or
provide. In the past, certain third parties have asserted or suggested the possibility of asserting patent infringement claims against us. In two instances, we have entered into patent license
agreements with such third parties. In 2003, Alexsam, Inc. asserted a claim of patent infringement against us. Alexsam dismissed the claim without prejudice less than one month later pursuant to the
parties' agreement to negotiate a patent license agreement. We subsequently entered into a license agreement with Alexsam that gave us the option to begin using Alexsam's patents (if we so chose) in
exchange for royalties, but provided that we would not owe Alexsam royalties for the use of our existing systems.
In 2008, we received a letter from Ronald A. Katz Technology Licensing, L.P., or RAKTL, which contained an offer for us to acquire a license under the RAKTL portfolio of patents related to
certain interactive voice response technologies. In 2010, we entered into a release and contingent license agreement with RAKTL relating to the RAKTL portfolio of patents. Whether or not an
infringement or misappropriation claim is valid or successful, it could adversely affect our business by diverting management's attention and involving us in costly and time-consuming
litigation. In the event a claim of infringement against us is successful, we may be required to pay past and future royalties to use technology or other intellectual property rights then in use, we
may be required to enter into a license agreement and pay license fees or we may be required to stop using the technology or other intellectual property rights then in use. We may be unable to obtain
necessary licenses from third parties at a reasonable cost or within a reasonable time. In addition, our distributors may be subject to infringement or misappropriation claims that if successful could
preclude the distributor from distributing our products and services or cause the distributor to increase the fees they charge us. In addition, if claims made against our distributors arise out of
their distribution of our products and services, we are required to indemnify them against any losses. We may not be fully protected against all losses associated with an infringement or
misappropriation claim involving our licensors and suppliers who provide us with the software and technology that we use in our business. In addition, any such suppliers may refuse to, or may be
unable to, pay any damages or honor their defense and indemnification obligations to us, which may result in us having to bear such losses.
We have entered into outsourcing and other agreements related to certain business operations, and any difficulties experienced in these arrangements could result in
additional expense, loss of cardholders and revenue or an interruption of our services.
We have entered into outsourcing agreements with third parties to provide certain customer service and related support functions to
our cardholder, including the outsourcing of customer service through facilities located in Texas, Mexico and the Philippines. As a result, we must rely on third parties over which we have limited
control to perform certain of our operations and, in certain circumstances, interface with our cardholders. In addition, it may be difficult to continue to outsource customer support services to
facilities outside of the U.S. If these third parties are unable to perform to our requirements, we may be forced to pursue alternative strategies to provide these services, which could result in
delays, interruptions, additional expenses and loss of cardholders.
We
have also entered into contracts with third-party vendors to provide certain services, technology and software. In the event that these service providers fail to maintain adequate
levels of support, do not provide high quality service, discontinue their lines of business, terminate our contractual arrangements or cease or reduce operations, we may be required to pursue new
third-party relationships, which could disrupt our operations, increase the costs of these services, technology or software and divert management's time and resources. If we are unable to complete
21
Table of Contents
a
transition to a new provider on a timely basis, or at all, we could be forced to temporarily or permanently discontinue certain services, which could disrupt services to our customers and adversely
affect our business, financial condition and results of operations.
We are subject to risks and write-offs resulting from fraudulent activities and losses from overdrawn cardholder accounts, which could adversely impact our
financial performance and results of operations.
Our prepaid cards expose us to counterfeit threats through the misuse of such cards, collusion, fraud, identity theft and systemic
attacks on our systems. An additional threat is the theft of cards in a retail environment. Although these stolen cards are not active and thus not able to be used, theft or attempted misuse of our
prepaid debit cards could nonetheless cause reputational harm. While a large portion of fraudulent activity is addressed through the chargeback systems and procedures maintained by the card
associations and network organizations, we are often responsible for losses that result from transactions in small amounts that are fraudulently forced by merchants through the settlement systems
maintained by the card associations and network organizations without prior authorization for which it is not economically feasible to pursue chargebacks. The systems and procedures we have
established to detect and reduce the impact of fraud may not be entirely effective and, as a result, incidents of fraud could increase in the future. Failure to effectively manage risk and prevent
fraud would increase our write-off liability and could harm our reputation, which could have an adverse effect on our operating results and financial condition.
In
addition, from time to time, certain of our cardholders may attempt to utilize their prepaid debit cards for purchase transactions which exceed the amount of funds available in their
card accounts. While we generally decline authorization attempts for such transactions in accordance with the policies and procedures established by our issuing banks, card accounts may become
overdrawn through the application of card association and network organization rules and regulations, the timing of the settlement of card transactions and the assessment of subscription, maintenance
or other fees charged by our issuing banks. We also provide certain cardholders with a "cushion" which allows them to overdraw their card accounts. In any such event, we may be liable to our issuing
banks for the resulting overdrawn account balance.
Finally,
eligible cardholders may enroll in overdraft programs offered by certain of our issuing banks, pursuant to which the issuing bank, in its sole discretion, funds certain prepaid
debit card transactions that exceed the available balance in the relevant card account. While this is a discretionary service offered by the issuing bank to eligible cardholders, we are responsible to
our issuing banks for any losses associated with these overdrawn account balances.
We
maintain reserves intended to cover the risk that we may not recover losses resulting from fraudulent activities and from our cardholders' overdrawn account balances. The provision
for these cardholder related losses resulted in $2.6 million, $2.4 million and $4.9 million of expense during the years ended December 31, 2007, 2008 and 2009,
respectively, but our exposure may increase above these levels for a variety of reasons, including our failure to predict the actual recovery rate, failure to effectively manage risk, and failure to
prevent fraud. Accordingly, our business, results of operations and financial condition could be materially and adversely affected to the extent that we incur losses resulting from overdrawn
cardholder accounts and fraudulent activity which exceed our designated reserves, or we determine that it is necessary to increase our reserves substantially in order to address any increased recovery
risk.
22
Table of Contents
If any of the large retailers in our distribution and reload network fails to remit the cardholders' funds they collect in connection with the load or reload of cards to our
issuing banks, we may reimburse our issuing banks for such funds, which could have a material adverse effect on our financial position and results of operations.
A significant portion of our business is conducted through retailers that provide load and reload services to our cardholders at their
retail locations. Members of our distribution and reload network collect our cardholders' funds and are contractually required to remit them by electronic transfer directly to our issuing banks for
deposit in the cardholder accounts. Our issuing banks typically receive our cardholders' funds no earlier than three business days after they are collected by the retailer. If a retailer becomes
insolvent, files for bankruptcy, commits fraud or otherwise fails to remit funds to our issuing banks, we typically reimburse our issuing banks for such funds. Given the unprecedented volatility in
global financial markets and the economic challenges facing the U.S., the approaches we use to assess and monitor the creditworthiness of our retail distributors may be inadequate, and we may be
unable to detect and take steps to mitigate an increased credit risk in a timely manner. If in the future any of the large retailers in our reload network for any reason fails to remit funds to our
issuing banks and we reimburse our issuing banks for such funds, it could have a material adverse effect on our financial position and results of operations.
The lack of a strong brand name or inability to maintain or strengthen our brand may reduce our ability to retain and attract customers, which could adversely affect our
business, financial condition and operating results.
Many of our cards are principally branded with the trademarks of our distributors. Accordingly, many of our customers do not have a
strong awareness of the NetSpend brand and may not associate our products and services with us. Increasing brand awareness among distributors and ultimate consumers is an important part of our
strategy to grow our business. Developing, promoting and maintaining our brand and image requires a consistent capital investment and expense, and this investment in our brand and image may not be
successful. If we fail to develop, promote and maintain our brand and image, we may not be able to grow our customer base and our financial and operational results may suffer.
If we lose key personnel or are unable to attract additional qualified personnel as we grow, our business could be adversely affected.
We depend on the ability and experience of a number of our key personnel who have substantial experience with our operations, the
rapidly changing payment processing industry, other public companies and the selected markets in which we offer our products and services. It is possible that the loss of the services of one or a
combination of our senior executives or key managers would have an adverse effect on our operations. Our success also depends on our ability to continue to attract, manage and retain other qualified
management and technical personnel as we grow, and we may be unable to attract, manage or retain such personnel. Due to the competitive nature of our industry, we may also be vulnerable to successful
attempts by our competitors to hire our employees.
We may not increase cardholder direct deposit participation and therefore may not achieve all of our strategic growth objectives.
Product features such as direct deposit loading onto reloadable prepaid debit cards have increased the attractiveness of such cards
and increased their utility to underbanked consumers. Because direct deposit active cardholders on average initiate more debit transactions and generate more revenues for us than active cardholders
without direct deposit, increasing cardholder adoption of direct deposit is an important part of our strategy. We are devoting significant resources to the
23
Table of Contents
further
development of our direct deposit programs, and our growth profile depends on a resulting increase in direct deposit participation by our cardholders. Some of our existing contracts with our
retail distributors prohibit us from directly promoting direct deposit to their customers. It is possible that other distributors will in the future insist on similar restrictions, which could limit
our ability to grow direct deposit participation. If we are unable to increase direct deposit participation as projected, we will be unable to meet our growth projections, and our business and results
of operations will be adversely affected.
Business, political and economic factors may affect our operations, the manner in which we conduct our business and our rate of growth.
The U.S. economy has deteriorated significantly over the last two years and unemployment rates have risen. If economic conditions and
unemployment rates continue to deteriorate or do not improve, our target consumer base may be disproportionately affected due to the generally lower incomes of the consumers of our products. In
addition, a large proportion of our target customers work in industries that may be disproportionately affected by a downturn in the U.S. economy. Stagnant economic growth and high unemployment are
likely to negatively affect our customers' ability to purchase new services from us and the use of our GPR cards to purchase good and services. We believe rising unemployment rates contributed
significantly to cardholder attrition in 2008 and 2009. The resulting impact of such economic conditions on our customers and on consumer spending could have a material adverse effect on demand for
our services and on our business, financial condition and operating results.
We have engaged, and may engage in the future, in mergers, acquisitions or strategic transactions that could disrupt our business and harm our financial condition.
We acquired Skylight Financial, Inc., or Skylight, in 2008 to add its employer distribution network to our retail distribution and
direct-to-consumer and online marketing efforts. We may in the future further expand our distribution channels, technology platform or other aspects of our business through the
acquisition of other businesses, assets or technologies. Any such transactions can entail risk, may require a disproportionate amount of our management and financial resources, and may create
operating and financial challenges, including:
-
- difficulty integrating the acquired technologies, services, products, operations and personnel of the acquired business;
-
- disruption to our existing business;
-
- increased regulatory and compliance requirements;
-
- negative impact on our cash and available credit lines for use in financing future growth and working capital;
-
- inability to achieve projected synergies;
-
- increasing costs and complexity associated with the maintenance of adequate internal control and disclosure controls and
procedures; and
-
- loss of key personnel.
The
anticipated benefit to us of any strategic transactions, acquisitions or mergers may never materialize. For example, in 2008 we recorded an impairment of goodwill and acquired
intangible assets related to our acquisition of Skylight in the amount of $26.3 million. Future investments, acquisitions or dispositions could result in dilutive issuances of our equity
securities, a reduction in our cash reserves, the incurrence of additional debt, contingent liabilities or amortization expenses,
24
Table of Contents
or
write-offs of goodwill, any of which could have an adverse effect on our business, financial condition and operating results.
If we are unable to adequately protect our intellectual property and other proprietary rights, we may lose a valuable competitive advantage or be forced to incur costly
litigation to protect our rights.
Our success depends in part on developing and protecting our intellectual property and other proprietary rights. We rely on a
combination of patent, trade secret, copyright and trademark laws, as well as licenses of intellectual property from third parties, to protect our intellectual property and conduct our business in a
manner that does not infringe or misappropriate the intellectual property of third parties. We also rely on other confidentiality and contractual agreements and arrangements with our employees,
affiliates, business partners and customers to establish and protect our intellectual property and similar proprietary rights. We have five patent applications pending with the United States Patent
and Trademark Office, including applications related to our payment processing platform and business methods. These patent applications may not become issued patents. If they do not become issued
patents, our competitors would not be prevented from using these inventions.
Existing
laws afford only limited protection for our intellectual property rights. Intellectual property rights or registrations granted to us may provide an inadequate competitive
advantage to us or be too narrow to protect our products and services. The protections outlined above may not be sufficient to prevent unauthorized use, misappropriation or disclosure of our
intellectual property or technology and may not prevent our competitors from copying, infringing, or misappropriating our products and services. It is possible that others will independently develop,
design around or otherwise acquire equivalent or superior technology or intellectual property rights. If we are unable to adequately protect our intellectual property rights, our business and growth
prospects could be materially and adversely affected.
Our failure to anticipate rapid changes in technology may negatively affect demand for our services in the marketplace.
The electronic payments industry is subject to rapid and significant technological changes. We expect that new services and
technologies applicable to our industry will continue to emerge, and these new services and technologies may be superior to, or render obsolete, the technologies we currently utilize in our products
and services. Additionally, we may make future investments in, or enter into strategic alliances to develop, new technologies and services or to implement changes to our operating platform to further
our growth prospects, strengthen our existing businesses and remain competitive. However, our ability to transition to new services and technologies that we develop may be inhibited by a lack of
industry-wide standards, by resistance from our distributors, network acceptance members, third-party network processors or consumers to these changes, or by the intellectual property
rights of third parties. Our future success will depend, in part, on our ability to develop new technologies and adapt to technological changes and evolving industry standards. These initiatives are
inherently risky, and they may not be successful or may have an adverse effect on our business, financial condition and results of operations.
We and some of our third-party suppliers are susceptible to the occurrence of catastrophic events, which could impair our ability to operate our business.
We and some of the third-party services providers on which we rely are vulnerable to damage from catastrophic events, such as power
loss, natural disasters, terrorism and similar events beyond our control. Some of the third-party providers we rely on to provide customer service and related support functions to our customers are
located in developing nations such as Mexico and the
25
Table of Contents
Philippines,
which may make our products and services more susceptible to certain events, including political upheavals, war, terrorist attacks, strikes, natural disasters and pandemics. If we or our
suppliers experience any of these events, our systems and networks may not function properly, we may lose customers and revenues, and we may have difficulty attracting new customers, any of which
could have a material adverse impact on our business, financial condition and results of operations. In addition, the business interruption insurance we carry may not cover any or all of the losses we
may experience as a result of such events. Any significant losses that are not covered by insurance could negatively affect our financial condition and results of operations.
The terms of our credit agreement and the maximum amounts we are contractually permitted to borrow may restrict our current and future operations and limit our flexibility
in obtaining additional financing and in pursuing other business opportunities.
Prior to the closing of this offering, we expect to enter into a new revolving credit agreement with a syndicate of banks with
SunTrust Bank as administrative agent. This credit agreement will provide a revolving credit facility of $150.0 million. The new credit agreement will be unconditionally guaranteed and secured
by virtually all of the assets of our existing and future subsidiaries.
The new credit agreement will contain, and any future indebtedness of ours would likely contain, a number of restrictive financial and non-financial covenants that impose significant
operating and financial restrictions on us, including requirements that we maintain certain liquidity levels and financial ratios and certain restrictions on our ability to make investments, pay
dividends or sell assets. A failure by us to comply with the covenants or financial ratios contained in our credit agreement could result in an event of default which could adversely affect our
ability to respond to changes in our business and manage our operations. Upon the occurrence of any event of default under our credit agreement, the lender could elect to declare all amounts
outstanding to be due and payable and require us to apply all of our available cash to repay these amounts. The acceleration of indebtedness under our credit agreement could have a material adverse
effect on our business, financial condition and results of operations.
In addition to the current restrictions and requirements contained in this new credit agreement, the maximum amounts we are contractually permitted to borrow under the new credit
agreement could limit our flexibility in obtaining additional financing and in pursuing other business opportunities. These restrictions and requirements could have negative consequences for us,
including the following:
-
- our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes may
be impaired or financing may not be available to us on favorable terms;
-
- we would need a substantial portion of our cash flows to pay the interest and, at maturity in September 2015, the
principal on our indebtedness, including indebtedness that we may incur in the future, which would reduce the funds that would otherwise be available for operations and future business opportunities;
-
- a substantial decrease in net operating cash flows could make it difficult for us to repay our indebtedness at maturity
and force us to modify our operations and to comply with the financial covenants contained in the new credit agreement;
-
- our debt level could make us more vulnerable than our competitors to an increasingly competitive environment, and to a
downturn in either our business or the economy generally; and
-
- because our debt has a variable rate of interest, it exposes us to the risk of increased interest rates.
26
Table of Contents
As a public company, we will be subject to additional reporting and corporate governance requirements that may be difficult for us to satisfy, will raise our costs and may
divert resources and management attention from operating our business.
We have historically operated as a private company. After this offering, we will become subject to certain reporting and corporate
governance requirements, including the rules of the Nasdaq Stock Market, and the provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the regulations promulgated thereunder,
which will impose significant new compliance obligations upon us. As a public company, we will be required, among other things, to evaluate and maintain our system of internal control over financial
reporting, and report on management's assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and related rules and regulations of the SEC and the
Public Company Accounting Oversight Board.
The
adequacy of our internal control over financial reporting must be assessed by management each year commencing with the year ending December 31, 2011. We do not currently have
comprehensive documentation of our internal control over financial reporting, nor do we document our compliance with these controls on a periodic basis in accordance with Section 404 of the
Sarbanes-Oxley Act. Furthermore, we have not tested our internal control over financial reporting in accordance with Section 404 and, due to our lack of documentation, this testing would not be
possible at this time. If we were unable to implement the controls and procedures required by Section 404 in a timely manner or otherwise to comply with Section 404, management might not
be able to certify, and our independent registered public accounting firm might not be able to report
on, the adequacy of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial
information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq Stock Market listing standards. There could also be a negative reaction in the financial markets due to
a loss of investor confidence in us and the reliability of our financial statements. In addition, if we are unable to implement the controls and procedures required by Section 404 effectively
or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent registered public accounting
firm.
The
changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight that will increase our 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. In addition, we might not be successful in implementing and maintaining
controls and procedures that comply with these requirements. If we fail to maintain an effective internal control environment or to comply with the numerous legal and regulatory requirements imposed
on public companies, we could make material errors in, and be required to restate, our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our
financial statements and sanctions imposed on us by the SEC.
Risks Related to This Offering
A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop
significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the
lock-up agreements described in "Underwriting." These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of
our common stock. After the close of this offering, we will have shares of common stock outstanding based on the number of shares outstanding as of
, 2010. This includes the shares that we
are selling in this offering, which may
27
Table of Contents
be
resold in the public market immediately. The remaining shares, or % of our outstanding shares after this offering, will be able to be sold,
subject to any
applicable volume limitations under federal securities laws, in the near future as set forth below.
|
|
|
|
|
Days after date of prospectus
|
|
Shares eligible
for resale |
|
Comment |
Date of prospectus |
|
|
|
Freely tradable shares saleable under Rule 144 that are not subject to lock-up |
90 days |
|
|
|
Shares resaleable under Rules 144 and 701 that are not subject to lock-up |
180 days |
|
|
|
Lock-up released; shares saleable under Rules 144 and 701 |
Thereafter |
|
|
|
Restricted securities held for one year or less |
In addition, as of June 30, 2010, there were 722,597 shares subject to outstanding warrants, 11,168,708 shares subject to outstanding
options and an additional 1,843,479 shares reserved for future issuance under our stock option plan that will become eligible for sale in the public market to the extent permitted by any
applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act. Moreover, after this offering, holders of an aggregate of approximately
shares of our common stock as of June 30, 2010, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to
include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our employee
incentive plans. Once we register these shares, they can be freely sold in the public market upon
issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.
After
this offering, the holders of approximately shares of our common stock will have rights to demand the registration of their shares or include their shares in
registration statements that we may file on our behalf or on behalf of other stockholders. By exercising their registration rights and selling a large number of shares, these holders could cause the
price of our common stock to decline, which could impede our ability to make acquisitions through the issuance of additional shares of our common stock. Furthermore, if we file a registration
statement to offer additional shares of our common stock and have to include shares held by those holders, it could impair our ability to raise needed capital by depressing the price at which we could
sell our common stock.
Because our common stock price is likely to be highly volatile, the market price of our common stock could drop unexpectedly.
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock
will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering. An active trading market may
not develop or be sustained and the market price of our common stock may decline. Even if an active market for our stock develops and continues, our stock price nevertheless may be volatile. Some of
the factors that may cause the market price of our common stock to fluctuate include:
-
- markets, including the Nasdaq Stock Market, have experienced significant price and volume fluctuations that have affected
the actual or anticipated variations in our quarterly operating results or the quarterly financial results of companies perceived to be similar to us;
28
Table of Contents
-
- announcements of technological innovations or new services by us or our competitors;
-
- changes in estimates of our financial results or recommendations by market analysts;
-
- announcements by us or our competitors of significant projects, contracts, acquisitions, strategic alliances or joint
ventures;
-
- changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
-
- regulatory developments in the U.S. or other countries in which we operate or have clients;
-
- litigation involving our company, our general industry or both;
-
- additions or departures of key personnel;
-
- investors' general perception of us;
-
- changes in general economic, industry and market conditions; and
-
- changes in the market valuations of other IT service providers.
Many
of these factors are beyond our control. In addition, the stock market prices of equity securities of many technology companies fluctuate. These fluctuations have often been
unrelated or disproportionate to operating performance. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation. Any securities
class action litigation could result in substantial costs and the diversion of management's attention and resources.
Our executive officers, directors and principal stockholders have substantial control over our business, which could lead to conflicts of interest with other stockholders
and could limit your ability to influence corporate matters.
Following this offering:
-
- Oak Investment Partners will beneficially own approximately % of our outstanding common stock;
-
- JLL Partners and its affiliated investment funds will own in the aggregate approximately % of our
outstanding common stock, representing just under 25% of the aggregate voting power; and
-
- Our executive officers and directors will collectively own approximately % of our outstanding common stock.
Accordingly,
these stockholders, acting individually or together, will have significant influence over all matters requiring stockholder approval, including the election and removal of
directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders may dictate the day-to-day management of our
business. This concentration of ownership could limit your ability to influence corporate matters and could have the effect of delaying, deferring or preventing a change in control, or impeding a
merger or consolidation, takeover or other business combination or a sale of all or substantially all of our assets. In addition, the significant concentration of stock ownership may adversely affect
the trading price of our common stock.
29
Table of Contents
If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment and may experience additional dilution in the
future.
If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for
their shares. As a result, you will incur immediate and substantial dilution of $ per share, representing the difference between our adjusted net tangible book value per share after
giving effect to this offering and an assumed initial public offering price of $ per share. Purchasers of shares of our common stock in this offering will have contributed approximately
% of the aggregate price paid by all purchasers of our common stock, but will own only approximately % of the shares of our common stock
outstanding after this offering.
Moreover, we issued options in the past to acquire common stock at prices significantly below the initial public offering price. As of June 30, 2010, there were 722,597 shares of common
stock issuable upon the exercise of warrants at a weighted average exercise price of $1.69 per share and 3,275,568 shares subject to exercisable outstanding options at a weighted average
exercise price of $2.94 per share. To the extent that these outstanding warrants or options are ultimately exercised, you will incur further dilution. In the future, we may also acquire other
companies or assets, raise additional capital or finance strategic alliances by issuing equity, which may result in additional dilution to you.
We have no plans to pay regular dividends on our common stock, so you may not receive funds from your investment without selling your common stock.
We do not intend to declare or pay regular dividends on our common stock in the foreseeable future. Instead, we generally intend to
invest any future earnings in our business. Subject to Delaware law, our board of directors will take into account the following factors
in determining the timing and amount of the payment of future dividends on our common stock, if any:
-
- applicable contractual restrictions limiting our ability to pay dividends (such as those contained in our current credit
facility);
-
- our earnings and cash flows;
-
- our capital requirements;
-
- our overall financial condition; and
-
- other factors our board of directors deems relevant.
Accordingly,
you may have to sell some or all of your common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our
common stock and may lose the entire amount of your investment.
Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and could also limit the market price of our common stock.
Certain provisions of Delaware law and of our certificate of incorporation and bylaws to be effective upon the closing of this
offering could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us, even if such a change in control
would be beneficial to our stockholders or result in a premium for your shares of our common stock. These provisions may also prevent or
frustrate attempts by our stockholders to replace or remove our management. These provisions include:
-
- limitations on the removal of directors;
30
Table of Contents
-
- the ability of our board of directors, without stockholder approval, to issue preferred stock with terms determined by our
board of directors and to issue additional shares of our common stock;
-
- advance notice requirements for stockholder proposals and nominations;
-
- the inability of stockholders to act by written consent or to call special meetings; and
-
- the ability of our board of directors to make, alter or repeal our bylaws.
The affirmative vote of the holders of at least 75% (or 80% in the case of the provision related to stockholder action by written consent) of our shares of capital stock entitled to
vote is necessary to amend or repeal the above provisions that are contained in our certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and
issue new series of preferred stock without stockholder approval. Also, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of
at least 75% of our shares of capital stock entitled to vote.
In
addition, upon the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination
transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for
stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
These
provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
Because we will have broad discretion in using the net proceeds of this offering, the benefits from our use of the proceeds may not meet investors' expectations.
Our management will have broad discretion over the allocation of the net proceeds from this offering as well as over the timing of
their expenditure without stockholder approval. We may use a portion of the proceeds to pay down amounts owed under our existing credit facility, and we expect the balance of the net proceeds to be
used for working capital and other general corporate purposes, including possible acquisitions of complementary technologies or businesses. As a result, investors will be relying upon management's
judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. Our failure to apply these proceeds effectively could cause our
business to suffer. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
31
Table of Contents
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections
about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of
forward-looking terminology 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 referencing future events, conditions or circumstances. Those statements include, among other things, the discussions of our business strategy and
expectations concerning our market position, future operations, financial position, revenue, costs, prospects, margins, profitability, liquidity and capital resources, as well as management's plans
and objectives. We caution you that reliance on any forward-looking statement involves risks and uncertainties and that although we believe that the assumptions on which our forward-looking statements
are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be materially incorrect. These
factors include but are not limited to:
-
- increasing competition in the prepaid debit card industry;
-
- our dependence on a limited number of retail distributors of our products;
-
- exposure to cardholder and other losses;
-
- our reliance on our relationships with our issuing banks;
-
- regulatory, legislative and judicial developments in our operations area;
-
- changes in regulations impacting interchange fees;
-
- changes in card association or network organization rules;
-
- our ability to protect against unauthorized disclosure of cardholder data;
-
- fluctuations in customer retention rates;
-
- general economic conditions;
-
- our ability to promote our brand;
-
- our reliance on outsourced customer service providers; and
-
- our ability to protect our intellectual property rights.
These
and other factors are more fully discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this
prospectus. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans, objectives or projected financial results referred to in any of the
forward-looking statements. Except as required by law, we do not intend to update any of these forward-looking statements to reflect future events or circumstances.
INDUSTRY DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate,
including our general expectations and market position, market opportunity and market share, is based on information from various sources (including industry publications, surveys and forecasts and
our internal research), on assumptions that we have made, which we believe are reasonable, based on those data and other similar sources and on our knowledge of the markets for our services. Our
internal research has not been verified by
32
Table of Contents
any
independent source and we have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, market
opportunity and market share information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future
performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in
"Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates included in this prospectus.
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $ million
(or approximately
$ million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of
$ per share, which is the
mid-point of the range of prices set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses that we must pay. A $1.00
increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately
$ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts
and
commissions and estimated offering expenses payable by us. We will not receive any of the net proceeds from the sale of shares by the selling stockholders.
We may use a portion of the net proceeds from this offering to repay outstanding borrowings under the new revolving credit facility we expect to enter into prior to the closing of this
offering. As of June 30, 2010, there were no outstanding borrowings under our existing revolving credit facility and outstanding borrowings of $56.3 million under our existing term loan
facility, which will be repaid in full by borrowings under the new revolving credit facility. The new revolving credit facility will have a maturity in September 2015. The outstanding borrowings under
the new revolving credit facility will bear interest, at our election, as either base rate (Base Rate) or Eurodollar loans:
-
- Eurodollar loans will bear interest at the adjusted LIBOR for the interest period in effect for such borrowing plus a
spread of 2.50% to 3.25% based on our leverage ratio.
-
- Base Rate loans will bear interest at the base rate plus a spread of 1.50% to 2.25% based on our leverage ratio.
We
intend to use the remainder of the net proceeds for general corporate purposes, including to fund working capital. We may also use a portion of the net proceeds to expand our current
business through strategic alliances involving, or acquisitions of, other assets or businesses that are complementary to ours. However, we have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any such transaction. Pending use of the net proceeds, as described above, we plan to invest the net proceeds in a variety of capital preservation
investments, including investment-grade, short-term, interest-bearing securities.
This
expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual
expenditures will depend upon numerous factors, including cash flows from operations and the anticipated growth of our business.
33
Table of Contents
DIVIDEND POLICY
We do not expect to pay dividends in the foreseeable future. We currently intend to retain all of our future earnings to fund the
operation, development and expansion of our business. In addition, the terms of the revolving credit facility we expect to enter into prior to the closing of this offering contains certain limitations
on our ability to pay cash dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of
operations, financial condition, future prospects, contractual restrictions and other factors that our board of directors deems relevant.
In
connection with our acquisition of Skylight, on July 7, 2008, our board of directors declared a special cash dividend of approximately $30 million on shares of our
Class A Common Stock, Class B Common Stock and Series A Preferred Stock. The record date for the dividend was July 14, 2008 and the dividend was paid in two tranches:
$25 million in July 2008 and $5 million in March 2009.
34
Table of Contents
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2010:
-
- on an actual basis; and
-
- on a pro forma basis to give further effect to the sale in this offering of shares of our common
stock at
an assumed initial public offering price of $ per share, the mid-point of the range of prices set forth on the cover of this prospectus, after deducting underwriting
discounts and
commissions and estimated offering expenses payable by us. See "Use of Proceeds" on page 33 for additional information regarding our intended use of the net proceeds from this offering.
This
table should be read in conjunction with our "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
Actual |
|
Pro forma |
|
|
|
|
(in thousands,
except share amounts) |
|
Cash and cash equivalents |
|
$ |
15,384 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion: |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
$ |
|
|
|
|
|
|
Term loan |
|
|
45,000 |
|
|
|
|
|
Capital lease |
|
|
694 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
|
45,694 |
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, $0.001 par value, 165,000,000 shares authorized, 87,781,040 shares issued less 3,370,000 shares held in treasury (actual)
; shares authorized, shares issued and outstanding less 3,370,000 shares held in treasury (pro forma)(1) |
|
|
88 |
|
|
|
|
Treasury stock |
|
|
(11,374 |
) |
|
|
|
Additional paid-in capital |
|
|
122,719 |
|
|
|
|
Accumulated other comprehensive income |
|
|
823 |
|
|
|
|
Retained earnings |
|
|
6,373 |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
118,629 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
164,323 |
|
|
|
|
|
|
|
|
|
|
- (1)
- Assumes
the conversion of all outstanding shares of our Class A Common Stock into shares of our common stock. Includes 15,000,000 authorized shares
of Class B common stock, of which 10,509,197 shares were outstanding as of June 30, 2010.
A
$1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the pro forma amount of each of cash and cash
equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $ million, assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.
35
Table of Contents
The
table above does not include:
-
- 11,168,708 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010 under our
2004 Plan at a weighted average exercise price of $3.38 per share;
-
- 315,511 shares of restricted common stock outstanding as of June 30, 2010;
-
- 1,843,479 additional shares of common stock reserved as of June 30, 2010 for future issuance under our 2004 Plan;
and
-
- 722,597 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2010 at a
weighted average exercise price of $1.69 per share, all of which have been exercised or expire upon consummation of this offering.
36
Table of Contents
DILUTION
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the assumed
initial public offering price of $ per share, the mid-point of the range of prices set forth on the cover page of this prospectus, and the adjusted net tangible book value
per share of
our common stock after this offering.
At
June 30, 2010, the net tangible book value of our common stock was approximately $(37.3) million, or approximately $(0.44) per share. We calculate our net tangible book
value per share as total assets less intangible assets and total liabilities, divided by the number of shares of our common stock outstanding on June 30, 2010.
After
giving effect to the sale of shares of our common stock offered by us at the assumed initial public offering price of
$ per share, the mid-point of
the range of prices set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, our adjusted net tangible book value at
June 30, 2010 would have been approximately $ million, or approximately $ per share.
This amount represents an immediate increase in net tangible book value
of approximately $ per share to our existing stockholders and
an immediate dilution in net tangible book value of $ per share to new investors purchasing shares of our common stock in this offering.
The
following table illustrates this dilution without giving effect to the option to purchase additional shares granted to the underwriters.
|
|
|
|
|
|
|
|
Assumed initial public offering price per share |
|
|
|
|
$ |
|
|
Net tangible book value per share at June 30, 2010 |
|
$ |
|
|
|
|
|
Increase in net tangible book value per share attributable to new investors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net tangible book value per share after this offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in net tangible book value per share to new investors |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
A
$1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the adjusted net tangible book value per share after
this offering by approximately $ million, and dilution in net tangible book value per share to new investors by approximately
$ assuming that the number of shares
offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.
The
following table sets forth as of June 30, 2010, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average
price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering, before deducting underwriting discounts and commissions and estimated offering
expenses at an assumed initial public offering price of $ per share, the mid-point of the range of prices set forth on the cover page of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Total Consideration |
|
|
|
|
|
Average Price
per Share |
|
|
|
Number |
|
Percent |
|
Amount |
|
Percent |
|
Existing stockholders |
|
|
|
|
|
|
|
$ |
|
|
|
|
% |
$ |
|
|
New investors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
|
|
|
100.0 |
% |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Table of Contents
The
number of shares of our common stock to be outstanding following this offering is based on 84,411,040 shares of our common stock outstanding as of June 30, 2010 and
excludes:
-
- 11,168,708 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2010 under our
2004 Plan at a weighted average exercise price of $3.38 per share;
-
- 315,511 shares of restricted common stock outstanding as of June 30, 2010;
-
- 1,843,479 additional shares of common stock reserved as of June 30, 2010 for future issuance under our 2004 Plan;
and
-
- 722,597 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2010 at a
weighted average exercise price of $1.69 per share, all of which have been exercised or expire upon consummation of this offering.
To
the extent any of these outstanding options or warrants is exercised, there will be further dilution to new investors. To the extent all of such outstanding options and warrants had
been exercised as of June 30, 2010, the adjusted net tangible book value per share after this offering would be $ and total dilution per share to new investors would be
$ .
If
the underwriters exercise their option to purchase additional shares in full:
-
- the percentage of shares of common stock held by existing stockholders will decrease to approximately % of
the total number of shares of our common stock outstanding after this offering; and
-
- the number of shares held by new investors will increase
to , or approximately % of the total
number of shares of our common stock outstanding after this offering.
38
Table of Contents
SELECTED CONSOLIDATED FINANCIAL DATA
The tables below set forth selected consolidated financial data for the periods indicated. The consolidated balance sheet data as of
December 31, 2008 and 2009 and statement of operations data for the years ended December 31, 2007, 2008 and 2009 have been derived from the audited consolidated financial statements of
NetSpend Holdings, Inc. for the years ended December 31, 2007, 2008 and 2009 included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2006 and
2007 and statement of operations data for the year ended December 31, 2006 have been derived from the audited consolidated financial statements of NetSpend Holdings, Inc. for the years
ended December 31, 2006 and 2007 not included in this prospectus. The consolidated balance sheet and statement of operations data as of and for the year ended December 31, 2005 have been
derived from the unaudited consolidated financial statements of NetSpend Holdings, Inc. for the year ended December 31, 2005 not included in this prospectus. The consolidated balance
sheet and statement of operations data as of and for the six months ended June 30, 2009 and 2010 have been derived from the unaudited condensed consolidated financial statements of NetSpend
Holdings, Inc. included elsewhere in this prospectus. It is important that you read this information together with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 42, and our consolidated financial statements and related notes beginning on page F-1. The unaudited selected consolidated financial data include, in
the opinion of our management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position and results of operations for
these periods.
Our
historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily
indicative of results for a full fiscal year.
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Six Months Ended
June 30, |
|
|
|
(unaudited)
2005 |
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
(in thousands, except per share amounts)
|
|
Revenues |
|
$ |
45,703 |
|
$ |
76,526 |
|
$ |
128,597 |
|
$ |
183,170 |
|
$ |
225,000 |
|
$ |
109,636 |
|
$ |
136,967 |
|
Direct operating costs |
|
|
24,185 |
|
|
46,108 |
|
|
57,294 |
|
|
80,216 |
|
|
106,572 |
|
|
51,826 |
|
|
63,017 |
|
Other operating expenses |
|
|
19,957 |
|
|
30,063 |
|
|
46,020 |
|
|
76,983 |
|
|
92,842 |
|
|
46,849 |
|
|
49,115 |
|
Goodwill and intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
Operating income (loss) |
|
|
1,561 |
|
|
355 |
|
|
25,283 |
|
|
(314 |
) |
|
35,815 |
|
|
21,190 |
|
|
20,535 |
|
Income (loss) before income taxes |
|
|
970 |
|
|
773 |
|
|
24,094 |
|
|
(4,338 |
) |
|
30,677 |
|
|
18,464 |
|
|
18,524 |
|
Provision for income taxes |
|
|
251 |
|
|
861 |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
7,386 |
|
|
7,460 |
|
Net income (loss) |
|
|
719 |
|
|
(88 |
) |
|
14,726 |
|
|
(11,645 |
) |
|
18,174 |
|
|
11,078 |
|
|
11,064 |
|
Net income (loss) per share for Class A and Class B Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
$ |
(0.01 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.13 |
|
$ |
0.13 |
|
|
Diluted |
|
$ |
0.01 |
|
$ |
(0.01 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.13 |
|
$ |
0.13 |
|
39
Table of Contents
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
As of June 30, |
|
|
|
(unaudited)
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
(unaudited)
2010 |
|
|
|
(in thousands)
|
|
Cash and cash equivalents |
|
$ |
11,702 |
|
$ |
20,678 |
|
$ |
30,141 |
|
$ |
21,490 |
|
$ |
21,154 |
|
$ |
15,384 |
|
Total assets |
|
|
82,667 |
|
|
96,909 |
|
|
109,734 |
|
|
216,747 |
|
|
222,285 |
|
|
218,637 |
|
Long-term debt, net of current portion |
|
|
|
|
|
|
|
|
42,000 |
|
|
76,875 |
|
|
51,979 |
|
|
45,694 |
|
Total stockholders' equity |
|
|
66,223 |
|
|
67,870 |
|
|
35,544 |
|
|
88,345 |
|
|
109,352 |
|
|
118,629 |
|
Other Financial and Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
(unaudited) |
|
Six Months Ended
June 30,
(unaudited) |
|
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
(dollars in thousands)
|
|
Adjusted EBITDA(1) |
|
$ |
4,188 |
|
$ |
5,200 |
|
$ |
31,288 |
|
$ |
37,343 |
|
$ |
40,367 |
|
$ |
18,442 |
|
$ |
33,920 |
|
Cash net income(2) |
|
$ |
2,496 |
|
$ |
(458 |
) |
$ |
16,644 |
|
$ |
7,800 |
|
$ |
16,854 |
|
$ |
7,509 |
|
$ |
16,370 |
|
Number of active cards (at period end)(3) |
|
|
545,338 |
|
|
861,115 |
|
|
1,188,201 |
|
|
1,577,767 |
|
|
1,868,341 |
|
|
1,640,017 |
|
|
2,037,515 |
|
Gross dollar volume(4) |
|
$ |
1,313,758 |
|
$ |
3,260,281 |
|
$ |
3,686,554 |
|
$ |
5,690,842 |
|
$ |
7,570,339 |
|
$ |
3,703,370 |
|
$ |
4,915,607 |
|
Percentage of active card accounts with direct deposit(5) |
|
|
9.3 |
% |
|
11.2 |
% |
|
14.0 |
% |
|
23.4 |
% |
|
27.5 |
% |
|
24.8 |
% |
|
29.4 |
% |
- (1)
- We
use a non-GAAP financial metric that we label "Adjusted EBITDA" to evaluate our financial performance. We compute Adjusted EBITDA by
adjusting net income or net loss to remove the effect of income and expenses related to interest, taxes, depreciation and amortization ("EBITDA"), and then adjusting for stock-based compensation, and
non-recurring gains and losses. We believe that Adjusted EBITDA is an important metric for the following reasons:
-
- It provides a meaningful comparison of our operating results over several periods because it removes the impact of income
and expense items that are not a direct result of our core operations, such as goodwill and intangible impairments, legal settlements and one-time settlement gains;
-
- We use it as a tool to assist in our planning for the effect of strategic operating decisions and for the prediction of
future operating results;
-
- It functions as a threshold target for our company-wide employee bonus compensation; and
-
- We use it to evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.
40
Table of Contents
- The
following is a reconciliation of our net income (loss) for the years ended December 31, 2005, 2006, 2007, 2008 and 2009 and the six
months ended June 30, 2009 and 2010 to Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
Six Months Ended
June 30,
(unaudited) |
|
|
|
(unaudited)
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
(in thousands)
|
|
Net income (loss) |
|
$ |
719 |
|
$ |
(88 |
) |
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
Interest income |
|
|
(164 |
) |
|
(452 |
) |
|
(876 |
) |
|
(384 |
) |
|
(32 |
) |
|
(27 |
) |
|
(46 |
) |
|
Interest expense |
|
|
48 |
|
|
34 |
|
|
2,065 |
|
|
4,408 |
|
|
5,170 |
|
|
2,753 |
|
|
2,057 |
|
|
Income tax expense |
|
|
251 |
|
|
861 |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
7,386 |
|
|
7,460 |
|
|
Depreciation and amortization |
|
|
3,321 |
|
|
3,988 |
|
|
5,251 |
|
|
8,899 |
|
|
10,297 |
|
|
5,144 |
|
|
6,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
4,175 |
|
|
4,343 |
|
|
30,534 |
|
|
8,585 |
|
|
46,112 |
|
|
26,334 |
|
|
26,610 |
|
|
Stock-based compensation expense |
|
|
13 |
|
|
857 |
|
|
754 |
|
|
2,473 |
|
|
4,484 |
|
|
2,337 |
|
|
3,010 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
4,188 |
|
$ |
5,200 |
|
$ |
31,288 |
|
$ |
37,343 |
|
$ |
40,367 |
|
$ |
18,442 |
|
$ |
33,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Our
Adjusted EBITDA is not necessarily comparable to what other companies define as Adjusted EBITDA. In addition, Adjusted EBITDA is not a
measure defined by U.S. GAAP and should not be considered as a substitute for or alternative to net income, operating income, cash flows from operating activities or other financial information
as determined by U.S. GAAP. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or non-recurring
items.
-
(2)
- We
also use a non-GAAP financial metric that we label "Cash Net Income" to evaluate our financial performance. We compute Cash Net Income by
adjusting net income or net loss to remove tax-effected amortization expense, stock-based compensation and other non-recurring gains and losses. We believe that Cash Net Income
is an important metric for the following reasons:
-
- It provides a meaningful indicator of our cash flows because it removes the impact of significant non-cash
items from net income;
-
- We use it as a tool to assist in cash forecasting; and
-
- We use it to evaluate our ability to service debt and fund capital expenditures.
The
following is a reconciliation of our net income (loss) for the six months ended June 30, 2009 and 2010, and the years ended December 31, 2005, 2006, 2007, 2008 and 2009 to Cash Net
Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
Six Months Ended
June 30,
(unaudited) |
|
|
|
(unaudited)
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
(in thousands)
|
|
Net income (loss) |
|
$ |
719 |
|
$ |
(88 |
) |
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
Stock-based compensation expense |
|
|
13 |
|
|
857 |
|
|
754 |
|
|
2,473 |
|
|
4,484 |
|
|
2,337 |
|
|
3,010 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
2,385 |
|
|
2,385 |
|
|
2,385 |
|
|
3,224 |
|
|
3,516 |
|
|
1,944 |
|
|
1,577 |
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax adjustments |
|
|
2,398 |
|
|
3,242 |
|
|
3,139 |
|
|
31,982 |
|
|
(2,229 |
) |
|
(5,948 |
) |
|
8,887 |
|
|
Tax rate |
|
|
25.9 |
% |
|
111.4 |
% |
|
38.9 |
% |
|
39.2 |
% |
|
40.8 |
% |
|
40.0 |
% |
|
40.3 |
% |
|
Tax adjustment |
|
|
621 |
|
|
3,612 |
|
|
1,221 |
|
|
12,537 |
|
|
(909 |
) |
|
(2,379 |
) |
|
3,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash net income |
|
$ |
2,496 |
|
$ |
(458 |
) |
$ |
16,644 |
|
$ |
7,800 |
|
$ |
16,854 |
|
$ |
7,509 |
|
$ |
16,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Table of Contents
The
2008 tax rate was adjusted to remove the impact of the goodwill impairment charge recorded during 2008 in order to establish the rate used to book taxes in the absence of this impairment
consistent with the pre-tax adjustments used to calculate Cash Net Income.
Our Cash Net Income is not necessarily comparable to what other companies define as Cash Net Income. In addition, Cash Net Income is not a measure defined by U.S. GAAP and should not be
considered as a substitute for or alternative to net income, operating income, cash flows from operating activities or other financial information as determined by U.S. GAAP. Our presentation
of Cash Net Income should not be construed as an implication that our future results will be unaffected by unusual or non-recurring items.
- (3)
- Number
of active cards represents the total number of our GPR card accounts that have had a PIN- or signature-based transaction, a load
transaction at a retailer location or an ATM withdrawal within the previous 90 days.
- (4)
- Gross
dollar volume represents the total volume of debit transactions and cash withdrawals made using our GPR cards.
- (5)
- Percentage
of active card accounts with direct deposit represents the percentage of our active card accounts that have had a direct deposit load within the
previous 90 days.
42
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in "Risk Factors."
Overview
NetSpend is a leading provider of general-purpose reloadable prepaid debit cards, or GPR cards, and related alternative financial
services to underbanked consumers in
the U.S. We empower underbanked consumers by providing innovative and affordable financial products and services tailored to meet their particular financial services needs and preferences in a manner
that traditional banking institutions have historically not met. In addition, our products and services provide our retail distributors an opportunity to enhance their customer relationships and
generate incremental, ongoing revenue streams.
We
have 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 cards through multiple
channels, including retail distributors, direct-to-consumer and online marketing programs, and corporate employers as an alternative method of wage payment for their employees.
Beginning in 2008, we decided to focus primarily on our GPR cards, and we ceased marketing gift cards entirely as of August 21, 2010.
We
have developed a proprietary, fully-integrated operational and technology platform. Our in-house platform is end-to-end in that it encompasses the
critical functions required for us to acquire cardholders, process transactions, maintain account-level data, communicate with cardholders, manage risk, ensure regulatory compliance and connect to our
issuing banks and distributors. These integrated capabilities allow us to customize our products and services for different markets, distribution channels and customer segments. Further, by processing
transactions on our own platform, we gain unique and extensive insight into the attitudes, characteristics and purchasing behavior of underbanked consumers. Our processing platform is scalable, which
will allow us to increase our profitability as our number of active cards and the volume of the transactions we process increase.
We
have agreements with FDIC-insured depository institutions that serve as the issuers of our MasterCard- and Visa-branded GPR cards. Our cardholders may use
their GPR card to make purchase transactions at any merchant that participates in the MasterCard, Visa or PULSE networks and to withdraw funds from participating automated teller machines, or ATMs.
MetaBank, which has been one of our issuing banks since 2005, is a federal savings bank and a leading issuer of prepaid debit cards. In January 2010, we agreed to promote MetaBank as a preferred
issuing bank and MetaBank agreed to promote us as a preferred program manager. In order to further align our strategic interests with MetaBank, we also acquired approximately 4.9% of the outstanding
equity interests in Meta Financial Group, Inc., MetaBank's holding company.
Our
operating company and predecessor, NetSpend Corporation, was incorporated in Texas in 1999. In May 2004, Oak Investment Partners acquired a controlling equity interest in our
operating company through a recapitalization transaction pursuant to which we, as a newly-formed holding company incorporated in Delaware, acquired all of the capital stock of NetSpend Corporation. In
43
Table of Contents
2008
we acquired Skylight Financial, Inc., or Skylight, a payroll card provider, in a stock-for-stock merger.
Key Business Metrics
As a leading provider of GPR cards and related alternative financial services to underbanked consumers, we evaluate a number of
business metrics to monitor our performance and manage our business. We believe the following metrics are the primary indicators of our performance.
Number of Active Cards represents the total number of our GPR cards that have had a personal identification number,
or PIN, or signature-based purchase transaction, a load transaction at a retailer location or an ATM withdrawal within the previous 90 days. We had approximately 1.2 million,
1.6 million, 1.9 million, and 2.0 million active cards as of December 31, 2007, December 31, 2008, December 31, 2009, and June 30, 2010, respectively.
Percentage of Active Card Accounts with Direct Deposit represents the percentage of our active card accounts that
have had a direct deposit load within the previous 90 days. The percentage of our active card accounts that were direct deposit active card accounts as of December 31, 2007,
December 31, 2008, December 31, 2009, and June 30, 2010, was 14.0%, 23.4%, 27.5% and 29.4%, respectively.
Gross Dollar Volume (GDV) represents the total dollar volume of debit transactions and cash withdrawals made using
our GPR cards. Our gross dollar volume was $3.7 billion, $5.7 billion and $7.6 billion for the years ended December 31, 2007, December 31, 2008, and
December 31, 2009, respectively, and $4.9 billion for the six months ended June 30, 2010.
Key Components of Our Results of Operations
Operating Revenues
Our operating revenues primarily consist of compensation for the services we provide to our issuing banks resulting from service fees
and interchange revenue.
Our
cardholders are charged fees in connection with the products and services we provide, as follows:
-
- Transactions Cardholders are typically charged a fee for each PIN and signature-based purchase
transaction made using their GPR cards, unless the cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as
applicable. Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.
-
- Customer Service and Maintenance Cardholders are typically charged fees for balance inquiries made
through our customer service. Cardholders are also charged a monthly maintenance fee after a specified period of inactivity.
-
- Additional Products and Services Cardholders are charged fees associated with additional products and
services offered in connection with certain of our GPR cards, including MetaBank's iAdvance line of credit, overdraft protection through our issuing banks, a variety of bill payment
options, and card-to-card transfers of funds through our customer service.
-
- Other Cardholders are charged fees in connection with the activation of our GPR cards and gift cards
at retailers.
Our
operating revenues also include fees charged to retail distributors in connection with the reload of our GPR cards at retailers, fees charged in connection with a third party
processing
44
Table of Contents
services
agreement with a large national bank that we terminated effective 2009, as well as interest earned, if any, on cardholder funds maintained at one of our issuing banks. Under our current
arrangement with such issuing bank, we would only be entitled to receive interest on cardholder funds if market interest rates rose significantly above current levels.
The
Federal Reserve Board recently amended Regulation E, limiting the ability of financial institutions to assess overdraft fees on a cardholder's account unless the cardholder
"opts-in" for these services. In 2009, overdraft revenue pursuant to programs under which the cardholder was not required to opt in represented approximately 6% of our operating revenues. While the
impact of this change is difficult to assess, we expect our overdraft revenues to decline as a percentage of our operating revenues.
We
earn interchange revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using our prepaid debit cards. Interchange fees are
fixed by the card associations and network organizations. Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the card associations and network
organizations for services they provide in processing purchase transactions routed through their networks.
Operating Expenses
We classify our operating expenses into the following categories:
Direct Operating Costs Direct operating costs consist primarily of the commissions we pay to members of our
distribution and reload network for their services, ATM processing fees, card supply costs, cardholder and other losses related to our card programs, customer verification costs, customer service
costs and fees paid to our issuing banks. These costs are driven by transaction volumes and the number of active cards.
Salaries, Benefits and Other Personnel Costs Salaries, benefits, and other personnel costs consist of the
compensation costs associated with our employees, including base salaries, benefits, bonus compensation and stock-based compensation. This excludes any personnel costs associated 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 of marketing programs including direct-to-consumer and internet advertising to potential cardholders, promotional events run in conjunction with our distributors,
conferences, trade shows and marketing materials.
Other General and Administrative Costs Other general and administrative costs primarily consist of costs for legal,
accounting, information technology, travel, facility and other corporate expenses.
Depreciation and Amortization Depreciation and amortization consists of depreciation of our long-lived
assets and amortization of finite-lived intangibles.
Other Income (Expense)
Other income (expense) primarily consists of interest income and interest expense. Interest income represents interest we receive on
our cash and cash equivalents. Interest expense is associated with our long-term debt and capital leases.
Income Tax Expense
Income tax expense primarily consists of corporate income taxes related to profits resulting from our ongoing operations.
45
Table of Contents
Consolidated Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
(in thousands) |
|
Operating Revenues |
|
$ |
128,597 |
|
$ |
183,170 |
|
$ |
225,000 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
57,294 |
|
|
80,216 |
|
|
106,572 |
|
|
Salaries, benefits, and other personnel costs |
|
|
21,288 |
|
|
35,034 |
|
|
46,668 |
|
|
Advertising, marketing, and promotion costs |
|
|
9,380 |
|
|
11,999 |
|
|
13,803 |
|
|
Other general and administrative costs |
|
|
10,101 |
|
|
21,051 |
|
|
22,074 |
|
|
Depreciation and amortization |
|
|
5,251 |
|
|
8,899 |
|
|
10,297 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
26,285 |
|
|
|
|
|
Settlement gains |
|
|
|
|
|
|
|
|
(10,229 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
103,314 |
|
|
183,484 |
|
|
189,185 |
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
25,283 |
|
|
(314 |
) |
|
35,815 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
876 |
|
|
384 |
|
|
32 |
|
|
Interest expense |
|
|
(2,065 |
) |
|
(4,408 |
) |
|
(5,170 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(1,189 |
) |
|
(4,024 |
) |
|
(5,138 |
) |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
24,094 |
|
|
(4,338 |
) |
|
30,677 |
|
Provision for income taxes |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
|
|
|
|
|
|
|
|
46
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Total
Operating Revenues |
|
|
|
Year Ended
December 31, |
|
|
|
2007 |
|
2008 |
|
2009 |
|
Operating Revenues |
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
44.6 |
|
|
43.8 |
|
|
47.4 |
|
|
Salaries, benefits, and other personnel costs |
|
|
16.6 |
|
|
19.1 |
|
|
20.7 |
|
|
Advertising, marketing, and promotion costs |
|
|
7.3 |
|
|
6.6 |
|
|
6.1 |
|
|
Other general and administrative costs |
|
|
7.8 |
|
|
11.5 |
|
|
9.8 |
|
|
Depreciation and amortization |
|
|
4.0 |
|
|
4.8 |
|
|
4.6 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
14.4 |
|
|
|
|
|
Settlement gains |
|
|
|
|
|
|
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80.3 |
|
|
100.2 |
|
|
84.1 |
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
19.7 |
|
|
(0.2 |
) |
|
15.9 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
0.7 |
|
|
0.2 |
|
|
|
|
|
Interest expense |
|
|
(1.6 |
) |
|
(2.4 |
) |
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(0.9 |
) |
|
(2.2 |
) |
|
(2.3 |
) |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
18.8 |
|
|
(2.4 |
) |
|
13.6 |
|
Provision for income taxes |
|
|
7.3 |
|
|
4.0 |
|
|
5.5 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
11.5 |
% |
|
(6.4 |
)% |
|
8.1 |
% |
|
|
|
|
|
|
|
|
47
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, |
|
|
|
(unaudited) |
|
|
|
2009 |
|
2010 |
|
|
|
|
(in thousands) |
|
Operating Revenues |
|
$ |
109,636 |
|
$ |
136,967 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
51,826 |
|
|
63,017 |
|
|
Salaries, benefits, and other personnel costs |
|
|
23,557 |
|
|
26,583 |
|
|
Advertising, marketing, and promotion costs |
|
|
6,173 |
|
|
7,369 |
|
|
Other general and administrative costs |
|
|
11,975 |
|
|
9,088 |
|
|
Depreciation and amortization |
|
|
5,144 |
|
|
6,075 |
|
|
Settlement (gains) and other losses |
|
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88,446 |
|
|
116,432 |
|
|
|
|
|
|
|
Operating income |
|
|
21,190 |
|
|
20,535 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
Interest income |
|
|
27 |
|
|
46 |
|
|
Interest expense |
|
|
(2,753 |
) |
|
(2,057 |
) |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(2,726 |
) |
|
(2,011 |
) |
|
|
|
|
|
|
Income before income taxes |
|
|
18,464 |
|
|
18,524 |
|
Provision for income taxes |
|
|
7,386 |
|
|
7,460 |
|
|
|
|
|
|
|
Net income |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
|
|
|
|
|
48
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
As a
Percentage of
Total Operating
Revenues |
|
|
|
Six Months
Ended
June 30, |
|
|
|
2009 |
|
2010 |
|
Operating Revenues |
|
|
100.0 |
% |
|
100.0 |
% |
Operating Expenses |
|
|
|
|
|
|
|
|
Direct operating costs |
|
|
47.3 |
|
|
46.1 |
|
|
Salaries, benefits, and other personnel costs |
|
|
21.5 |
|
|
19.4 |
|
|
Advertising, marketing, and promotion costs |
|
|
5.6 |
|
|
5.4 |
|
|
Other general and administrative costs |
|
|
10.9 |
|
|
6.6 |
|
|
Depreciation and amortization |
|
|
4.7 |
|
|
4.4 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
(9.3 |
) |
|
3.1 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80.7 |
|
|
85.0 |
|
|
|
|
|
|
|
Operating income |
|
|
19.3 |
|
|
15.0 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2.5 |
) |
|
(1.5 |
) |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(2.5 |
) |
|
(1.5 |
) |
|
|
|
|
|
|
Income before income taxes |
|
|
16.8 |
|
|
13.5 |
|
Provision for income taxes |
|
|
6.7 |
|
|
5.4 |
|
|
|
|
|
|
|
Net income |
|
|
10.1 |
% |
|
8.1 |
% |
|
|
|
|
|
|
49
Table of Contents
Comparison of Six Months Ended June 30, 2009 and 2010 (unaudited)
Operating Revenues
Operating Revenues Our operating revenues totaled
$137.0 million in the six months ended June 30, 2010, an increase of $27.3 million, or 24.9%, from the comparable period in 2009. Service fee revenue represented approximately
78.5% of our revenue for the six months ended June 30, 2010 with the balance of our revenue consisting of interchange. Service fee revenue increased $19.0 million or 21.4% from
$88.6 million in the six months ended June 30, 2009 to $107.6 million in the comparable period in 2010. The substantial portion of the increase in service fee revenue was driven
by an increase in transaction volume resulting from a 24.2% increase in the average number of active cards outstanding during the six months ended June 30, 2010 compared to the same period in
the prior year. To a lesser extent, service fee revenue increased due to the introduction of new products to our cardholder base and increased use of the
overdraft feature offered to some of our cardholders through our issuing banks. These increases in service fee revenue were offset by modest declines in revenue generated by customer service
activities and other revenue.
Interchange revenue represented approximately 21.5% of our operating revenues for the six months ended June 30, 2010. Interchange revenue increased $8.4 million or 39.9%
from $21.0 million in the six months ended June 30, 2009 to $29.4 million in the comparable period in 2010. The increase in interchange revenue was driven primarily by the
increase in transaction volume.
Our
total operating revenues of $137.0 million in the six months ended June 30, 2010 were comprised of $133.0 million related to our GPR cards and the remaining
$4.0 million related to our gift cards. Our GPR card related revenues increased by $31.1 million, or 30.6%, from the comparable period in 2009. Our gift card related revenues decreased
by $3.8 million, or 48.7%, from the comparable period in 2009 as a result of our decision in 2008 to focus primarily on our core GPR card product. We ceased marketing gift cards entirely as of
August 21, 2010.
50
Table of Contents
Operating Expenses
The following table presents the breakdown of operating expenses among direct operating costs, personnel costs, other general and
administrative costs, advertising and marketing costs, depreciation and amortization, and other components of operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2009 |
|
Six Months Ended
June 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 |
|
$ |
51,826 |
|
|
47.3% |
|
$ |
63,017 |
|
|
46.1% |
|
$ |
11,191 |
|
|
Salaries, benefits, and other personnel costs |
|
|
23,557 |
|
|
21.5 |
|
|
26,583 |
|
|
19.4 |
|
|
3,026 |
|
|
Advertising, marketing, and promotion costs |
|
|
6,173 |
|
|
5.6 |
|
|
7,369 |
|
|
5.4 |
|
|
1,196 |
|
|
Other general and administrative costs |
|
|
11,975 |
|
|
10.9 |
|
|
9,088 |
|
|
6.6 |
|
|
(2,887 |
) |
|
Depreciation and amortization |
|
|
5,144 |
|
|
4.7 |
|
|
6,075 |
|
|
4.4 |
|
|
931 |
|
|
Settlement (gains) and other losses |
|
|
(10,229 |
) |
|
(9.3 |
) |
|
4,300 |
|
|
3.1 |
|
|
14,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
88,446 |
|
|
80.7% |
|
$ |
116,432 |
|
|
85.0% |
|
$ |
27,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Operating Costs Our direct operating costs were $63.0 million in the six months ended June 30,
2010, an increase of $11.2 million, or 21.6%, from the comparable period in 2009. This increase was primarily the result of an increase in commissions we paid to our distributors and an
increase in ATM processing fees, all resulting from an increase in the number of our active cards and the corresponding increase in GDV.
Salaries, Benefits, and Other Personnel Costs Our salaries, benefits, and other personnel costs were
$26.6 million in the six months ended June 30, 2010, an increase of $3.0 million, or 12.8%, from the comparable period in 2009. This increase was primarily the result of a 1.3%
increase in non-customer service headcount, a $1.3 million increase in annual bonus expense resulting from our 2010 performance and a $0.7 million increase in stock-based
compensation.
Advertising, Marketing, and Promotion Costs Our advertising, marketing, and promotion costs were $7.4 million
in the six months ended June 30, 2010, an increase of $1.2 million, or 19.4%, from the comparable period in 2009. This period-over-period increase was primarily
the result of a $0.5 million increase in marketing costs related to our direct-to-consumer and online marketing programs, as well as an increase in amounts paid for
sales incentives programs with our retail distributors and other advertising expenses.
Other General and Administrative Costs Our other general and administrative costs were $9.1 million in the
six months ended June 30, 2010, a decrease of $2.9 million, or 24.1%, from the comparable period in 2009. This decrease was primarily the result of a $1.4 million decline in legal
and other professional expenses as well as a $1.6 million decline in non-capitalizable IT
51
Table of Contents
professional
service expenses resulting from the completion of significant financial infrastructure software development in 2009.
Depreciation and Amortization Our depreciation and amortization costs were $6.1 million in the six months
ended June 30, 2010, an increase of $0.9 million, or 18.1%, from the comparable period in 2009. This increase was primarily the result of significant investments in operational and
financial infrastructure software that were placed in service in the second half of 2009 and first half of 2010.
Settlement (Gains) and Other Losses We recognized $10.2 million of settlement gains in the six months ended
June 30, 2009, which related to $9.0 million of recoveries of excess funds from our issuing banks for fee and chargeback recoveries and $1.2 million resulting from the settlement
of certain litigation. During the six months ended June 30, 2010, we recognized a $3.5 million loss related to a patent infringement dispute and a $0.8 million loss associated
with a contractual dispute with a vendor.
Income Tax Expense
The following table presents the breakdown of our effective tax rate among federal, state, and other:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
2010 |
|
U.S. federal income tax |
|
|
35.0 |
% |
|
35.0 |
% |
State income taxes, net of federal benefit |
|
|
2.7 |
|
|
4.5 |
|
Other |
|
|
2.3 |
|
|
0.8 |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
40.0 |
% |
|
40.3 |
% |
|
|
|
|
|
|
Our
total income tax expense was $7.5 million during the six months ended June 30, 2010, an increase of $0.1 million from the same period in 2009, which was
primarily the result of a period-over-period increase in our taxable income. Our effective tax rate increased by approximately 0.3% from the six months ended June 30,
2009 to the comparable period in 2010 primarily due to an increase in state taxes as a result of increases in apportionment percentages for the states in which we file.
Comparison of Fiscal 2008 and 2009
Operating Revenues
Operating Revenues Our operating revenues totaled
$225.0 million in fiscal 2009, an increase of $41.8 million, or 22.8%, from fiscal 2008. Service fee revenue represented approximately 80.7% of our revenue for fiscal 2009 with the
balance of our revenue consisting of interchange. Service fee revenue increased $29.5 million or 19.4% from fiscal 2008 to fiscal 2009. $16.7 million of the $29.5 million
year-over-year increase in service fee revenues resulted from the inclusion of a full year of Skylight's operating results in fiscal 2009, as compared to the inclusion of only
six months of Skylight's operating results in fiscal 2008. The remainder of this year-over-year increase was primarily the result of increased transaction fees charged to
cardholders and increased fees for additional products and services unrelated to the Skylight acquisition, primarily resulting from a 15.3% increase in the average number of our active cards
outstanding. $6.7 million of the increase in transaction fees was caused by rate changes in the fees charged for domestic ATM transactions. These increases were offset by a decrease in customer
service and maintenance fees unrelated to
52
Table of Contents
the Skylight acquisition, caused primarily by decreased gift maintenance as we focused our business on our core GPR card product. Finally, there was a decrease of $5.0 million in other
revenues caused by decreased third-party processing services under an agreement with a large national bank that we terminated in 2008 effective in 2009.
Interchange revenue represented approximately 19.3% of our revenue for fiscal 2009. Interchange revenue increased $12.3 million or 39.7% from fiscal 2008 to fiscal 2009.
$0.8 million of the $12.3 million year-over-year increase in our interchange revenues resulted from the inclusion of a full year of Skylight's operating results in fiscal 2009, as
compared to approximately six months of Skylight's operating results in fiscal 2008. The remainder of this increase was primarily the result of a year-over-year increase in the average number of
active cards outstanding.
Our
total operating revenues of $225.0 million in fiscal 2009 was comprised of $211.6 million related to our GPR cards and the remaining $13.4 million related to
our gift cards. Our GPR card related revenues increased by $52.8 million, or 33.2%, from the comparable period in 2008. Our gift card related revenues decreased by $11.0 million, or
45.1%, from the comparable period in 2008 as a
result of our decision in 2008 to focus primarily on our core GPR card product. We ceased marketing gift cards entirely as of August 21, 2010.
Operating Expenses
The following table presents the breakdown of operating expenses among direct operating costs, personnel costs, other general and
administrative costs, advertising and marketing costs, depreciation and amortization, and other components of operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2008 |
|
2009 |
|
|
|
|
|
Amount |
|
Percentage
of Total
Operating
Revenues |
|
Amount |
|
Percentage
of Total
Operating
Revenues |
|
Change |
|
|
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
80,216 |
|
|
43.8 |
% |
$ |
106,572 |
|
|
47.4 |
% |
$ |
26,356 |
|
|
Salaries, benefits, and other personnel costs |
|
|
35,034 |
|
|
19.1 |
|
|
46,668 |
|
|
20.7 |
|
|
11,634 |
|
|
Advertising, marketing, and promotion costs |
|
|
11,999 |
|
|
6.6 |
|
|
13,803 |
|
|
6.1 |
|
|
1,804 |
|
|
Other general and administrative costs |
|
|
21,051 |
|
|
11.5 |
|
|
22,074 |
|
|
9.8 |
|
|
1,023 |
|
|
Depreciation and amortization |
|
|
8,899 |
|
|
4.8 |
|
|
10,297 |
|
|
4.6 |
|
|
1,398 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
26,285 |
|
|
14.4 |
|
|
|
|
|
|
|
|
(26,285 |
) |
|
Settlement (gains) |
|
|
|
|
|
|
|
|
(10,229 |
) |
|
(4.5 |
) |
|
(10,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
183,484 |
|
|
100.2 |
% |
$ |
189,185 |
|
|
84.1 |
% |
$ |
5,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Table of Contents
Direct Operating Costs Our direct operating costs were $106.6 million in fiscal 2009, an increase of
$26.4 million, or 32.9%, from fiscal 2008. $7.7 million of this increase was the result of the inclusion of a full year of Skylight's operating results in fiscal 2009, as compared to the
inclusion of approximately six months of Skylight's operating results in fiscal 2008. The remaining $18.7 million of this year-over-year increase was primarily the
result of an increase in commissions we paid to our distributors, an increase in ATM processing fees resulting from an increase in the number of ATM transactions made using our cards, and an increase
in card supply costs as we expanded our distribution network and direct-to-consumer marketing programs. From 2008 to 2009, our direct operating costs increased as a percentage
of revenues from 43.8% to 47.4%, which was primarily the result of an increase in card supply costs as a percentage of revenues as we expanded our direct-to-consumer marketing
programs, and an increase in distributor commission rates as we renewed long-term distributor agreements.
Salaries, Benefits, and Other Personnel Costs Our salaries, benefits, and other personnel costs were
$46.7 million in fiscal 2009, an increase of $11.6 million, or 33.2%, from fiscal 2008. $4.0 million of this increase was the result of the inclusion of a full year of Skylight's
operating results in fiscal 2009, as compared to the inclusion of approximately six months of Skylight's operating results in fiscal 2008. The remainder of this year-over-year
increase was primarily the result of an increase in salary and benefit costs resulting from an 18.1% increase in non-customer service headcount, from 288 employees to 340 employees, and a
$1.5 million increase in stock-based compensation.
Advertising, Marketing, and Promotion Costs Our advertising, marketing, and promotion costs were
$13.8 million in fiscal 2009, an increase of $1.8 million, or 15.0%, from fiscal 2008. This year-over-year increase was primarily the result of a
$2.4 million increase in marketing costs related to our purchase of customer leads as we expanded our direct-to-consumer and online marketing programs.
Other General and Administrative Costs Our other general and administrative costs were $22.1 million in
fiscal 2009, an increase of $1.0 million, or 4.9%, from fiscal 2008. This year-over-year increase was caused by the inclusion of a full year of Skylight's operating
results in fiscal 2009, as compared to approximately six months of activity in fiscal 2008.
Depreciation and Amortization Our depreciation and amortization costs were $10.3 million in fiscal 2009, an
increase of $1.4 million, or 15.7%, from fiscal 2008. $1.0 million of this
increase was the result of the inclusion of a full year of amortization related to Skylight's intangible assets in fiscal 2009, as compared to the inclusion of approximately six months of amortization
related to Skylight's intangible assets in fiscal 2008. The remainder of this increase was primarily the result of depreciation on our 2008 and 2009 capital expenditures of $10.7 million and
$14.6 million, respectively.
Goodwill and Acquired Intangible Asset Impairment In 2008, we recognized $26.3 million in goodwill and
intangible asset impairment related to our Skylight reporting unit. Goodwill and intangible assets with indefinite lives are tested for impairment annually or if an event occurs or conditions change
that would more likely than not reduce the fair value below the carrying value. Based on a combination of comparative market multiples and discounted cash flow analyses, we determined that the
carrying value of the goodwill attributed to the Skylight reporting unit exceeded its fair value by approximately $23.0 million and that that the carrying value of the Skylight tradename
exceeded its fair value by $3.3 million. The impairment was caused by declining market conditions and the adverse business environment in which our Skylight reporting unit was then operating.
There was no impairment of goodwill or intangible assets in 2009.
Settlement Gains We recognized $10.2 million of settlement gains during fiscal 2009, $9.0 million of
which related to recoveries of excess funds from our issuing banks for historical fee
54
Table of Contents
and
chargeback recoveries, with the remaining $1.2 million resulting from the MPower litigation settlement.
Income Tax Expense
The following table presents the breakdown of our effective tax rate among federal, state and other:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
2009 |
|
U.S. Federal Income Tax |
|
|
(35.0 |
)% |
|
35.0 |
% |
State income taxes, net of federal benefit |
|
|
3.9 |
|
|
3.3 |
|
Other |
|
|
199.5 |
|
|
2.4 |
|
|
|
|
|
|
|
|
Income Tax Expense |
|
|
168.4 |
% |
|
40.7 |
% |
|
|
|
|
|
|
Our
income tax expense was $12.5 million in 2009, an increase of $5.2 million from fiscal 2008. Approximately $4.1 million of this increase relates to taxes due for
gains on settlements recognized during fiscal 2009. The remainder of this increase is due to growth unrelated to the Skylight acquisition and increased income before taxes. The effective rate
difference from 2008 to 2009 is primarily caused by the $26.3 million non-deductible goodwill and intangible asset impairment recognized during 2008.
Comparison of Fiscal 2007 and 2008
Operating Revenues
Operating Revenues Our operating revenues totaled
$183.2 million in fiscal 2008, an increase of $54.6 million, or 42.4%, from fiscal 2007. Service fee revenue represented approximately 83.0% of our revenue for fiscal 2008 with the
balance of our
revenue consisting of interchange. Service fee revenue increased $45.5 million from $106.6 million in fiscal 2007 to $152.1 million in fiscal 2008. $10.7 million of the
$45.5 million year-over-year increase in service fee revenues resulted from the inclusion of approximately six months of Skylight's operating results in fiscal 2008, the
year we acquired Skylight. The remainder of this year-over-year increase was primarily the result of increase in transaction fees and customer service and maintenance fees,
which resulted primarily from a 30.4% increase in the average number of our active cards outstanding. The year-over-year increase was also caused by a $3.2 million
increase in fees charged in connection with a third party processing services agreement.
Interchange revenue represented approximately 17.0% of our revenue for fiscal 2008. Interchange revenue increased $9.1 million from $22.0 million in fiscal 2007 to
$31.1 million in fiscal 2008. $1.0 million of the $9.1 million year-over-year increase in our interchange revenues resulted from the inclusion of approximately six months of
Skylight's operating results in fiscal 2008, the year we acquired Skylight. The remainder of this increase was primarily the result of a year-over-year increase in the average number of active cards
outstanding.
55
Table of Contents
Operating Expenses
The following table presents the breakdown of operating expenses among direct operating costs, personnel costs, other general and
administrative costs, advertising and marketing costs, depreciation and amortization, and other components of operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2007 |
|
2008 |
|
|
|
|
|
Amount |
|
Percentage
of Total
Operating
Revenues |
|
Amount |
|
Percentage
of Total
Operating
Revenues |
|
Change |
|
|
|
|
(in thousands) |
|
|
|
|
(in thousands) |
|
|
|
|
(in thousands) |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
57,294 |
|
44.6% |
|
$ |
80,216 |
|
43.8% |
|
$ |
22,922 |
|
|
Salaries, benefits, and other personnel costs |
|
|
21,288 |
|
16.6% |
|
|
35,034 |
|
19.1% |
|
|
13,746 |
|
|
Advertising, marketing, and promotion costs |
|
|
9,380 |
|
7.3% |
|
|
11,999 |
|
6.6% |
|
|
2,619 |
|
|
Other general and administrative costs |
|
|
10,101 |
|
7.8% |
|
|
21,051 |
|
11.5% |
|
|
10,950 |
|
|
Depreciation and amortization |
|
|
5,251 |
|
4.0% |
|
|
8,899 |
|
4.8% |
|
|
3,648 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
|
|
26,285 |
|
14.4% |
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
103,314 |
|
80.3% |
|
$ |
183,484 |
|
100.2% |
|
$ |
80,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Operating Costs Our direct operating costs were $80.2 million in fiscal 2008, an increase of
$22.9 million, or 40.0%, from fiscal 2007. $4.6 million of this increase was the result of the inclusion of approximately six months of Skylight's operating results in fiscal 2008, the
year we acquired Skylight. The remaining $18.3 million of this year-over-year increase was primarily the result of an increase in commissions we paid to our
distributors, an increase in ATM processing fees, an increase in customer service costs, and an increase in card supply costs, all resulting from an increase in the number of our active cards and the
corresponding increase in GDV and an increase in the amount of funds loaded onto our cards purchased through our retail distributors.
Salaries, Benefits, and Other Personnel Costs Our salaries, benefits, and other personnel costs were
$35.0 million in fiscal 2008, an increase of $13.7 million, or 64.6%, from fiscal 2007. $3.7 million of this increase was the result of the inclusion of approximately six months
of Skylight's operating results in fiscal 2008, the year we acquired Skylight. The remainder of this year-over-year increase was primarily the result of increased salaries
resulting from a 49.2% increase in our non-customer service headcount, from 193 to 288 employees, unrelated to our acquisition of Skylight.
Advertising, Marketing, and Promotion Costs Our advertising, marketing, and promotion costs were
$12.0 million in fiscal 2008, an increase of $2.6 million, or 27.9%, from fiscal 2007. $1.0 million of this increase was the result of the inclusion of approximately six months of
Skylight's operating results in fiscal 2008, the year we acquired Skylight. The remaining year-over-year
56
Table of Contents
increase
was primarily the result of a $2.0 million increase in marketing costs related to our purchase of customer leads as we expanded our direct-to-consumer and
online marketing programs.
Other General and Administrative Costs Our other general and administrative costs were $21.1 million in
fiscal 2008, an increase of $11.0 million, or 108.4%, from fiscal 2007. $1.4 million of this increase was the result of the inclusion of approximately six months of Skylight's operating
results in fiscal 2008, the year we acquired Skylight. $5.5 million of this increase was the result of an increase in legal and accounting professional fees, and consulting services related to
development of requirements for improving our financial infrastructure systems and processes. The remainder of this increase was primarily the result of a $2.6 million increase in expenses
resulting from an increased headcount and our opening of two additional business offices in San Mateo, California and Kansas City, Kansas.
Depreciation and Amortization Our depreciation and amortization was $8.9 million in fiscal 2008, an increase
of $3.6 million, or 69.5%, from fiscal 2007. $1.1 million of this increase was the result of the inclusion of approximately six months of Skylight's operating results in fiscal 2008, the
year we acquired Skylight. The remainder of this increase was primarily from depreciation resulting from 2007 and 2008 capital expenditures of $5.7 million and $10.7 million,
respectively.
Goodwill and Acquired Intangible Asset Impairment In 2008, we determined that the carrying value of the Skylight
reporting unit exceeded its fair value, and recognized a $26.3 million goodwill and acquired intangible asset impairment charge. The impairment was due to declining
market conditions and the adverse business environment in which the Skylight reporting unit operates. There was no impairment of goodwill during 2007.
Income Tax Expense
The following table presents the breakdown of our effective tax rate among federal, state and other:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
2008 |
|
U.S. Federal Income Tax |
|
|
35.0 |
% |
|
(35.0 |
)% |
State income taxes, net of federal benefit |
|
|
2.7 |
% |
|
3.9 |
% |
Other |
|
|
1.2 |
% |
|
199.5 |
% |
|
|
|
|
|
|
|
Income Tax Expense |
|
|
38.9 |
% |
|
168.4 |
% |
|
|
|
|
|
|
Our
income tax expense was $7.3 million in 2008, a decrease of $2.1 million from fiscal 2007. The majority of this difference relates to decreased income before taxes. The
effective rate difference from 2008 to 2009 is primarily the result of the $26.3 million non-deductible goodwill and intangible asset impairment recognized during 2008.
Quarterly Results of Operations and Seasonality
The following table sets forth unaudited consolidated statement of operations data for the three months ended September 30,
2008 and December 31, 2008, the four quarters of fiscal 2009, the three months ended March 31, 2010 and June 30, 2010. We have prepared our consolidated statements of operations
for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, except for certain consolidated statements of operations items
related to income allocated to common stockholders and earnings per common share and, in the opinion of our management, each statement of operations includes
57
Table of Contents
all
adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with
our consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future
period.
Our
quarterly operating revenues fluctuate as a result of certain seasonal factors affecting our GDV and the number of our active cards. For example, the most significant increases in
the number of our active cards and our GDV typically occur in our first fiscal quarter as a result of consumers acquiring new cards and loading federal tax refunds onto their cards during tax season.
In addition, the number of our active cards and our GDV typically increase from our third to fourth fiscal quarters as a result of increases in holiday employment and holiday-associated consumer
spending.
The
following table shows quarterly results of operations from the three months ended September 30, 2008 through the three months ended June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Sept. 30,
2008 |
|
Dec. 31,
2008 |
|
March 31,
2009 |
|
June 30,
2009 |
|
Sept. 30,
2009 |
|
Dec. 31,
2009 |
|
March 31,
2010 |
|
June 30,
2010 |
|
|
|
|
(unaudited)
(in thousands) |
|
Revenues |
|
$ |
46,732 |
|
$ |
49,141 |
|
$ |
54,738 |
|
$ |
54,898 |
|
$ |
55,962 |
|
$ |
59,402 |
|
$ |
69,520 |
|
$ |
67,447 |
|
Direct operating costs |
|
|
19,205 |
|
|
22,702 |
|
|
26,594 |
|
|
25,232 |
|
|
25,754 |
|
|
28,992 |
|
|
32,713 |
|
|
30,304 |
|
Other operating expenses |
|
|
21,746 |
|
|
22,929 |
|
|
21,959 |
|
|
24,890 |
|
|
23,250 |
|
|
22,743 |
|
|
23,911 |
|
|
25,204 |
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement (gains) and other losses |
|
|
|
|
|
|
|
|
(1,068 |
) |
|
(9,161 |
) |
|
|
|
|
|
|
|
4,000 |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
5,781 |
|
|
(22,775 |
) |
|
7,253 |
|
|
13,937 |
|
|
6,958 |
|
|
7,667 |
|
|
8,896 |
|
|
11,639 |
|
Net income |
|
|
2,729 |
|
|
(23,848 |
) |
|
3,568 |
|
|
7,510 |
|
|
3,580 |
|
|
3,516 |
|
|
4,618 |
|
|
6,446 |
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from our operating activities and access to borrowings under our term loan and
revolving credit facilities.
Comparison of Six Months Ended June 30, 2009 and 2010 (unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June, 30, |
|
|
|
2009 |
|
2010 |
|
|
|
|
(in thousands) |
|
Net cash provided by operating activities |
|
$ |
21,772 |
|
$ |
22,577 |
|
Net cash used in investing activities |
|
|
(7,041 |
) |
|
(7,479 |
) |
Net cash used in financing activities |
|
|
(9,165 |
) |
|
(20,868 |
) |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
5,566 |
|
$ |
(5,770 |
) |
|
|
|
|
|
|
58
Table of Contents
Cash Flows from Operating Activities
During the six months ended June 30, 2010, our operating activities provided $22.6 million of cash resulting from
$11.1 million of net income, increased by $9.8 million of non-cash adjustments to net income and $1.7 million in cash provided by changes in operating assets and
liabilities. The $9.8 million adjustment to net income for non-cash items primarily relates to $6.1 million of depreciation and amortization expense, $3.4 million of
provision for cardholder losses, and $3.0 million of stock-based compensation expense, offset by a $2.9 million increase in deferred income taxes. The $1.7 million in cash
provided by changes in operating assets and liabilities was primarily the result of a $3.6 million increase in income tax payables and a $2.2 million increase in accounts payable and
accrued expenses, offset by $3.2 million of write-offs flowing through our cardholders' reserve. The $0.8 million year-over-year increase in operating
cash flows from the six months ended June 30, 2009 to the six months ended June 30, 2010 relates to a $0.9 million increase in non-cash adjustments, partially offset
by a $0.1 million decrease in cash provided by changes in operating assets and liabilities.
Cash Flows from Investing Activities
Investing activities used $7.5 million of cash for the six months ended June 30, 2010, which primarily related to a
$3.2 million investment in Meta Financial Group, Inc., the holding company of our issuing bank, MetaBank. The remaining $4.3 million of cash used for investing activities related to
purchases of property and equipment. Cash used by investing activities for the six months ended June 30, 2009 was $7.0 million, which was exclusively caused by additions to property and
equipment.
Cash Flows from Financing Activities
Financing activities used $20.9 million of cash for the six months ended June 30, 2010, primarily related to
$6.2 million of scheduled debt payments and a $9.0 million payment of outstanding borrowings under our revolving credit facility. In addition, during the six months ended June 30,
2010, we completed a $5.7 million repurchase of treasury stock. For the six months ended June 30, 2009, financing activities used $9.2 million of cash primarily for payment of the
remaining $5.0 million portion of the $30.0 million dividend declared in 2008 and $3.8 million in scheduled debt payments.
Comparison of Fiscal 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
(in thousands) |
|
Net cash provided by operating activities |
|
$ |
15,554 |
|
$ |
25,020 |
|
$ |
36,195 |
|
Net cash used in investing activities |
|
|
(5,716 |
) |
|
(4,115 |
) |
|
(14,741 |
) |
Net cash used in financing activities |
|
|
(375 |
) |
|
(29,556 |
) |
|
(21,790 |
) |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
9,463 |
|
$ |
(8,651 |
) |
$ |
(336 |
) |
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
During fiscal 2009, our operating activities provided $36.2 million of cash, resulting from $18.2 million of net income
and an adjustment of $22.1 million for non-cash items, offset by $4.1 million in cash used for operating assets and liabilities. The $22.1 million adjustment for
non-cash items primarily relates to $10.3 million of depreciation and amortization expense, $4.9 million of provision for cardholder losses, $4.5 million of
stock-based compensation expense
59
Table of Contents
and
$3.1 million in deferred income taxes. These items were offset by a $1.2 million non-cash legal settlement gain. The $36.2 million of 2009 operating cash flows
represents an $11.2 million increase over 2008 operating cash flows of $25.0 million. The $11.2 million increase in operating cash flows primarily relates to an
$8.8 million year-over-year increase in net income adjusted for non-cash items, which excludes a $26.3 million goodwill and intangible asset
impairment charge in 2008.
During
fiscal 2008, our operating activities provided $25.0 million of cash, resulting from a net loss of $11.6 million, increased by a $43.1 million adjustment for
non-cash items and decreased by $6.4 million in cash used for operating assets and liabilities. The $43.1 million adjustment for non-cash items primarily relates
to a $26.3 million charge for impairment of goodwill and intangible assets, $8.9 million of depreciation and amortization expense, $2.4 million of provision for cardholder losses,
$2.5 million of stock-based compensation expense and $2.5 million in deferred income taxes. The $25.0 million of 2008 operating cash flows represents a $9.4 million
increase over 2007 operating cash flows of $15.6 million. The $9.4 million year-over-year increase primarily relates to a $9.9 million increase in net
income adjusted for non-cash items.
During
fiscal 2007, our operating activities provided $15.6 million of cash, resulting from net income of $14.7 million, increased by a $6.9 million adjustment for
non-cash items, and decreased by $6.0 million in cash used for operating assets and liabilities. The $6.9 million adjustment for non-cash items primarily relates
to $5.3 million of depreciation and amortization expense, $2.6 million in cardholder losses and $0.8 million of stock-based compensation expense, partially offset by
$2.2 million in tax benefits associated with stock options.
Cash Flows from Investing Activities
Investing activities used $14.7 million of cash in fiscal 2009, which related primarily to $14.6 million of purchases of
property and equipment. Cash used for investing activities in fiscal 2008 was $4.1 million, which included $10.7 million of purchases of property and equipment offset by
$6.6 million of net cash acquired primarily from our acquisition of Skylight. Investing activities used $5.7 million of cash in fiscal 2007, which exclusively related to purchases of
property and equipment.
Cash Flows from Financing Activities
Financing activities used $21.8 million of cash in fiscal 2009. The $21.8 million of cash outflows primarily related to
$25.5 million in debt-related payments, which included $25.1 million of principal payments and $0.4 million of debt issuance costs. The $25.5 million of
debt-related payments was partially offset by a $9.0 million draw on the revolving credit facility during 2009. Financing cash flows in 2009 also included a $5.0 million cash
outflow related to the remaining portion of a $30.0 million dividend declared in 2008.
Financing
activities used $29.6 million of cash in fiscal 2008. The $29.6 million of cash outflows primarily related to $25.0 million of dividend payments related
to a $30.0 million dividend declared immediately prior to the Skylight acquisition. The remaining $5.0 million of this dividend was paid in fiscal 2009. Also in conjunction with the
Skylight acquisition, we entered into an amended and restated credit agreement, which resulted in the payment of $91.5 million towards the outstanding balance on the old term loans and line of
credit and $1.2 million of debt issuance costs related to the amended and restated credit agreement. Simultaneous with the payment of the balance on the old term loans and line of credit, we
borrowed $75.0 million on the new term loan and $10.0 million on the new line of credit. We subsequently drew an additional $5.0 million on the line of credit during fiscal 2008
to fund working capital requirements. These repayments and borrowings resulted in a net cash outflow of $2.7 million in 2008. Also included in cash flows from financing activities during 2008
was a $3.2 million purchase of treasury stock associated with the
60
Table of Contents
former
chief executive officer's separation agreement, which was partially offset by $1.3 million of proceeds from the exercise of common stock options and warrants.
For
fiscal 2007, financing activities used $0.4 million of cash. The $0.4 million of cash outflows was the result of $56.1 million in cash dividends paid to
stockholders, $2.8 million in debt-related payments, which includes $2.0 million of principal payments and $0.8 million of debt issuance costs, and a
$1.1 million purchase of treasury stock. Cash inflows from financing activities were almost completely offset by cash inflows caused by $50.0 million of proceeds from the issuance of
long-term debt, $7.4 million of proceeds from the exercise of common and preferred stock options and warrants and a $2.2 million tax benefit associated with stock options.
Sources of Financing
Since the inception of NetSpend Holdings in February 2004, we have primarily financed our operations through cash flows from
operations. We believe that our existing cash balances, the expected net proceeds from this offering, the amounts we expect to generate from operations and the amounts available through our revolving
credit facility will be sufficient to meet our operating needs for the next twelve months, including working capital requirements, capital expenditures and debt repayment obligations.
In connection with the acquisition of Skylight on July 15, 2008, we extinguished our then-existing credit agreement and entered into an amended and restated credit
agreement, which provides financing of $105.0 million, consisting of a $30.0 million revolving credit facility and a $75.0 million term loan. We utilized the proceeds of the
$75.0 million term loan and our initial draw of $10.0 million under the revolving credit facility to fund the dividend paid in connection with the Skylight acquisition as well as closing
costs of the Skylight acquisition, including retiring $40.4 million of existing Skylight debt and refinancing our existing outstanding borrowings of $46.0 million. During the years ended
December 31, 2008 and December 31, 2009 the weighted average interest rate for the term loan and the revolving credit facilities was 6.3% and 6.0%, respectively.
As of December 31, 2009, we were utilizing approximately $0.2 million of the available letters of credit, and had outstanding borrowings under this revolving credit
facility of $9.0 million. As of June 30, 2010, there were no outstanding borrowings under this revolving credit facility.
Prior to the closing of this offering, we expect to enter into a new revolving credit facility with a syndicate of banks with SunTrust Bank as administrative agent. The initial
borrowings under this new credit facility will be used to repay the outstanding indebtedness under our existing credit facilities. The new revolving credit facility will have a maturity date five
years from closing, and provides for and includes a $15.0 million swingline facility and $5.0 million letter of credit facility. At our option, we may prepay any borrowings in whole or
in part, without any prepayment penalty or premium.
The new credit agreement will contain certain financial and non-financial covenants and requirements, including a leverage ratio, fixed charge ratio and certain restrictions
on our ability to make investments, pay dividends or sell assets. It also will provide for customary events of default as defined in the agreement, including failure to pay any principal or interest
when due, failure to comply with covenants, and default in the event of a change of control. We would have been in compliance with these covenants as of June 30, 2010. The consummation of this
offering will not constitute a change of control under the new credit agreement.
While we currently believe that we will be able to meet all of the financial covenants that will be imposed by our new credit agreement, there is no assurance that we will in fact be
able to do so or that, if we do not, we will be able to obtain waivers of default or amendments to our credit agreements in the future.
61
Table of Contents
In addition to the restrictions and requirements that will be contained in our new credit agreement, the maximum amounts we will be contractually permitted to borrow under this facility
could limit our flexibility in obtaining additional financing and in pursuing other business opportunities. These restrictions and requirements could have negative consequences for us, including the
following:
-
- our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes may
be impaired or financing may not be available to us on favorable terms;
-
- we would need a substantial portion of our cash flows to pay interest and, at maturity in September 2015, the principal on
our indebtedness, including indebtedness that we may incur in the future, which would reduce the funds that would otherwise be available for operations and future business opportunities;
-
- a substantial decrease in net operating cash flows could make it difficult for us to repay our indebtedness at maturity
and force us to modify our operations and to comply with the financial covenants contained in the new credit agreement;
-
- our debt level could make us more vulnerable than our competitors to an increasingly competitive environment, and to a
downturn in either our business or the economy generally; and
-
- because our debt has a variable rate of interest, it exposes us to the risk of increased interest rates.
In
May 2009, we entered into a capital lease arrangement with a software provider for perpetual database licenses. The capital lease arrangement resulted in the recognition of a
$3.4 million capital lease liability, which was the present value of future payments under the lease agreement discounted using an effective interest rate of 6.0%. As of December 31,
2009, approximately $2.6 million in principal payments remained payable on the capital lease.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are comprised of settlement indemnifications and overdraft guarantees with our issuing
banks. We have no off-balance sheet debt, other than operating leases, purchase orders, and other commitments entered into in the ordinary course of business as discussed below and
reflected in our contractual obligations and commitments table.
A
significant portion of our business is conducted through our retail distributors that provide load and reload services to our cardholders at their retail locations. Members of our
distribution and reload network collect our cardholders' funds and remit them by electronic transfer directly to our issuing banks for deposit in the cardholder accounts. We do not take possession of
our cardholders' funds at any time during the settlement process. Our issuing banks typically receive our cardholders' funds no earlier than three business days after they are collected by the
retailer. If any retailer fails to remit our cardholders' funds to our issuing banks, we typically reimburse our issuing banks for such funds. We manage the settlement risk associated with this
process through a formalized set of credit standards, limiting load volumes for certain retailers and requiring certain retailers to maintain deposits on account, and by typically maintaining a right
of offset of cardholders' funds against commissions payable to retailers. As of June 30, 2010, our estimated gross settlement exposure was $10.7 million.
Our
cardholders can in some circumstances incur charges in excess of the funds available in their card accounts, and are liable for the resulting overdrawn account balance. While we
generally decline authorization attempts for amounts that exceed the available balance in a cardholder's account, the application of card association and network organization rules and regulations,
the
62
Table of Contents
timing
of the settlement of transactions and the assessment of subscription, maintenance or other fees, among other things, can result in overdrawn card accounts. We also provide, as a courtesy and at
our discretion, certain cardholders with a "cushion" which allows them to overdraw their card accounts. In addition, eligible cardholders may enroll in our issuing banks' overdraft protection programs
pursuant to which our issuing banks fund transactions that exceed the available balance in their card accounts. We are responsible to our issuing banks for any losses associated with these overdrawn
account balances. As of June 30, 2010, our reserve intended to cover the risk that we may not recover our cardholders' overdrawn account balances was approximately $1.9 million. As of
June 30, 2010, our cardholders' overdrawn account balances totaled $6.2 million.
Contractual Obligations and Commitments
Our contractual commitments and contingencies will have an impact on our future liquidity. The following table summarizes our
contractual obligations that represent material expected or contractually committed future obligations at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period as of December 31, 2009 |
|
|
|
Total |
|
Less than 1 Year |
|
1-3 Years |
|
3-5 Years |
|
More than 5 Years |
|
|
|
|
(in thousands) |
|
Long-term debt obligations(1) |
|
$ |
78,848 |
|
$ |
23,709 |
|
$ |
43,636 |
|
$ |
11,503 |
|
$ |
|
|
Capital lease obligations(2) |
|
|
2,793 |
|
|
1,392 |
|
|
1,401 |
|
|
|
|
|
|
|
Operating lease obligations(3) |
|
|
2,592 |
|
|
1,518 |
|
|
1,070 |
|
|
4 |
|
|
|
|
Other long-term liabilities(4) |
|
|
19,735 |
|
|
7,130 |
|
|
9,549 |
|
|
2,056 |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
103,968 |
|
$ |
33,749 |
|
$ |
55,656 |
|
$ |
13,563 |
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Long-term
debt obligations consisted of outstanding principal and expected interest payments under our amended and restated credit agreement as
of December 31, 2009. These future expected payments include $61.9 million in required principal payments on our term loan, $8.0 million in future interest payments applicable to
the term loan at an expected interest rate of 6.0% per annum, and the $9.0 million balance on our revolving credit facility. We repaid the $9.0 million balance on our revolving credit
facility in January 2010. Therefore, the above table does not reflect any expected interest associated with our revolving credit facility balance.
- (2)
- Capitalized
lease obligations consist of future required payments under our financing agreement to purchase software.
- (3)
- Operating
lease obligations primarily include future payments related to the lease for our primary office facility located in Austin, Texas. The Austin,
Texas lease expires in 2011.
- (4)
- Other
long-term obligations consist of required minimum future payments under contracts with our distributors and other service providers.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America, or U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management's judgment in its
application, while in other cases management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions.
The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
63
Table of Contents
revenue,
costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Accordingly, actual results 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 of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our
historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Revenue Recognition
We generate revenue from compensation for the services we provide to our issuing banks resulting from service fees and interchange
revenue. Revenue is recognized when there is persuasive evidence of an arrangement, services have been rendered, the price is fixed or determinable and collectability is reasonably assured.
Our
cardholders are charged fees in connection with the products and services we provide, as follows:
-
- Transactions Cardholders are typically charged a fee for each PIN and signature-based purchase
transaction made using their GPR cards, unless the cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as
applicable. Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.
-
- Customer Service and Maintenance Cardholders are typically charged fees for balance inquiries made
through our customer service. Cardholders are also charged a monthly maintenance fee after a specified period of inactivity.
-
- Additional Products and Services Cardholders are charged fees associated with additional products and
services offered in connection with certain of our GPR cards, including MetaBank's iAdvance line of credit, overdraft protection through our issuing banks, a variety of bill payment
options and card-to-card transfers of funds through our customer service.
-
- Other Cardholders are charged fees in connection with the activation of our GPR cards and gift cards
at retailers.
Revenue
resulting from the service fees charged to our cardholders described above is recognized when the fees are charged because the earnings process is substantially complete, except for revenue
resulting from the activation of our cards and annual subscription fees. Revenue resulting from the activation of our cards is recognized ratably, net of commissions paid to our distributors, over the
average account life, which is approximately one year for our GPR cards and three months for our gift cards. Revenue resulting from annual subscription fees is recognized ratably over the annual
period to which the fees relate.
Our
revenues also include fees charged to retail distributors in connection with the reload of our GPR cards. Revenue resulting from the reload of our GPR cards is recognized when the
fee is charged.
Our
revenues also include fees charged in connection with program management and processing services we provide for private-label programs, as well as fees charged to one of our issuing
banks based on interest earned on cardholder funds. Under our current arrangement with such issuing bank, we would only be entitled to receive interest on cardholder funds if market interest rates
rose
significantly above certain specified levels. Revenue resulting from these fees is recognized when we have fulfilled our obligations under the underlying service agreements.
64
Table of Contents
We
earn interchange revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using our prepaid debit cards. Interchange fees are
fixed by the card associations and network organizations. Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the card associations and network
organizations for services they provide in processing purchase transactions routed through their networks. Interchange revenue is recognized during the period that the purchase transactions occur.
Stock-Based Compensation
We have one stock-based employee compensation plan. Through December 31, 2007, we used the Black-Scholes option pricing model
for determining the estimated fair value for stock-based awards. Beginning in January 2008, we have used the Binomial Lattice model for determining the estimated fair value for stock-based awards. We
determined this model better reflects the characteristics of the employee share option in estimating fair value, particularly in light of the complexity of performance awards granted in 2008 and 2009.
We measure the fair value of restricted stock awards at the estimated fair value of the common stock on the date of grant. We recognize compensation expense for both types of awards on a
straight-line basis over the requisite service period, net of estimated forfeitures. We consider many factors when estimating expected forfeitures, including types of awards, employee
class and historical experience. We present excess tax benefits from the exercise of stock options, if any, as financing cash flows.
During
2007, 2008 and 2009 and the six months ended June 30, 2010, we granted options to purchase shares of common stock with weighted average exercise prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Options
Granted |
|
Weighted
Average
Exercise
Price |
|
Weighted Average
Fair Value
per Share of
Common Stock of the
Underlying Grants |
|
Weighted Average
Fair Value
per Share of the
Options at the
Grant Date |
|
January 1, 2007 - June 30, 2007 |
|
|
871,000 |
|
$ |
1.29 |
|
$ |
1.29 |
|
$ |
0.65 |
|
July 1, 2007 - December 31, 2007 |
|
|
555,500 |
|
|
3.12 |
|
|
3.12 |
|
|
1.44 |
|
January 1, 2008 - June 30, 2008 |
|
|
2,951,143 |
|
|
3.51 |
|
|
3.51 |
|
|
1.48 |
|
July 1, 2008 - December 31, 2008 |
|
|
6,576,731 |
|
|
3.51 |
|
|
3.47 |
|
|
1.71 |
|
January 1, 2009 - June 30, 2009 |
|
|
1,201,495 |
|
|
3.47 |
|
|
3.47 |
|
|
2.13 |
|
July 1, 2009 - December 31, 2009 |
|
|
127,500 |
|
|
3.47 |
|
|
3.47 |
|
|
2.10 |
|
January 1, 2010 - June 30, 2010 |
|
|
2,272,700 |
|
|
3.78 |
|
|
3.78 |
|
|
2.36 |
|
For all dates listed above, we granted employees options and restricted shares at exercise prices equal to the estimated fair value of the
underlying common stock at the time of grant, as determined by our board of directors on a contemporaneous basis. We have also used these fair market valuations in calculating our stock-based
compensation expense.
Valuation of Common Stock
Because there was no public market for our common stock, our board of directors determined the fair value of our common stock at the
time of grant by considering a number of objective and subjective factors, including discounted cash flow analysis, comparable company analysis, regular periodic valuations from an independent
third-party valuation firm, overall market conditions, board approved arm's-length sales of our common stock, repurchases of our common stock, and our current, historical and expected future operating
performance. This approach is consistent with the methods outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities
Issued as Compensation.
65
Table of Contents
The
factors considered by our board of directors include periodic independent third-party valuation analysis, which is based upon a combination of the income and market approaches. The
income approach discounts expected future cash flows to their present value at a discount rate based upon our weighted-average cost of capital that considers the risk free rate, as well as risks
associated with an investment in the business. Under the market approach, consideration is given to pricing information for similar public companies, called the guideline public company method, and to
relevant transactions involving the sales of similar companies, called the mergers and acquisitions method. The projections used in connection with the income and market valuation approaches were
based on our expected operating results and cash flows over the forecast period. In determining the enterprise value, we generally have placed more weight on the income approach than on the guideline
public company method or the mergers and acquisitions method given that our growth was higher than our peer group companies and the volatility of the market during recent years. Our peer group is
comprised of a number of U.S. based publicly traded companies primarily focused on the processing of electronic payment transactions. There is inherent uncertainty and
subjectivity in these fair value estimates. If different peer companies, discount rates and other assumptions had been used, the valuations would have been different.
In
connection with the July 15, 2008 acquisition of Skylight Financial, we issued 16,906,100 shares of Class A Common Stock and 10,043,137 shares of
Class B Common Stock, which represented approximately 30% of the total outstanding shares of our common stock. Also in July 2008, subsequent to the completion of the acquisition, we obtained an
independent third-party valuation of our common stock which resulted in a board approved fair market value of $3.47 per share using the following assumptions: 17.1% marketability discount, 50%
weighting from the income approach using a 14% discount rate, 25% weighting from the mergers and acquisitions method, and 25% weighting from the guideline public company method. Our board of directors
continued to use $3.47 per share for all option grants through March 31, 2009.
During
our fourth quarter 2008 evaluation of goodwill and intangible impairment, we determined that the carrying value of the Skylight reporting unit exceeded its fair value, resulting
in goodwill and intangible asset impairment expense of approximately $26.3 million in 2008. The impairment was caused by significantly declining economic conditions which impacted the
environment in which the Skylight reporting unit operated.
On
April 1, 2009, we initiated a new independent third-party valuation of our common stock to determine the fair value of our common stock given the recent impairment and
recession. This valuation indicated a $2.98 per share value of our common stock based upon the following assumptions: 18.3% marketability discount, 50% weighting from the income approach using a 17%
discount rate, 25% weighting from the mergers and acquisitions method, and 25% weighting from the guideline public company method. The higher discount rate used in the April 1, 2009 valuation
of our common stock was caused by increased market volatility in late 2008 and early 2009. Our board of directors considered this valuation, along with expectations that the increased market
volatility of our peer companies was temporary and expectations of strong performance in our other reporting units, and ultimately approved the continued utilization of a $3.47 per share value of
common stock for the grant of stock-based awards through December 31, 2009. The $2.98 per share value from the independent third-party valuation was used as the basis for valuing and recording
a non-cash acquisition of 400,000 shares of Class A Common Stock in settlement of certain litigation, which was recorded as a settlement gain of approximately $1.2 million in the
second quarter of 2009.
During
the third quarter of 2009, there was an arms' length transaction involving our common stock between two unrelated third parties. This transaction used a convertible loan
structure that allowed the holder of the note to convert the loan into shares of our common stock. The conversion rate of the loan implied a fair value of $3.08 per share for our common stock. Our
board of directors considered the implied fair value indicated by the arms' length transaction and elected to
66
Table of Contents
continue
to utilize the $3.47 per share value of common stock for stock-based awards granted in the third and fourth quarter of 2009.
In
December 2009, we again commenced an independent third-party valuation of our common stock. This valuation indicated a $3.78 per share value of our common stock. The value was
derived using the following assumptions: 19.7% marketability discount, 45% weighting from the income approach using a 1416% discount rate depending on reporting unit, 10% weighting from
the mergers and acquisitions method, and 45% weighting from the guideline public company method. We increased the relative weight of the guideline public company method and decreased the weight of the
merger and acquisition method given that there were few recent merger and acquisition transactions relevant to our valuation at the time the valuation was prepared. Based on the valuation, our board
of directors approved a $3.78 per share value of our common stock, which was used to value stock-based awards from January 1, 2010 through May 31, 2010.
In
the first quarter of 2010, we received a request to approve the sale and transfer of 1.5 million shares of our common stock between two unrelated third parties. The proposed
sale price in the agreement included initial cash consideration of $3.30 per share, and provided for some additional consideration if the sale of shares resulted in a gain to the buyer. In response,
we offered to repurchase the shares at the then-current estimated fair value of $3.78 per share. The offer was accepted by the sellers and in March 2010 we repurchased 1.5 million shares of our
common stock at a per share price of $3.78.
In June 2010, we engaged independent third-party valuation professionals to value our common stock. Given our recent communications with prospective underwriters about a potential
initial public offering of our common stock, we used the Probability Weighted Average Expected Return Method (PWERM) to value our common stock. Under the PWERM method, our enterprise value is
estimated based upon the timing and likelihood of various assumed potential future liquidity scenarios at the valuation date, including an initial public offering, merger or strategic sale, continued
private operation, or dissolution. At the valuation date, we estimated the likelihood of a scenario in which we remain private to be 45% versus a liquidity event through either an initial public
offering or strategic sale, which we estimated the likelihood to be 50%, with equal weighting between the two. We believed that it was somewhat more likely that a liquidity event would occur than a
scenario in which we would remain private, but given the volatility in the public markets, the fact that we are not in full control of the timing and certainty of a liquidity event, and recent changes
in the regulatory environment in the financial industry in which we operate, it was difficult to reliably predict the timing and the likelihood of a liquidity event. We also considered a dissolution
scenario which represented downside equity risk, or the probability that our valuation will fall below
its current value in the future. We believed that this was a remote scenario, and assigned it a low likelihood of 5%. We estimated the fair value of our common stock in a remain private scenario using
the following assumptions: 14.8% marketability discount, 50% weighting from the income approach using a 13.9% discount rate based upon the weighted-average cost of capital, 25% weighting from the
mergers and acquisitions method, and 25% weighting from the guideline public company method. We reduced the weighting applied to the guideline public company method from our December 2009 valuation
given the significant volatility in the share prices of our peer group, which we believe stemmed from uncertainty surrounding the impact of proposed financial regulatory reforms. We estimated the fair
value of our common stock in a merger or strategic sale and an initial public offering scenario using a 16.9% discount rate based upon the cost of equity and a 14.8% marketability discount. The
valuation yielded a price per share of $7.06 which has been used to value option awards since June 1, 2010.
In
July 2010, we granted options to purchase 350,000 shares of our common stock to our President at a negotiated strike price per share of $3.78 as well as 406,250 shares
of restricted stock. The options and the restricted stock have been valued at a fair value of $7.06 per share.
67
Table of Contents
Goodwill
Goodwill represents the excess of the purchase price of an acquired company over the fair value of assets acquired and liabilities
assumed. We evaluate goodwill and intangible assets with indefinite lives for impairment annually or at an interim period if events occur or circumstances indicate it is more likely than not that the
carrying value exceeds the fair value of the associated reporting unit. We assign goodwill to our reporting units for the purpose of impairment testing. The first step of the impairment test is to
compare the estimated fair value of the respective reporting unit with its carrying value. If the carrying value is less than fair value, no indication of impairment exists. If the carrying value is
greater than fair value, a second step in the impairment test is performed to determine the implied fair value of goodwill and the amount of the impairment loss, if any.
Cardholders' Reserve
We are exposed to transaction losses due to cardholder and other losses resulting from cardholder activity, as well as
non-performance of third parties. We have established a cardholders' reserve for estimated losses arising from processing customer transactions, debit card overdrafts, chargebacks for
unauthorized card use, and merchant-related chargebacks due to non-delivery of goods or services. We establish these reserves based upon historical loss and recovery rates, and cardholder
activity for which specific losses can be identified. We charge off the balance of these receivables at 90 or 180 days, depending on the nature of the receivable and type of loss. Establishing
the reserve for transaction losses is an inherently uncertain process, and ultimate losses may vary from the current estimates. We regularly update our reserve estimate as new facts become known and
events occur that may impact the settlement or recovery of losses.
Income Taxes
We recognize tax benefits or expenses on the temporary difference between the financial reporting and tax bases of our assets and
liabilities. We measure deferred tax assets and liabilities using statutory based tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be
recovered or settled. We are required to adjust our deferred tax assets and liabilities in the period in which tax rates or the provisions of the income tax laws change. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount for which we believe recovery is more likely than not. We classify interest and penalties associated with uncertain tax positions
as a component of income tax expense.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or the FASB, issued revised guidance on accounting for business
combinations. Our adoption of this revised guidance on January 1, 2009 did not have an impact on our consolidated financial statements. The effect of this guidance will depend on the nature and
significance of business combinations occurring after our adoption of this revised guidance.
The
FASB guidance on fair value measurement and disclosures became effective January 1, 2008. However, in February 2008, the FASB delayed the effective date regarding fair value
measurement
and disclosures of non-financial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements, to
January 1, 2009. Our adoption of these provisions related to non-financial assets and non-financial liabilities on January 1, 2009 did not have a material impact
on our consolidated financial statements.
In
April 2008, the FASB issued new requirements regarding the determination of the useful lives of intangible assets. These new requirements applied to intangible assets acquired after
68
Table of Contents
January 1,
2009. Our adoption of these new requirements did not have a material impact on our consolidated financial statements.
In
June 2008, the FASB issued a new accounting standard on determining whether instruments granted in share-based payment transactions are participating securities prior to vesting and
therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method. Unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents are treated as a separate class of securities in calculating earnings per share. This new standard was effective for fiscal years
beginning after December 15, 2008. Our adoption of this new standard did not have an impact on our consolidated financial statements.
In
November 2008, the FASB issued guidance on accounting for an asset acquired in a business combination or in an asset acquisition that an entity does not intend to actively use. Our
adoption of this guidance on January 1, 2009 did not have an impact on our consolidated financial statements.
In
April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination
that arise from contingencies. Our adoption of this amendment did not have an impact on our consolidated financial statements.
In
April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying
transactions that are not orderly. This guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. Our adoption of this guidance did not have a
material impact on our consolidated financial statements.
In
May 2009, the FASB issued guidelines on accounting for subsequent events effective for interim and annual periods ending after June 15, 2009. Our adoption of these guidelines
in our fiscal quarter ended June 30, 2009 did not have an impact on our consolidated financial statements.
In
July 2009, the FASB issued the FASB Accounting Standard Codification, or the Codification. The Codification became the single source of authoritative nongovernmental
U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. The Codification eliminates the previous
U.S. GAAP hierarchy and establishes one level of authoritative U.S. GAAP. All other literature is considered non-authoritative. The Codification was effective for interim and
annual periods ending after September 15, 2009 and did not have an impact on our consolidated financial statements.
In
August 2009, the FASB issued guidance on the measurement of fair value. Our adoption of this guidance on October 1, 2009 did not have an impact on our consolidated financial
statements.
In
January 2010, the FASB issued guidance on fair value measurements and disclosures to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair
value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarified existing fair value measurement disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. These additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009,
except for the additional disclosure requirements related to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010. Our adoption of these
requirements is not expected to have an impact on our consolidated financial statements.
In
February 2010, the FASB issued an amendment to the guidelines on accounting for subsequent events. This amendment clarifies that an SEC filer is required to evaluate subsequent
events through the date that the financial statements are issued, but that SEC filers are not required
69
Table of Contents
to
disclose the date through which subsequent events have been evaluated. This amendment was effective upon issuance and did not have an impact on our consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business operations, primarily risks associated with fluctuating
interest rates for borrowings under
our amended and restated credit agreement. Borrowings under our amended and restated credit agreement incur interest based on current market interest rates. We have not historically used derivative
financial instruments to manage these market risks. As of December 31, 2009, outstanding borrowings under our term loan and revolving credit facilities were $70.9 million. A 1.0%
increase or decrease in interest rates would have a $0.5 million impact on our operating results and cash flows for fiscal 2009.
The
table below presents principal amounts and related weighted average interest rates as of December 31, 2009 for our term loan and revolving credit facilities:
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Term loan and revolving credit facilities |
|
$ |
70,875 |
|
Weighted average interest rate |
|
|
6.0 |
% |
70
Table of Contents
BUSINESS
Overview
NetSpend is a leading provider of general-purpose reloadable prepaid debit cards, or GPR cards, and related alternative financial
services to underbanked consumers in the U.S. We believe we are one of the largest dedicated providers of GPR cards in the U.S., with approximately 2.0 million active cards as of
June 30, 2010 and a gross dollar volume of debit transactions and cash withdrawals of $8.8 billion for the twelve months ended June 30, 2010. We primarily focus on the
estimated 60 million underbanked consumers in the U.S. who do not have a traditional bank deposit account or who rely on alternative financial services. We empower underbanked consumers by
providing innovative and affordable financial products and services tailored to meet their particular financial services needs and preferences in a manner that traditional banking institutions have
historically not met. In addition, our products and services provide our retail distributors an opportunity to enhance their customer relationships and generate incremental,
ongoing revenue streams. We believe that by providing value to both underbanked consumers and our retail distributors we are well-positioned to continue to take advantage of the
significant opportunities within two large, fast-growing markets the prepaid card market and the market for financial services targeting underbanked consumers.
According
to Mercator Advisory Group, the GPR card market is forecasted to grow at a compound annual growth rate of 92% from 2008-2012 and is expected to reach
$118.5 billion in annual funds loaded by 2012. A December 2009 study by the Federal Deposit Insurance Corporation, or the FDIC, estimates that more than 25% of U.S. households are unbanked or
underbanked, which we collectively refer to as underbanked. According to the FDIC, underbanked households in the U.S. represent approximately 60 million adults who receive approximately
$1.1 trillion annually in payments from employers and government entities. This consumer segment represents a large and underpenetrated market for alternative financial services solutions.
According to the FDIC, only 16% of underbanked households have used a GPR card and only 4% of underbanked households currently receive their income through a payroll card.
We
have been focused on serving underbanked consumers since 2001, which has given us unique and extensive knowledge regarding their attitudes, characteristics and purchasing behavior.
We have leveraged this knowledge to develop a robust portfolio of products and services designed to meet the financial needs of these consumers. Our GPR cards are tied to FDIC-insured
depository accounts and can be used to make purchase transactions at any merchant that participates in the MasterCard, Visa or PULSE networks and to withdraw funds at participating ATMs. The
additional features we offer to our cardholders include direct deposit, interest-bearing savings accounts, bill pay and card-to-card transfer functionality, personal financial
management tools and online and mobile phone card account access. We believe that the depth and breadth of our portfolio of products and services, including direct deposit, not only attracts new
cardholders, but also drives longer cardholder retention. The number of our direct deposit active card accounts has increased from approximately 130,000 as of December 31, 2007 to approximately
500,000 as of June 30, 2010. As of June 30, 2010, the average lifetime of a card account was approximately 11 months and the average lifetime of a direct deposit card account was
approximately 20 months. We measure the lifetime of a card account as the period of time between the date the card is initially loaded with funds and the last date the card account is
considered active.
We
have built an extensive and diverse distribution and reload network throughout the U.S. to support the marketing and ongoing use of our GPR cards. We market our cards through
multiple distribution channels, including contractual relationships with retail distributors, direct-to-consumer and online marketing programs, and contractual relationships
with corporate employers. As of June 30, 2010, we marketed our GPR cards through approximately 500 retail distributors at over
71
Table of Contents
39,000 locations
and offered our cardholders the ability to reload funds onto their cards at over 100,000 locations. Our extensive retail distribution and reload network provides
underbanked consumers the ability to acquire and load cards at retailers that service their primary financial
services needs, as well as non-financial retailers that are convenient to consumers, such as grocery and convenience stores. Our direct-to-consumer and online
marketing programs allow us to broaden our market reach to underbanked consumers beyond our retail distributors. We have developed a direct marketing platform that we believe is among the largest and
most sophisticated in the industry, incorporating a database that includes information regarding a significant portion of the underbanked consumer population in the U.S. In addition, we have
contractual relationships with approximately 800 employers that offer our GPR card to their employees as a direct deposit alternative to paper checks. We believe that the breadth and diversity
of our distribution and reload network allows us to reach a larger number of underbanked consumers and reduce our dependency on any single channel or distributor.
We
have developed a proprietary, fully-integrated operational and technology platform. Our in-house platform is "end-to-end" in that it encompasses
the critical functions required for us to acquire cardholders, process transactions, maintain account-level data, communicate with cardholders, manage risk, ensure regulatory compliance and connect to
our issuing banks and distributors. These integrated capabilities allow us to customize our products and services for different markets, distribution channels and customer segments. Further, by
processing transactions on our own platform, we gain unique and extensive insight into the attitudes, characteristics and purchasing behavior of underbanked consumers. Our processing platform is
scalable, which will allow us to increase our profitability as our number of active cards and the volume of the transactions we process increase.
We
have experienced significant growth since our inception in 1999. From 2005 through 2009, our revenues grew from $45.7 million to $225.0 million and our net income grew
from $0.7 million to $18.2 million, representing a compound annual growth rate of 49% and 124%, respectively.
Market Opportunity
Prepaid Cards
The prepaid card market is one of the fastest growing segments of the payments industry in the U.S. This market has experienced
significant growth in recent years due to consumers and merchants embracing improved technology, greater convenience, more product choices and greater flexibility. Within the prepaid card market,
which includes branded and private label gift cards, GPR cards, payroll cards, travel cards, college campus cards and teen spending cards, one of the fastest growing segments is GPR cards. A GPR card,
typically branded with the MasterCard or Visa logo, is an "open-loop" prepaid debit card that provides
cardholders the ability to load and reload funds onto their cards and make purchase transactions at any merchant that participates in the MasterCard, Visa or PULSE network, as well as to withdraw
funds from participating ATMs. GPR cards such as NetSpend's have the same functionality as bank debit cards, serving as access devices to an FDIC-insured depository account with a bank.
NetSpend is one of the most established providers of GPR cards, having marketed GPR cards since our inception.
Mercator
Advisory Group estimates the total loads on open-loop prepaid debit cards in 2009 to be $94 billion, and forecasts network branded prepaid cards to grow at a
compound annual growth rate of 48% from 2008-2012. Mercator estimates that of those loads in 2009, $18.3 billion was loaded on GPR cards and that the total GPR card market will grow
at a compound annual growth rate of 92% from 2008-2012, reaching an estimated $118.5 billion in load volume in 2012.
72
Table of Contents
GPR Card Load Volumes 2008-2012 (U.S. $ billions)
Underbanked Consumers
Prepaid debit cards have proven an attractive alternative to traditional bank accounts for certain segments of the population,
particularly underbanked consumers. A December 2009 study by the FDIC concluded that at least 25.6% of U.S. households, comprising approximately 60 million adults, are unbanked or underbanked,
which we refer to collectively as underbanked. This includes 7.7% of U.S. households that are "unbanked" those
without a checking or savings account, and another 17.9% that are "underbanked" those reliant on alternative financial services such as non-bank money orders, check
cashing, rent-to-own agreements and payday loans. Although this consumer segment represents an attractive market segment for financial services products given the large amounts
of payments they receive, underbanked consumers often remain underserved by traditional financial services providers. We believe many underbanked consumers are dissatisfied with the traditional
banking sector due to expensive fee structures, including minimum balance fees and overdraft charges, denial of access to credit products due to a lack of credit history or poor credit, or a distrust
in non-cash financial instruments. In addition, many traditional financial services providers are not open during hours or located in areas that are convenient for underbanked consumers.
As
a result of their lack of access to traditional bank services, many underbanked consumers have historically used cash as their primary payment vehicle. However, the reliance on cash
inherently limits these consumers' purchasing power and flexibility. For this large portion of the population, prepaid debit cards have emerged as an attractive alternative to cash, allowing a
cardholder to participate in mainstream financial transactions by other means. Our GPR cards provide the cardholder with the convenience, security and freedom associated with access to universal
electronic payment capabilities and product innovations such as direct deposit, interest-bearing savings accounts, complimentary insurance coverage, bill pay and card-to-card
transfer functionality, personal finance management tools and online and mobile phone card account access. We believe these features increase the attractiveness of our cards by increasing their
utility to underbanked consumers.
We
have developed prepaid products, services and distribution methods designed to reach underbanked consumers and address their particular financial services needs and preferences. We
believe that our experience and focus on the underbanked consumer uniquely positions us to take advantage of the opportunities created by the growing demands for prepaid debit cards and alternative
financial services from this consumer segment.
73
Table of Contents
Competitive Strengths
We believe that our competitive strengths include the following:
Extensive Knowledge of Underbanked Consumers
Since 2001, we have served more than six million underbanked consumers and have developed a database of more than 28 million
consumers who we believe are underbanked. The experience we have gained and the data we have gathered have allowed us to develop extensive knowledge regarding the attitudes, characteristics and
purchasing behavior of underbanked consumers. We have utilized this knowledge to develop a robust portfolio of products and services that we believe not only attracts underbanked consumers as new
cardholders, but also drives longer cardholder retention.
Valuable and Loyal Customer Base
We believe we have achieved one of the highest average cardholder lifetimes among GPR card providers. As of June 30, 2010, the
average lifetime of a card account was approximately 11 months and the average lifetime of a direct deposit card account was approximately 20 months. We measure the lifetime of a card
account as the period of time between the date the card is initially loaded with funds and the last date the card is considered an active card. Providers of GPR cards do not necessarily use the
same metrics for determining average lifetime of a card account or other similar measurements of cardholder retention, and therefore a comparison of our average lifetime of a card account with that of
a competitor may not be meaningful. We believe these retention rates result primarily from our promotion of direct deposit and our offering of a comprehensive suite of features, functions and
supplemental products to our cardholders. As of June 30, 2010, we had approximately 2.0 million active cards and for the twelve months ended June 30, 2010 approximately 65% of all
loads on our GPR cards were made through direct deposit, or approximately $5.8 billion. From December 31, 2007 to June 30, 2010, we increased the number of our direct deposit
active card accounts by approximately 279%. Our promotion of direct deposit and our comprehensive product suite provide consumers a consistent and affordable financial services solution and increase
the lifetime value of the customer relationship.
Extensive and Diverse Distribution and Reload Network
We believe that our nationwide distribution and reload network provides us with a significant competitive advantage relative to other
GPR card providers as it enables us to reach a large number of underbanked consumers and reduces our dependency on any single distribution channel or distributor. As of June 30, 2010, we
marketed our GPR cards through approximately 500 retailers at over 39,000 locations in the U.S. and offered reload services at over 100,000 locations in the U.S. While our network
also provides underbanked consumers the ability to conveniently acquire and load cards at mainstream retailers that have not traditionally offered financial services, such as grocery stores and
convenience stores, we believe that our strong presence at retailers that service the primary financial services needs of underbanked consumers represents a significant competitive advantage relative
to the distribution and reload networks of other GPR card providers. We also market our cards directly to consumers through direct-to-consumer and online marketing programs,
which has allowed us to broaden our market reach beyond our retail distributors. By directly acquiring cardholders through our direct-to-consumer and online marketing programs
we are able to maintain greater control over our relationship with cardholders and eliminate the revenue-share associated with marketing cards through our retail distributors. As of June 30,
2010, we also marketed our GPR cards through approximately 800 corporate employers. These employers promote our GPR card to their employees as an alternative method of wage payment, allowing their
employees to receive their
74
Table of Contents
wages
on their GPR cards through direct deposit rather than a paper check and allowing the employers to avoid the costs associated with distributing paper checks.
End-to-End, Scalable and Proprietary Technology Platform
We believe that the full integration of our program management and transaction processing operations into a single
end-to-end operational and technology platform is unique among the leading GPR card providers. This platform provides us with a significant competitive advantage derived from
attractive economies of scale, flexible product development capabilities and speed to market with differentiated product offerings. Our platform is end-to-end in that it
encompasses the critical functions required for us to acquire cardholders, process transactions, maintain account-level balance data, communicate with cardholders, manage risk and ensure regulatory
compliance and communicate with our issuing banks and distributors. These integrated capabilities allow us to customize our products and services for different markets, distribution channels and
customer segments. Further, by processing transactions on our own platform, we gain unique and extensive insight into the attitudes, characteristics and purchasing behavior of underbanked consumers,
which allows us to
better tailor our products and services to this consumer segment. During the twelve months ended June 30, 2010, we processed over 250 million financial transactions on our platform. Our
processing platform is scalable, which allows us to increase our profitability as our number of active cards and the volume of transactions we process increase by lowering our incremental cost per
transaction.
Strong Regulatory Compliance
We believe that our regulatory compliance, risk management and fraud prevention programs are highly efficient and effective. As a
provider of prepaid debit cards targeting underbanked consumers since 2001, we have acquired extensive knowledge about the unique characteristics of prepaid debit card programs for underbanked
consumers. We have incorporated that knowledge into our proprietary regulatory and risk management systems. Through our regulatory compliance and risk management staff, we maintain substantially all
aspects of portfolio and cardholder risk management, fraud exposure, chargeback recovery and transaction and distribution monitoring on behalf of our issuing banks and distributors. We believe that
our significant investment in these programs effectively limits our losses. Working closely with our issuing banks and distributors, we have developed systems and processes designed to comply with
rigorous federal regulatory standards for anti-money laundering and consumer protection in a manner adapted to the unique characteristics of our programs.
Proven and Experienced Management Team
We have assembled an executive team with substantial public company experience in financial services, payment systems, retail program
management, direct marketing and technology. Our Chief Executive Officer, Daniel R. Henry, co-founded Euronet Worldwide, Inc., a global leader in processing secure electronic financial
transactions, before joining NetSpend in 2008. Our President, Charles Harris, previously served as the general manager of the payment solutions division of Intuit, Inc., a NASDAQ-listed company that
is a leading provider of financial management, tax and online banking solutions for consumers, small and mid-sized businesses, accountants and financial institutions. Our Chief Financial Officer,
George W. Gresham, has served as Chief Financial Officer of Global Cash Access, Inc., a leading provider of cash access services to the gaming industry, and as Chief Financial Officer, Chief
Administrative Officer and Executive Vice President of eFunds Corporation, a NYSE-listed company that specialized in the development and deployment of payment and payments-related
technology. We believe that the strength and experience of our
75
Table of Contents
management
team has helped us attract and retain our cardholders and distributors and create a differentiated product offering, contributing to our significant growth.
Business Strategy
We aim to be the leading provider of GPR cards and related alternative financial services to underbanked consumers. To achieve this
goal, we have developed a multi-pronged growth strategy that leverages our core capabilities to address expanding market opportunities for our services.
Increase Cardholder Usage and Retention
We believe we have one of the highest profitability rates per cardholder among prepaid debit card providers. We plan to increase this
profitability by extending cardholder life, the amount loaded on each card, the number of transactions per cardholder, and the additional revenue-generating product offerings available to cardholders.
We plan to do this primarily by increasing the number of our cardholders who direct deposit their wages, government benefits or tax refunds onto their cards, as well as through marketing programs,
product development, customer support and joint marketing efforts with our distributors. For the twelve months ended June 30, 2010, our direct deposit active cardholders initiated an average of
approximately 18 debit transactions and/or cash withdrawals per month, compared to our active cardholders without direct deposit, who initiated an average of approximately four debit transactions
and/or cash withdrawals per month. For the twelve months ended June 30, 2010, a direct deposit load on our cards was on average approximately three times larger than a load made on our cards
through a retailer. As of June 30, 2010, the average lifetime of a direct deposit card account was approximately three times longer than the average lifetime of a card account without direct
deposit. On average a direct deposit active card account generates over six times more revenue over the life of an account than an active account without direct deposit. We plan to continue to provide
competitive pricing while adding functionality and complementary products and services that will encourage underbanked consumers to use our cards as the equivalent of a traditional bank account over a
longer period of time.
Increase Penetration of the Underbanked Consumer Market
We believe the opportunity to increase our revenues attributable to the underbanked consumer market is significant. While we had
approximately 2.0 million active cards as of June 30, 2010, we believe that our industry has reached only a small portion of the potential market of underbanked consumers. We further
believe that the market for our products and
services will grow as more consumers become aware of the benefits of prepaid debit cards relative to traditional bank debit and credit card offerings.
We
plan to focus on further penetrating the existing underbanked consumer market and attracting new categories of consumers who are dissatisfied with the traditional banking system
by:
-
- increasing our retail card sales by providing superior product offerings and pricing for underbanked consumers seeking
cash or bank alternatives;
-
- developing new distribution relationships with leading national retailers and corporate employers;
-
- continuing to grow and diversify our reload network; and
-
- improving the effectiveness and efficiency of our direct-to-consumer and online marketing
programs.
76
Table of Contents
Leverage Our Technology Platform to Increase Profitability
We believe that the investment we have made in our operational and technology platform enables us to sustain significant additional
growth in our business without corresponding increases in costs. Our end-to-end, proprietary technology platform provides us with attractive economies of scale, flexible
product development capabilities and speed to market with differentiated product offerings. In addition, we continue to
drive new efficiencies in our business, such as the continued integration of Skylight's infrastructure with our operational and technology platform. As we continue to increase our number of active
cards and the volume of transactions we process, we believe we will be able to increase our profitability.
Products and Services
GPR Cards
The GPR card is our core product. As of June 30, 2010, we had approximately 2.0 million active cards and our GPR cards
were responsible for approximately 97% of our total revenues for the six months ended June 30, 2010. We consider a GPR card to be "active" if a PIN or signature-based purchase transaction, a
load transaction at a retailer location, or an ATM withdrawal has been made with respect to such card within the previous 90 days. Marketed and processed by us and issued by our issuing banks,
our GPR card is a prepaid debit card tied to an FDIC-insured depository account maintained by us, with the funds held at an issuing bank on behalf of the cardholder. Our GPR card
represents the equivalent of a bank account for underbanked consumers and is marketed through our network of retail distributors, our direct-to-consumer and online marketing
programs and corporate employers as an alternative method of wage payment rather than through bank branches. Our GPR cards can be used to make purchase transactions at any merchant that participates
in the MasterCard, Visa or PULSE network and withdraw funds at participating ATMs.
Funds
may be loaded onto the GPR cards we market through our retail distributors and our direct-to-consumer and online marketing programs
by:
-
- a cardholder reloading his or her GPR card at a retail location within our distribution and reload network;
-
- direct deposit of wages, government benefits or tax refunds;
-
- a cardholder from his or her bank debit card through our online banking portal; or
-
- electronic transfer by a third party.
The
GPR cards we market through corporate employers are promoted to their employees as an alternative method of wage payment and are designed to be compliant with state wage and hour
laws governing payroll cards. Similar to the GPR cards we market through our retail distributors, cardholders may load their wages onto our employer-marketed GPR cards through direct deposit. Although
our employer-marketed GPR cards currently may not be reloaded through our reload network, they may be reloaded at all MoneyGram agent locations.
Additional Products and Services
We provide a feature rich suite of products and services to our cardholders, including direct deposit, MetaBank's
iAdvance line of credit, overdraft protection through our issuing banks, complimentary insurance coverage, and a variety of bill payment options. Our cardholders also have the ability to
transfer funds to other cardholders and deposit a portion of their funds into an interest-bearing savings account linked to their GPR cards. We also provide certain cardholders with a "cushion" which
allows them to overdraw their card accounts without a fee. Our website
77
Table of Contents
allows
our cardholders to access their account information and effectively manage their budgets through our personal finance management tools. Our interactive voice response systems also provide
account information and allow cardholders to activate their accounts and perform a range of transaction activities such as card-to-card transfers of funds. We also provide our
cardholders with a text message service that automatically sends balance and transaction information to enrolled cardholders' mobile phones, and also allows them to interact with their account by
sending text messages to NetSpend. We believe we were the first prepaid debit card provider to provide text message services to cardholders.
In
addition to GPR cards, we were also a provider of gift cards. Beginning in 2008, we decided to focus primarily on our GPR cards, and ceased marketing gift cards entirely as of
August 21, 2010.
Distribution
We have built an extensive distribution and reload network throughout the U.S. comprised of diverse categories of retailers, corporate
employers and our own direct-to-consumer and online marketing programs.
Retail Distribution
As of June 30, 2010, we marketed our GPR cards through approximately 500 retail distributors at over 39,000 locations in
the U.S. The majority of our agreements with our retail distributors require our retail distributors to exclusively market our GPR cards for a period of three to five years. Our long-term
relationships include leading alternative financial services providers, such as ACE Cash Express, Advance America, Cash America International, Community Financial Service Center and Check City,
leading grocery and convenience stores, such as H-E-B, Speedway, Murphy Oil and Winn-Dixie, and leading tax preparation service providers, such as Liberty Tax
Service.
Alternative Financial Services Providers. The most established category of retail distribution of our GPR cards is
alternative financial services
providers that operate stores that attract and serve underbanked consumers. We have marketed our cards through alternative financial services providers since 2001, and we believe we are the leading
provider of GPR cards through these retailers. Consumers who rely on these retailers to provide their financial services are inherently underbanked. We believe that offering these consumers an
electronic payment vehicle with all the convenience and security of an ATM/debit card in lieu of cash combined with the features of a traditional bank account is a compelling proposition. Since we
engaged our first alternative financial services provider as a distributor in 2001, we have created the largest distribution network for our GPR cards within this industry by securing exclusive,
long-term relationships with leading providers. Our current distribution and reload network represents a majority of the total number of alternative financial services provider locations
in the U.S. Our largest retail distributor is ACE Cash Express, with whom we have an exclusive distribution agreement through March 31, 2016. GPR cards distributed through ACE accounted for
approximately 37% of our total revenues in 2009.
Traditional Retailers. We also market our GPR cards through large grocery and convenience stores
and other traditional retailers, such as H-E-B, Speedway, Murphy Oil and Winn-Dixie. Retailers that offer a variety of non-bank financial services, such
as H-E-B and Winn-Dixie, market our GPR cards at a service desk, rather than off a "j-hook", and are more likely to generate higher sales of our
GPR cards, particularly to consumers who are more likely to become loyal cardholders.
Other Retailers. We also market our GPR cards through leading tax preparation service providers, such as Liberty Tax Service,
leading
non-standard auto insurance carriers, such as The
78
Table of Contents
General,
and retail agents of leading non-standard auto insurance carriers, such as Reliant General Insurance Services and Aggressive Insurance.
Consumers
who engage tax preparation service providers to file their tax returns are often underbanked. Our GPR cards provide underbanked consumers with a means to receive their tax
refunds on their GPR cards. Consumers who purchase non-standard auto insurance typically are underbanked and pay their monthly insurance premiums in cash. We believe that offering these
consumers a GPR card onto which they may direct deposit their wages and use to pay their monthly insurance premiums is a compelling value proposition.
Direct Distribution
We also market our cards directly to consumers through direct-to-consumer and online marketing programs. We
have developed proprietary systems for optimizing the placement of information regarding our products on the Internet through affiliate marketing and search optimization, and for identifying consumers
likely to be receptive to offers to apply for our GPR cards. We have developed a direct marketing platform that we believe is among the largest and most sophisticated in the industry,
incorporating a database that includes information regarding a significant portion of the underbanked consumer population in the U.S. By directly acquiring cardholders we are able to maintain greater
control over our relationship with our cardholders and eliminate the revenue-share associated with marketing cards through our retail distributors. Our experience in
direct-to-consumer and online marketing to underbanked consumers has enabled us to achieve high conversion rates relative to comparable marketing programs.
Corporate Distribution
As of June 30, 2010, we marketed our GPR cards through approximately 800 corporate employers. These employers promote our GPR
card to their underbanked employees as an alternative method of wage payment, allowing their employees to receive their wages on their GPR cards through direct deposit rather than a paper check and
allowing the employers to avoid the costs associated with distributing paper checks. The corporate employers through which we market our GPR cards include Kohl's, Macy's, TravelCenters of America,
Church's Chicken, Starwood Hotels & Resorts Worldwide and Hospital Corporation of America.
Reload Network
As of June 30, 2010, we offered reload services through approximately 500 retailers at over 100,000 locations in
the U.S. Our reload network is designed to provide convenient ways for our cardholders to add more funds to their cards, to provide our retail distributors with additional opportunities to earn
revenue by providing services to our cardholders and to supplement our core GPR card revenues. Retailers typically collect a fee in connection with the reload of our GPR cards and we are entitled to a
portion of such fee only with respect to some of such retailers. We do not process reloads of other providers and therefore none of our revenues are derived from reloads of cards offered by other
prepaid debit card companies. Our reload network is highly diversified, comprising all of the alternative financial services provider locations and traditional retail locations that market our GPR
cards, as well as all MoneyGram and Western Union agent locations and all Safeway grocery stores. In addition, in 2009 we entered into a contractual relationship with Interactive Communications
International, or InComm, to offer reload services through certain InComm agents.
79
Table of Contents
Sales and Marketing
Our sales force is comprised of business development and key account management professionals responsible for developing and
maintaining our relationships
with our retail distributors, online marketers and corporate employers. As of June 30, 2010, our sales force consisted of 77 full-time employees covering all 50 states in the U.S.
The purpose of our sales force is not only to establish new distribution opportunities, but also to provide implementation and day-to-day operational support to our retail
distributors, corporate employers and online partners. Our sales force is supported by 33 full-time service representatives who provide ongoing support by phone, fax and
e-mail.
Our
marketing staff is comprised of product, channel and functional marketing professionals focused on cardholder acquisitions, deepening usage and retention for us and our retail
distributors and corporate employers. We principally market our cards under the NetSpend and Skylight brands and in many cases have co-branding relationships with our retail distributors.
Our marketing programs focus principally on direct deposit enrollment and cardholder lifetime value optimization. As of June 30, 2010 our marketing staff consisted of 19 full-time
employees supporting our retail distributors, direct-to-consumer and online marketing programs and corporate employers.
Operations
The NetSpend Platform
We fully integrate our program management and transaction processing operations into a single proprietary platform. Our
end-to-end operational and technology platform encompasses the critical functions required for us to acquire cardholders, process transactions, maintain account-level balance
data, communicate with cardholders, manage risk and ensure regulatory compliance and communicate with our issuing banks and distributors. These integrated capabilities allow us to customize our
products and services for different markets, distribution channels and customer segments.
Our
operations are designed to be scalable. We leverage the existing payment processing systems of third-party network processors Elan and PULSE to connect to the Visa and MasterCard
networks. We perform all other critical processing functions in-house, including direct secure network connections to each retail distributor, transaction authorization and account
maintenance. This approach enables us to control performance, respond quickly to market needs and maintain a high level of product innovation and flexibility. We have also developed sophisticated
exception management processes and procedures that are critical to maintaining our ability to scale
effectively. During the twelve months ended June 30, 2010, we processed over 250 million financial transactions and our platform is designed to support a significantly higher level of
transaction activity.
A
diagram reflecting the core competencies encompassed within our end-to-end operational and technology platform is set forth below.
End-to-end operational platform
80
Table of Contents
Program Management
Customer Acquisition and Account Activation. Customers that acquire cards through our retail distributors and corporate
employers are typically
issued a temporary "Instant Issue" card with funds immediately available at reduced load and transaction limits. Card applications are typically submitted by these customers through the retail
distributor or corporate employer, as applicable. A customer may activate a temporary card either online or by telephone. Upon the approval of the application, the account is established and a
permanent card embossed and personalized with the customer's name is sent to the customer within ten business days. Customers that acquire a card through our direct-to-consumer
or online marketing campaigns submit
a card application to us directly, either online or by telephone, and upon approval of the application the card is activated and, if not included in the original solicitation, a permanent card is sent
to the customer. We accept or decline card applications based on a review of the personal data included in each customer's application against our own and third party databases, in accordance with
compliance procedures designed to comply with applicable law.
Customer Service and Support. The quality of our customer interaction and the breadth of the communication channels that we
provide to our
cardholders are fundamental features of our business strategy. Our customer service department is an important source of cardholder education and marketing, encouraging card usage and promoting direct
deposit enrollment and other product offerings that improve retention.
We
provide a comprehensive set of services to cardholders for account and balance information, budgeting tools, person-to-person payment, query resolution, bill
payment and similar services. Customer support is provided through a combination of live service agents, as well as 24 hours a day, seven days a week access to our interactive voice response
systems, our websites and other online and mobile phone based services. Our customer service includes employees at our Austin, Texas and Atlanta, Georgia facilities and outsourced services through
facilities in Texas, Mexico and the Philippines. We provide certain of our large distributors with private-labeled customer support interfaces incorporating their brands.
Risk Management and Regulatory Compliance. We maintain substantially all aspects of portfolio and customer risk management,
fraud exposure,
chargeback recovery and transaction and distributor monitoring on behalf of our issuing banks. We also support many aspects of regulatory compliance monitoring and management within the risk area.
We
have made significant investments to build comprehensive risk and regulatory compliance systems, procedures and infrastructure designed to comply with applicable federal and state
law. Our compliance infrastructure includes customer identification protocols, systemic controls on balances and transactions, distributor due diligence and oversight and automatic surveillance and
monitoring of card program activity, which results in our compliance with anti-money laundering laws and reduces fraud loss. We believe that our risk and related regulatory compliance
systems and procedures efficiently and effectively implement risk management and risk-based regulatory compliance requirements for us, our distributors and our issuing banks, while
facilitating execution of our customer acquisition and transaction processing strategy. We attempt to successfully balance a comprehensive regulatory compliance infrastructure with cardholder growth
and product penetration. We believe the combination of regulatory compliance standards and operational efficiency provides us with a significant competitive advantage. We have implemented numerous
post-issuance procedures to reduce the risk of chargebacks and fraud loss. For example, we limit the use of our temporary cards issued to new cardholders until customer identification
protocols and other account opening compliance procedures have been met and the cardholder is issued a permanent card.
81
Table of Contents
We
have made significant investments in building proprietary analysis, tracking, authorization and reporting systems to manage our risk and compliance processes. These processes contain
a substantial amount of intellectual property embodying the knowledge we have gained across our cardholders, products and channels. These systems, and the fact that they are managed
in-house, enable us to quickly respond to any new fraud or risk trend. We periodically review and upgrade our fraud and risk management systems.
Transactions
disputed by our cardholders are administered in accordance with Regulation E of the Board of Governors of the Federal Reserve System and the industry-standard
chargeback procedures established and maintained by the card associations. We attempt to assist our cardholders in investigating and resolving chargeback disputes as quickly as possible. If the
cardholder is able to demonstrate that a transaction was invalid and the dispute is resolved in favor of the cardholder, the transaction is charged back to the merchant and the amount is credited to
the cardholder's account. We assume responsibility for liabilities for fraud not covered by chargebacks and for negative balances that may result from small transactions that are forced by merchants
through the settlement systems maintained by the card associations and network organizations without prior authorization for which it is not economically feasible to pursue chargebacks, or from small
courtesy overdrafts we may extend cardholders.
Marketing and Promotion. Our marketing and promotional efforts are targeted at consumers as well as our retail distributors
and corporate employers.
We are able to leverage our experience and the data we gather from our cardholders to design marketing and promotional programs that we believe more effectively drive customer acquisition, usage and
retention. Because our marketing and promotional efforts are maintained by us as part of our end-to-end platform, we are able to quickly customize and change our programs to
match changes in the market, consumer purchasing trends and technology improvements.
Distributor Relationship Management. We believe that our prepaid debit card programs are an integral part of many of our
retail distributors'
businesses. We work with our distributors to create a prepaid debit card program and strategy tailored to their respective businesses. We do this through a combination of marketing, information
technology, risk management and regulatory compliance and sales and customer support.
Each
new distributor is typically provided with our proprietary software that can be quickly integrated with their point-of-sale systems to create a direct
secure network connection between the distributor's information technology systems and our own payment processing platform. This direct information technology connection between our payment system
platform and the distributors' point-of-sale systems enables the distributor to efficiently and securely establish new accounts and transmit data regarding reloads, debits and
other similar transactions.
We
provide our distributors with ongoing support, which includes full card lifecycle management, training, teller incentive programs, answering billing questions, responding to requests
for supplies and inventory, resolving failed payment transactions, repairing equipment, educating distributors on compliance issues and assisting distributors with pricing changes and purchases of
additional products and services.
Transaction Processing
Processing and Authorization. A transaction begins with an electronic message from a merchant requesting funds from a
cardholder's account followed
by a response from us authorizing or denying the transaction. In the case of an authorization, the cardholder's account is updated to reduce the funds available in the cardholder's account. We
electronically receive and respond to an authorization request through the MasterCard, Visa or PULSE networks. The transaction is
82
Table of Contents
completed
when a subsequent settlement transaction indicating the final purchase amount is received by us, upon which we debit the funds from the cardholder's account.
Network and Telecommunications. We maintain our own networking systems designed to provide secure and reliable connections
to our distributors,
issuing banks, cardholders and third parties, such as the card associations and other processors on whom we rely to provide services that are integrated into our platform.
Customer Statements and Account Information. Cardholders can access their account status and recent transactions through our
customer service
agents, through voice activation responses or by text messages to their mobile phones. Full account statements can be accessed online and printed statements are available to the cardholder upon
request.
Clearing and Settlement Process. We have agreements with our issuing banks to undertake funds management and settlement
processes through the card
associations and network organizations. All cardholder funds are held by our issuing banks in FDIC-insured custodial depository accounts. Members of our distribution and reload network
collect our cardholders' funds and remit them by electronic transfer to our issuing banks for deposit in the card accounts. Loads made through direct deposit are routed from the originating depository
financial institutions through the Federal Reserve to our issuing banks for deposit in the card accounts. We provide a series of daily reports and instructions to our issuing banks regarding the
movement of cardholder funds.
Key Relationship with MetaBank
Our issuing banks provide us with critical products and services, including the FDIC-insured depository accounts tied to
our GPR cards, access to the ATM networks, membership in the card associations and network organizations and other banking functions. All cardholder funds are held by our issuing banks. Our
cardholders are charged fees by our issuing banks in connection with the products and services we provide. Further, interchange fees are remitted by merchants to our issuing banks when cardholders
make purchase transactions using our prepaid debit cards. Our issuing banks compensate us for our services based on these service fees and interchange fees. The revenues earned by our issuing banks in
connection with our prepaid debit cards consist primarily of investment returns earned on our cardholders' funds, as well as fees from additional products and services of our issuing banks marketed
with our GPR cards, such as MetaBank's iAdvance line of credit and overdraft protection.
MetaBank,
which has been one of our issuing banks since 2005, is a federal savings bank that is a leading issuer of prepaid debit cards. In January 2010, we amended our agreement with
MetaBank pursuant to which we agreed to promote MetaBank as a preferred issuing bank and MetaBank agreed to promote us as a preferred program manager. Our status as a preferred program manager of
MetaBank allows us to manage our business more efficiently and provides us access to additional opportunities through referrals. In order to further align our strategic interests with MetaBank, we
also acquired approximately 4.9% of the outstanding equity interests in Meta Financial Group, Inc., MetaBank's holding company. Although we intend to maintain relationships with alternative issuing
banks, we expect to continue to utilize MetaBank as a preferred provider of banking services.
Technology
We believe our technology is a key differentiator of our business and a competitive advantage. We develop and maintain all critical
operations systems in-house. Our integrated end-to-end operational and technology platform supports a wide variety of core processing, client servicing and
operational functions. Our proprietary systems include an account hosting database infrastructure,
83
Table of Contents
an
integrated layer of banking, cardholder acquisition, cardholder relationship management and transactions processing applications, a range and variety of third-party client interfaces and a
real-time reporting infrastructure. In addition to our core systems, we have also developed a number of ancillary systems that support a variety of customized operational needs, including
risk management, customer servicing and financial reconciliation and reporting.
We
have made substantial investments in the development of our core processing architecture. This architecture is the backbone of our transaction and data processing systems, and
provides a common, extensible and scalable framework that positions us with what we believe is a versatile banking platform. We leverage our core processing platform to provide a scalable application
model that supports both high availability as well as a flexible approach to business rule management.
We
believe our existing infrastructure is capable of handling our projected growth. In 2009, we processed over 250 million financial transactions and our platform is designed to
support a significantly higher level of transaction activity.
Key
elements of our information technology infrastructure include:
-
- Network scalability and disaster recovery. Our core
systems are designed to securely operate across multiple geographic locations, with a disaster recovery site designed to accommodate all of our production traffic in the case of a catastrophic outage.
We also manage a secure network of third-party client connections to our issuing banks, distributors, processors and other third parties to support card sales, loads, authorizations and related
transactions.
-
- Software system. We have developed a
three-tier Java-based software architecture designed to process transactions while maintaining high security in accordance with what we believe are industry best practices.
-
- Internet presence. We maintain a large number of websites
to support our business in three key categories: customer account management, customer acquisition and distributor support.
-
- SMS. Our NetSpend SMS platform allows customers to
self-service their accounts by sending and receiving SMS text messages via their mobile phones with real-time information regarding their accounts and transactions. The
platform is highly scalable, currently sending and receiving over 12 million text messages per month.
-
- Security. We collect and store personally identifiable
information about our cardholders, including names, addresses, social security numbers, driver's license numbers and account numbers. In addition, we maintain a database of cardholder data relating to
specific transactions, including account numbers, in order to process transactions and prevent fraud. We maintain security systems and procedures designed to prevent unauthorized disclosure of
cardholder data in accordance with applicable law and we contractually obligate our distributors to comply with the same standards.
Intellectual Property
Our success depends, in part, on the protection of our intellectual property and other proprietary rights. We rely on a combination of
patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other methods to protect our intellectual property and other proprietary rights. In addition,
we license technology from third parties.
We
have five patent applications pending with the United States Patent and Trademark Office. These include applications related to our payment processing platform and business methods.
84
Table of Contents
Most
of our services and products are based on proprietary software and related payments systems solutions. Protecting our rights to our proprietary software and the patents, copyrights and trade
secrets related to them is critical, as it enhances our ability to offer distinctive services and products to our cardholders, distributors and issuing banks, which differentiates us from our
competitors. We have U.S. federal trademark registrations for the marks "NetSpend", "Skylight" and "All-Access" and several other marks, as well as registrations in a variety of foreign
jurisdictions.
Competition
The financial services industry, including the prepaid card market, is subject to intense and increasing competition. We directly
compete with a number of companies that market open-loop prepaid debit cards through retail and online distribution, including Green Dot Corporation, Account Now, Inc. and Blackhawk
Network Inc. Many transaction processors, such as First Data Corporation, Total System Services, Inc., Fidelity National Information Services and Galileo Processing, Inc., have prepaid platform
capability and are increasingly in direct competition with us for prepaid program management opportunities with large distributors. We compete against large retailers such as Wal-Mart
seeking to integrate more profitable financial services into their product offerings. We also anticipate increased competition from alternative financial services providers who are often
well-positioned to service the underbanked and who may wish to develop their own prepaid debit card programs. In the past year our retail distributors Pay-O-Matic,
Inc. and Checksmart Financial Company have both begun to distribute their own GPR cards through their stores. While the increased desire of banks, retailers and alternative financial services
providers to develop successful prepaid debit card programs frequently creates new business opportunities for us, it could also have an adverse effect on our business, including through increased
price competition and loss of distributor relationships.
Regulation
We, and the products and services that we market and provide processing services for, are subject to a variety of federal and state
laws and regulations, including, but not limited to:
-
- Banking laws and regulations;
-
- Money transmitter and payment instrument laws and regulations;
-
- State wage payment laws and regulations;
-
- Anti-money laundering laws;
-
- Privacy and data security laws and regulations;
-
- Consumer protection laws and regulations;
-
- Unclaimed property laws; and
-
- Card association and network organization rules.
As
the laws applicable to our business, and those of our distributors and issuing banks, change frequently, are often unclear and may differ or conflict between jurisdictions, ensuring
compliance has become more difficult and costly. Failure by us, our issuing banks or distributors to comply 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 could significantly harm our reputation and have a material adverse
impact on our business, results of operations and financial condition. For additional discussion of the laws to which we are subject, proposed changes to such laws, the related impact that such
changes may have on our business or financial position, and potential penalties associated with failure to
85
Table of Contents
comply
with such laws, see "Risk Factors Risks Relating to our Business We, our issuing banks and our retail distributors are subject to extensive and
complex federal and state regulation and new regulations and/or changes to existing regulations could adversely affect our business."
Banking Laws and Regulations
The products we market and process are the products of MetaBank, Inter National Bank, SunTrust Bank and U.S. Bank, or collectively our
issuing banks, and are subject to various federal and state laws and regulations, including those discussed below. MetaBank, a federal savings bank, as well as its holding company, are primarily
regulated by the Office of Thrift Supervision, or the OTS. Inter National Bank and U.S. Bank N.A. are each national banks primarily regulated by the Office of the Comptroller of the Currency, or the
OCC, and their respective holding companies are primarily regulated by the Board of Governors of the Federal Reserve System, or the FRB. SunTrust Bank is a Georgia state-chartered bank principally
regulated by the Georgia Department of Banking and Finance, or the GDBF, and the FRB, and its holding company is also principally regulated by the FRB. As the deposits of each of our issuing banks are
insured by the Federal Deposit Insurance Corporation, or the FDIC, up to the applicable limit, the FDIC also serves as the secondary federal regulator for each of our issuing banks. As an agent of,
and third-party service provider to, our issuing banks, we are subject to indirect regulation and direct audit and examination by the OTS, OCC, FRB, GDBF and FDIC.
The
GPR cards we market through corporate employers as payroll cards are subject to certain portions of the FRB's Regulation E, which implements the Electronic Fund Transfers
Act, or the EFTA. Additionally, while our other GPR cards are not expressly subject to the provisions of the EFTA and Regulation E, with the exception of those provisions comprising the CARD
Act described below, we, and our issuing banks, treat our GPR cards as being subject to certain provisions of the EFTA and Regulation E, such as those related to disclosure requirements,
periodic reporting, error resolution procedures and liability limitations.
On
November 12, 2009, the FRB amended its Regulation E, which implements the Electronic Fund Transfers Act, to require that financial institutions obtain an
accountholder's consent prior to assessing any fees or charges in connection with the payment of any consumer overdraft for any ATM or one-time debit transaction. This amendment applies to
all accounts subject to Regulation E, including payroll cards, and became effective on July 1, 2010. While this amendment does not expressly apply to prepaid cards other than payroll
cards, our issuing banks have each taken the position that they will apply these requirements to all of our prepaid card programs which include an overdraft service feature. A significant amount of
the revenue generated from the GPR cards we market through corporate employers historically has been attributable to overdraft fees charged on these cards. The application of these requirements may
result in a significant decrease in our revenues attributable to our GPR cards marketed through corporate employers, as it is possible that a large number of our cardholders that have historically
incurred overdraft charges will not provide their consent to continue participating in the overdraft service.
On
March 23, 2010, the FRB issued a final rule implementing Title IV of the Credit Card Accountability, Responsibility, and Disclosure Act 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 the requirements under this rule, as they fall within an express exclusion for cards which are reloadable and not
marketed or labeled as a gift card or gift certificate. However, this exclusion is not available if the issuer, the retailer selling the card to a consumer or the program manager promotes, even if
occasionally, the use of the card as a gift card or gift certificate. As a result, we provide retailers with instructions and policies regarding the display and promotion of our GPR cards so that
retailers do not place our GPR cards
86
Table of Contents
on
a display that does not separate or otherwise distinguish our GPR cards from gift cards. See "Risk Factors Risks Relating to Our Business Our card programs
are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply with such laws, or abuse of our card programs
for purposes of money laundering or terrorist financing, could have a material adverse impact on our business."
Money Transmitter and Payment Instrument Laws and Regulations
Most states regulate the business of money transmitters. While a large number of states expressly exempt banks and their agents from
such regulation, others purport to regulate the money transmittal business of banks and their agents to the extent not conducted through bank branches. We have historically taken the position that
state money transmitter statutes do not apply to our business for a number of reasons, including that we do not believe that our activities related to our prepaid debit cards are of the type which are
regulated by the state money
transmitter statutes, in that we do not receive or handle any consumer funds related to our prepaid debit cards at any time. Instead, our distributors collect all consumer funds related to the sale of
our prepaid debit cards and remit them by electronic transfer directly to our issuing banks. We, in turn, are compensated directly by each issuing bank for our provision of program management and
processing services related to our prepaid cards. We have obtained confirming opinions in support of our exemption from state regulation from regulators in a number of the states where our products
and services are offered, and periodically update our analysis of such issues and communications with the relevant regulatory authorities. In each of the remaining states, we provide all services
related to our prepaid debit cards either as a licensed money transmitter or on behalf of, and as the agent of, either MetaBank or Inter National Bank, and therefore are exempt from regulation as the
agent of an exempt entity. We currently are licensed in Ohio, Virginia, Florida, Texas and Wyoming, and are in the process of applying for licenses in Alaska, North Carolina and Michigan. In those
states where we are licensed as a money transmitter, we are subject to direct supervision and regulation by the relevant state banking departments or similar agencies charged with enforcement of the
money transmitter statutes, and must comply with various requirements, such as those related to the maintenance of a certain level of net worth, surety bonding, selection and oversight of our
authorized agents, permissible investments in an amount equal to our outstanding payment obligations, recordkeeping and reporting, and disclosures to consumers. We are also subject to periodic
examinations by the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position and related records, various agreements that we
have with our issuing banks, distributors and other third parties, privacy and data security policies and procedures, and other matters related to our business.
We
understand that state banking departments, which are charged with regulating the business of money transmission, have traditionally taken the position that the offering of payroll
cards does not constitute money transmission, such that we would not be required to obtain a state money transmission license in order to engage in such activity. We believe that our marketing,
distribution and servicing of GPR cards through corporate employers as a program manager and third-party service provider to our issuing banks is not subject to regulation under state money
transmitter statutes as we do not handle any related consumer funds at any time.
State Wage Payment Laws and Regulations
The GPR cards we market through corporate employers are designed to comply with applicable state wage and hour laws governing payroll
cards. The use of payroll cards as a means for an employer to remit wages or other compensation to its employees or independent contractors is governed by state labor laws related to wage payments.
Most states do permit the use of payroll
87
Table of Contents
cards
as a method of paying wages to employees, either through statutory provisions allowing such use, or, in the absence of specific statutory guidance, the adoption by state labor departments of
formal or informal policies allowing for the use of such cards. There are a few states, specifically Georgia, New Mexico and Rhode Island, which do not have statutes and regulations that specifically
provide for the use of payroll cards, and have taken the position, through the state labor department, that state law prohibits the use of payroll cards for the purpose of remitting wages or other
compensation. Nearly every state allowing payroll cards places certain requirements and/or restrictions on their use as a wage payment method, the most common of which involve obtaining the prior
written consent of the relevant employee, limitations on payroll card fees, and disclosure requirements. There is a risk that one or more states or state labor departments that currently permit the
use of payroll cards as a wage payment method will take a contrary position, either through revised legislation, regulation or policies, as applicable, or will impose additional requirements on the
provision and use of such cards, each of which could have an adverse impact on our business.
Anti-Money Laundering Laws and Regulations
At certain times in our history we have been registered with the Financial Crimes Enforcement Network of the U.S. Department of the
Treasury, or FinCEN, as a "money services business," and therefore have been subject to certain anti-money laundering compliance obligations arising under the Bank Secrecy Act and its
implementing regulations. However, we subsequently concluded that we were not required to be registered as a money services business, did not renew our registration, and requested a formal, written
opinion from FinCEN to confirm our conclusion. Accordingly, while we do have certain anti-money laundering compliance obligations, these obligations arise contractually 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 a money services business, whether due to a
notification from FinCEN that we are required to register under the current requirements or new regulatory requirements or otherwise. Furthermore, in the event that FinCEN's recent NPRM is adopted in
its current form, it is likely that we will be required to register as a money services business. See "Risk Factors Risks Relating to Our Business Our card
programs are subject to strict regulation under federal law regarding anti-money laundering and anti-terrorist financing. Failure to comply with such laws, or abuse of our card
programs for purposes of money laundering or terrorist financing, could have a material adverse impact on our business."
Privacy and Data Security Laws and Regulations
We collect and store personally identifiable information about our cardholders, including names, addresses, social security numbers,
driver's license numbers and account numbers, and maintain a database of Cardholder data relating to specific transactions, including account numbers, in order to process transactions and prevent
fraud. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, or GLBA, various other federal and state privacy statutes and
regulations, and the Payment Card Industry Data Security Standard, each of which is subject to change at any time. In order to comply with our obligations under GLBA and applicable state laws, and our
agreements with our issuing banks, we are required to safeguard and protect the privacy of such personally identifiable information, make disclosures to our cardholders regarding the applicable
privacy and information sharing policies, and give our cardholders the opportunity to prevent us and our issuing banks from releasing information about them to unaffiliated third parties for marketing
and other purposes. The privacy laws of certain states, including California, impose more stringent limitations on access and use of personal information than GLBA, requiring our cardholders to
affirmatively opt-in to certain categories of disclosures. We continue to work with our issuing banks to implement and maintain
88
Table of Contents
appropriate
policies and programs as well as adapt our business practices in order to comply with applicable privacy laws and regulations.
Consumer Protection Laws and Regulations
We are subject to various federal and state consumer protection laws, including those related to unfair and deceptive trade practices.
We continue to implement and maintain policies and procedures to assist us in our compliance with such laws, which are subject to frequent change due to the increased focus on this area by federal and
state legislatures, regulatory authorities and consumer protection groups.
Card Association and Payment Network Operating Rules
In providing certain of our services to our issuing banks, we are required to comply with the operating rules promulgated by various
card associations and network
organizations, including certain data security standards, with such obligations arising either under our agreements with each issuing bank or as a condition to access or otherwise participate in the
relevant card association or network organization. Each card association and network organization audits us from time to time to ensure our compliance with these standards, and our failure to comply
could subject us to a variety of fines or penalties, including the termination of our ability to process transactions routed through these networks. We continue to work with our issuing banks to
implement and maintain appropriate policies and programs as well as adapt our business practices in order to comply with all applicable rules and standards.
Other Laws and Regulations
As we develop new services and new products, we may become subject to additional federal and state regulations. These additional
regulations could substantially restrict the nature of the business in which we may engage and the nature of the businesses in which we may invest. In addition, changes in current laws or regulations
and future laws or regulations may restrict our ability to continue our current methods or operations or expand our operations and may have a material adverse effect on our business, results of
operations and financial condition.
Employees
As of June 30, 2010, we had 488 employees. We are not subject to any collective bargaining agreement and have never been
subject to a work stoppage. We believe that we have maintained good relationships with our employees.
Properties
Our principal executive offices are located in Austin, Texas, where we lease approximately 54,000 square feet. We also maintain leased
offices in Atlanta, Georgia, San Mateo, California, Kansas City, Kansas and Charlotte, North Carolina. We believe that our existing and planned facilities are adequate to support our existing
operations and that, as needed, we will be able to obtain suitable additional facilities on commercially reasonable terms.
Legal Proceedings
We are involved from time to time in various litigation and regulatory matters arising in the ordinary course of business. The amount,
if any, of our ultimate liability with respect to these matters cannot be determined, but we do not expect the resolution of any pending matters to have a material adverse effect on our business or
financial condition.
89
Table of Contents
On
October 24, 2007, Alexsam, Inc. filed suit against us in the District Court of Travis County, Texas, 419th Judicial District, asserting breach of a license agreement entered
into between us and Alexsam in 2004 and seeking monetary damages, attorneys' fees, costs and interest. The license agreement was entered into by the parties following Alexsam's assertion and
subsequent dismissal without prejudice of a claim of patent infringement filed by Alexsam against us in 2003. We have asserted counterclaims for breach of contract and declaratory judgment. In April
2010, we filed a motion for summary judgment, and following a hearing, the court denied the motion without substantive comment. We plan to contest vigorously Alexsam's claims.
90
Table of Contents
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers and directors, including their ages, as of June 30,
2010.
|
|
|
|
|
|
Name
|
|
Age |
|
Position |
Daniel R. Henry |
|
|
44 |
|
Chief Executive Officer, Director |
Charles J. Harris |
|
|
47 |
|
President |
George W. Gresham |
|
|
43 |
|
Chief Financial Officer |
Thomas A. Cregan |
|
|
39 |
|
Executive Vice President, Sales and Distribution |
Anh Hatzopoulos |
|
|
38 |
|
Executive Vice President of Online Business Development |
James DeVoglaer |
|
|
49 |
|
Executive Vice President of Information Technology |
James Jerome |
|
|
52 |
|
Executive Vice President of Card Operations |
Christopher T. Brown |
|
|
46 |
|
General Counsel and Secretary |
Francisco Rodriguez |
|
|
38 |
|
Director |
Thomas McCullough |
|
|
68 |
|
Director |
Ann Huntress Lamont |
|
|
53 |
|
Director |
Daniel M. Schley |
|
|
55 |
|
Director |
Alexander R. Castaldi |
|
|
60 |
|
Director |
Andrew W. Adams |
|
|
35 |
|
Director |
Daniel R. Henry has served as our Chief Executive Officer since February 2008 and has also served as a member of our board of directors
since June 2007. Prior to being appointed as Chief Executive Officer, Mr. Henry briefly served as our President beginning in January 2008. Prior to joining us, Mr. Henry
co-founded Euronet Worldwide, Inc., a Nasdaq-listed global provider of electronic payment and transaction processing solutions for financial institutions, retailers, service
providers and individual consumers, and, from May 1994 to December 2006, served as its President and Chief Operating Officer. In addition, Mr. Henry served as a director of Euronet
Worldwide, Inc. from 1996 to 2006. Mr. Henry earned a B.S. in business administration with majors in finance, economics and real estate from the University of Missouri-Columbia.
Charles J. Harris has served as our President since July 2010. Prior to joining us, from April 2009 to June 2010, Mr. Harris
served as the general manager of the payment solutions division of Intuit, Inc., a Nasdaq-listed company that is a leading provider of financial management, tax and online
banking solutions for consumers, small and mid-sized businesses, accountants and financial institutions. From September 2005 until April 2009, Mr. Harris served in multiple
positions for Electronic Clearing House, Inc., including as President and Chief Executive Officer, President and Chief Operating Officer and as a director. Prior to that, Mr. Harris held
a number of leadership roles with Chase Paymentech, including President and Chief Executive Officer of Merchant Link, a wholly owned subsidiary of Chase Paymentech. Mr. Harris holds a B.B.A. in
finance from the University of Texas at Austin.
George W. Gresham has served as our Chief Financial Officer since May 2010. Prior to joining us, from February 2008 to May 2010,
Mr. Gresham served as Chief Financial Officer of Global Cash
91
Table of Contents
Access, Inc.,
a NYSE-listed provider of payment processing services to the gaming industry. From May 2002 until October 2007, Mr. Gresham served as Chief Financial Officer, Chief
Administrative Officer and Executive Vice President of EFD eFunds Corporation, a NYSE-listed company that specialized in the development and deployment of payment and payments-related
technology. Mr. Gresham holds a B.S. in accountancy from Northern Arizona University, an MBA from the Thunderbird School of Global Management and is a Certified Public Accountant.
Thomas A. Cregan has served as our Executive Vice President, Sales and Distribution since July 2008. From March 2008 to June 2008,
Mr. Cregan served as our Managing Director, International and was responsible for evaluating international market opportunities. Prior to joining us, from 2005 to 2008, Mr. Cregan served
as President of PaySpot, Inc., since renamed epay Americas, Ltd., a wholly-owned subsidiary of Euronet Worldwide, Inc. Mr. Cregan joined Euronet following the acquisition
of his company, epay Australia and New Zealand Pty. Ltd., which he founded and acted as managing director from inception in November 1999 until December 2004. Mr. Cregan holds a Bachelor
of Business Degree and MBA from Monash University, Melbourne, Australia.
Anh Hatzopoulos has served as our Executive Vice President since February 2008. Prior to joining us, from July 2005 to February 2008,
Ms. Hatzopoulos served as founder and Chief Executive Officer of Little Grad, Inc., an online rebate-based college savings program. From July 2000 to July 2005, Ms. Hatzopoulos
was a senior executive on the core team responsible for building the online business of Wal-Mart Stores, Inc. Ms. Hatzopoulos holds a degree in computer science and business
administration from Stanford University and Carnegie Mellon University.
James DeVoglaer has served as our Executive Vice President of Information Technology since November 2009. From September 2006 to November
2009, Mr. DeVoglaer served as our Vice President of Information Technology. Prior to joining us, from January 2004 to September 2006, Mr. DeVoglaer served as co-founder of
KAIAN Business Solutions, an IT infrastructure integrator and operational process solutions provider. Prior to that, Mr. DeVoglaer served as Vice President, Information Technology for Accent
Health, a health education television network, and as General Manager and Director of Technology for Convergent Communications Services, Inc., a
leading provider of Enterprise Network Carrier (ENC) services. Mr. DeVoglaer holds a B.S. in computer studies from University of Maryland, University College.
James Jerome has served as an Executive Vice President since November 2009. Prior to being appointed as Executive Vice President,
Mr. Jerome served as a Senior Vice President from August 2008 to November 2009 and a Vice President from April 2008 to August 2008. Prior to joining us, from October 1999 to March 2008,
Mr. Jerome served in various capacities with Euronet Worldwide, Inc., including as an Executive Vice President and Managing Director of its software division. Also, Mr. Jerome
served in various capacities with the Electronic Banking Services division of BISYS, Inc. Mr. Jerome holds a degree in business administration from the State University of New York.
Christopher T. Brown has served as our General Counsel since January 2007 and our Secretary since June 2007. Prior to joining us, from
January 2001 to December 2006, Mr. Brown was a partner in the law firm of Baker Botts L.L.P. Mr. Brown holds a J.D. from the University of Iowa College of Law and a Bachelor of
Arts degree in political economy from Tulane University.
Francisco Rodriguez has served as a member of our board of directors since July 2008. Mr. Rodriguez is a managing director of
JLL Partners, Inc., which he joined in 1995. Prior to joining JLL, Mr. Rodriguez was a member of the merchant banking group at Donaldson, Lufkin & Jenrette Securities Corporation.
Mr. Rodriguez also serves as a director of several companies, including J.G. Wentworth, LLC, Education Affiliates, Inc., FC Holdings Inc., Ross Education, LLC and The
92
Table of Contents
Learning
Annex GP, LLC. Mr. Rodriguez holds a B.S. degree from the University of Pennsylvania Wharton School.
Thomas A. McCullough has served as a member of our board of directors since October 2008. From April 1987 to December 2009,
Mr. McCullough served as Executive Vice President and Chief Operating Officer of DST Systems, Inc., a major provider of processing services to the financial services and health care
industries. Prior to joining DST, Mr. McCullough was President and Chief Executive Officer of Garnac Grain Company, an international grain trading and exporting company. Prior to that, he was a
partner with the consulting firm of Arthur Young & Co. Mr. McCullough also serves on the board of directors of Boston Financial Data Services, DST, BlueCross BlueShield of Kansas
City, Country Club Bank and Balance Innovations LLC. Mr. McCullough holds an A.B. in mathematics from Rockhurst University and a Master's degree in economics from the University of
Missouri at Kansas City.
Daniel M. Schley has served as a member of our board of directors since June 2004. Since 2003, Mr. Schley has served as Chairman
of Foundation Source, Inc., a provider of back-office technology and services for private foundations, and served as CEO of
Foundation Source from 2003 through 2009. Mr. Schley also serves as a Co-Founder and Managing Director of Dolphin Capital Group, a private equity firm, where he has served since
2000. Mr. Schley also serves on the board of directors of Winder Farms, Inc., Dynamic Confections, Inc., and the Fairfield, Connecticut chapter of the World Presidents
Organization. Mr. Schley holds a Bachelor of Arts degree in economics and political science from Stanford University and a Master of Business Administration degree from Harvard University.
Ann Huntress Lamont has served as a member of our board of directors since June 2004. Ms. Lamont has been with Oak Investment
Partners, a multi-stage venture capital firm, since 1982, serving as a General Partner from 1986 to 2006 and as a Managing Partner since 2006. Prior to joining Oak, Ms. Lamont served as a
research associate with Hambrecht & Quist. Ms. Lamont currently serves on the board of directors of Clarient, Inc. and the Stanford University Board of Trustees. Ms. Lamont
holds a Bachelor of Arts degree in political science from Stanford University.
Alexander R. Castaldi has served as a member of our board of directors since January 2009. Since January 2005, Mr. Castaldi has
served as a Managing Director of JLL Partners, a private equity investment company. Prior to joining JLL, Mr. Castaldi served as Chief Financial & Administration Officer of Remington
Products Company, LLC. Mr. Castaldi also serves on the board of directors of PGT Industries, Inc., McKechnie Aerospace, Education Affiliates, Inc., J.G. Wentworth,
C.H.I. Overhead Doors, Inc., Medical Card System, Inc., FC Holdings, Inc. and PharmaNet Development Group, Inc. Mr. Castaldi holds a B.S. from Central
Connecticut State University.
Andrew W. Adams has served as a member of our board of directors since January 2010. Mr. Adams joined Oak Investment Partners in
October 2003 as a Senior Associate and has served as a General Partner since 2010. Prior to joining Oak, Mr. Adams was a Senior Associate with Capital Resource Partners. Mr. Adams was
also a Financial Analyst in the media and communications group of Deutsche Banc. Mr. Adams also serves on the board of directors of Clarient, Inc. Mr. Adams holds a Bachelor of
Arts degree in history from Princeton University.
Board Composition
We currently have seven directors, each of whom was elected pursuant to the board composition provisions of our stockholders
agreement. These board composition provisions will terminate upon the completion of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding
the election of our directors. Our directors hold office until their successors have been elected and qualified or, if earlier, until their death, resignation or removal.
93
Table of Contents
Upon the completion of this offering, our board of directors will be divided into three classes with members of each class of directors serving for staggered three-year
terms. Our board of directors will consist of the following:
-
- two class I directors (Messrs. Adams and Henry), whose initial terms will expire at the annual meeting of
stockholders in 2011;
-
- three class II directors (Messrs. Castaldi, McCullough and Schley), whose initial terms will expire at the
annual meeting of stockholders in 2012; and
-
- two class III directors (Ms. Lamont and Mr. Rodriguez), whose initial terms will expire at the annual
meeting of stockholders in 2013.
Upon the expiration of a term of a class of directors, directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in
which such term expires. In addition, the authorized number of directors may be changed by resolution duly adopted by at least a majority of our entire board of directors. Any increase or decrease in
the number of directors will be distributed among the three classes so that, to the extent possible, each class will consist of one-third of the directors. Our classified board of
directors could have the effect of making it more difficult for a third party to acquire control of us. See "Description of Capital Stock Certain Anti-Takeover
Provisions of our Certificate of Incorporation and Bylaws."
Our board of directors has determined that, upon consummation of this offering, all of our current directors other than Messrs. Henry, Rodriguez and Castaldi, will qualify as
"independent" directors as defined under the Nasdaq Stock Market rules. We do not currently have a chairman of the board.
Board Committees
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance
committee, each of which operates pursuant to a charter adopted by our board of directors. Upon consummation of this offering, the composition and functioning of all of our committees will comply with
all applicable requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq Stock Market and the Securities and Exchange Commission rules and regulations.
Audit Committee
Messrs. McCullough, Castaldi and Adams currently serve on the audit committee, which is chaired by Mr. McCullough. Upon
consummation of this offering, we expect to comply with the applicable rules of the Securities and Exchange Commission and the Nasdaq Stock Market rules relating to independence of audit committee
members. We expect to replace Mr. Castaldi with an independent director as soon as practicable following consummation of this offering. Our board of directors has determined that each audit
committee member has sufficient knowledge in financial and auditing matters to serve on the audit committee. Our board of directors has designated Mr. McCullough as an "audit committee
financial expert," as defined under the applicable rules of the Securities and Exchange Commission. The audit committee's responsibilities include:
-
- appointing, approving the compensation of, and assessing the independence of our independent registered public accounting
firm;
-
- pre-approving auditing and permissible non-audit services, and the terms of such services, to be
provided by our independent registered public accounting firm;
-
- reviewing the overall audit plan with the independent registered public accounting firm and members of management
responsible for preparing our financial statements;
94
Table of Contents
-
- reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly
financial statements and related disclosures as well as critical accounting policies and practices used by us;
-
- coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;
-
- establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;
-
- recommending, based upon the audit committee's review and discussions with management and the independent registered
public accounting firm, whether our audited financial statements shall be included in our Annual Report on Form 10-K;
-
- preparing the audit committee report required by Securities and Exchange Commission rules to be included in our annual
proxy statement;
-
- reviewing all related person transactions for potential conflict of interest situations and approving all such
transactions; and
-
- reviewing quarterly earnings releases and scripts.
Upon
completion of this offering, the audit committee charter will be available on our web site at www.netspend.com under the heading Corporate Governance.
Compensation Committee
Ms. Lamont and Messrs. Rodriguez and Schley currently serve on the compensation committee, which is chaired by
Mr. Schley. Upon consummation of this offering, we expect to comply with the Nasdaq Stock Market rules relating to independence of compensation committee members. The compensation committee's
responsibilities include:
-
- annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive
officer;
-
- evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining
the compensation of our chief executive officer;
-
- reviewing and approving the compensation of our other executive officers;
-
- reviewing and establishing our overall management compensation, philosophy and policy;
-
- overseeing and administering our compensation, welfare, benefit and pension and similar plans;
-
- reviewing and approving our policies and procedures for the grant of equity-based awards;
-
- reviewing and making recommendations to the board of directors with respect to non-employee director compensation; and
-
- reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy
statement or Annual Report on Form 10-K.
Upon
completion of this offering, the compensation committee charter will be available on our web site at www.netspend.com under the heading Corporate Governance.
Nominating and Corporate Governance Committee
Messrs. McCullough and Schley currently serve on the nominating and corporate governance committee. Upon consummation of this
offering, we expect to comply with Nasdaq Stock Market
95
Table of Contents
rules relating to independence of nominating and corporate governance committee members. The nominating and corporate governance committee's responsibilities include:
-
- searching for, identifying, evaluating the qualifications of and recommending to the board of directors qualified director
candidates, including nominees recommended by stockholders;
-
- recommending committee assignments in accordance with the membership requirements specified in the charter of each
committee;
-
- developing and recommending to the board of directors standards and processes for determining the independence of
directors that meet the rules and requirements of Nasdaq and applicable law and regulation;
-
- developing and recommending to the board of directors a code of business conduct and ethics and a set of corporate
governance guidelines;
-
- developing a mechanism by which violations of the code of business conduct and ethics can be reported in a confidential
manner; and
-
- overseeing the evaluation of the board of directors and management.
Although
the board of directors does not have a formal diversity policy, the nominating and corporate governance committee, when assessing the qualifications of prospective nominees to
the board of directors, will consider each nominee's personal and professional integrity, experience, skills, ability and willingness to devote the time and effort necessary to be an effective board
member, and commitment to acting in the best interests of our company and stockholders. The nominating and corporate governance committee will also give consideration to the qualifications that the
committee believes must be met by prospective nominees to the board, qualities or skills that the committee believes are necessary for one or more of our directors to possess and standards for the
overall structure, diversity and composition of the board.
The
nominating and corporate governance committee will consider director candidates recommended by stockholders. If a stockholder wishes to recommend a director for nomination by the
committee, the stockholder should submit the recommendation in writing to the Chairman, Nominating and Corporate Governance Committee, in care of the Secretary, NetSpend Holdings, Inc., 701
Brazos Street, Suite 1300, Austin, Texas 78701-2582. The recommendation should contain the following information:
-
- the name, age, contact information, business address and residence address of the nominee and the name, contact
information and address of the stockholders making the nomination;
-
- the principal occupation or employment of the nominee;
-
- the number of shares of each class or series of our capital stock beneficially owned by the nominee and the stockholder
and the period for which those shares have been owned; and
-
- any other information the stockholder may deem relevant to the committee's evaluation.
Candidates
recommended by stockholders will be evaluated on the same basis as candidates recommended by our directors, executive officers, third-party search firms or other sources.
Upon
completion of this offering, the nominating and corporate governance committee charter will be available on our web site at www.netspend.com under the heading Corporate Governance.
96
Table of Contents
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has
one or more executive officers serving as a member of our board of directors or compensation committee. No member of our compensation committee has ever been an officer or employee of ours. There are
no family relationships among any of our directors or executive officers.
Corporate Governance
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those
officers responsible for financial reporting. Upon the completion of this offering, our code of business conduct and ethics will be available on our website at www.netspend.com. We intend to disclose
any amendments to the code, or any waivers of its requirements, on our website.
Accounting and Auditing Concerns
The audit committee has established procedures to receive, retain and treat complaints regarding accounting, internal accounting
controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. We are also in the process of
implementing a confidential hotline by which employees can communicate concerns or complaints regarding these matters.
Stockholder Communication with the Board of Directors
Stockholders may communicate with the board of directors by submitting their communications in writing, addressed to the board as a
whole or, at the election of the stockholder, to one or more specific directors, in care of the Secretary, NetSpend Holdings, Inc., 701 Brazos Street, Suite 1300, Austin, Texas
78701-2582.
Director Compensation
Members of our board of directors who are not our employees and are not affiliated with Oak or JLL receive annual retainers of
$25,000, or $40,000 if they chair a committee or $90,000 if they serve as chairman of the board. They are also reimbursed for their out-of-pocket expenses related to their
service on our board of directors.
Any
new non-employee director who is not affiliated with Oak or JLL typically receives an initial option to purchase 50,000 shares of our common stock on the date
such individual joins the board of directors. These options will vest over a period of three years. In addition, such board member will typically be granted an option to purchase 25,000 shares
of our common stock on an annual basis thereafter. See "Executive Compensation Compensation of Directors."
97
Table of Contents
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base
salary, an annual cash bonus award, a long-term equity incentive compensation plan and broad-based benefits programs.
We
place significant emphasis on pay for performance-based incentive compensation programs, which make payments when certain company goals are achieved. This Compensation Discussion and
Analysis explains our compensation philosophy, policies and practices with respect to our chief
executive officer, chief financial officer, and the other three most highly-compensated executive officers, which are collectively referred to as the named executive officers.
The Objectives of our Executive Compensation Program
Our compensation committee is responsible for establishing and administering our policies governing the compensation for our executive
officers. Our executive officers are elected by our board of directors. The compensation committee is composed entirely of non-employee directors. See "Management
Board Committees Compensation Committee."
Our
executive compensation programs are designed to achieve the following objectives:
-
- Attract and retain talented and experienced executives in the highly competitive and dynamic payments industry;
-
- Motivate and reward executives whose knowledge, skills and performance are critical to our success;
-
- Align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder
value and rewarding executive officers when stockholder value increases;
-
- Provide a competitive compensation package which is weighted heavily towards pay for performance, and in which total
compensation is primarily determined by company and individual results and the creation of stockholder value;
-
- Ensure fairness among the executive management team by recognizing the contributions each executive makes to our success;
-
- Foster a shared commitment among executives by coordinating their company and individual goals; and
-
- Compensate our executives to manage our business to meet our long-range objectives.
Our Compensation Practices
The compensation committee meets outside the presence of all of our executive officers, including the named executive officers, to
consider appropriate compensation for our chief executive officer, or CEO. For all other named executive officers, the committee meets outside the presence of all executive officers except our CEO and
our general counsel who recuses himself when the committee discusses his compensation. Mr. Henry, our CEO, annually reviews each other named executive officer's performance with the committee
and makes recommendations to the compensation committee with respect to the appropriate base salary, annual cash bonus and the grants of long-term equity incentive awards for all executive
officers, excluding himself. Based in part on these recommendations from our CEO and other considerations discussed below, the compensation committee approves the annual compensation package of our
executive officers
98
Table of Contents
other
than our CEO. The compensation committee also annually analyzes our CEO's performance and determines his base salary, annual cash bonus and long-term equity incentive awards based on
its assessment of his performance. The annual performance reviews of our executive officers are considered by the compensation committee when making decisions on setting base salary, cash bonus award
and grants of long-term equity incentive awards. When making decisions on setting base salary, cash bonus award and initial grants of long-term equity incentive awards for new
executive officers, the compensation committee considers the importance of the position to us, the past salary history of the executive officer and the contributions to be made by the executive
officer to us.
We
use the following principles to guide our decisions regarding executive compensation:
Provide compensation opportunities that are competitive in the marketplace.
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our
stockholders, we strive to provide a total compensation package that is competitive with total compensation provided by other private and public companies in our industry.
Although
we do not specifically benchmark our compensation levels against a defined peer group, we do consider competitive market pay data important to our compensation decisions. We
gather competitive market compensation information from a number of sources:
-
- Data in proxy statement and other filings from public financial services companies that we believe are comparable to us
based on revenue and market capitalization;
-
- Surveys of comparably sized public and private companies; and
-
- Reviews of posted salaries on executive search sites.
We
utilize this data in assessing the competitiveness of our compensation packages. Our goal is to ensure that our executives are compensated at levels commensurate to what they could
achieve at other similarly situated companies in our industry. For each executive officer, we consider competitive compensation data in concert with:
-
- Our business need for the executive officer's skills;
-
- The contributions that the executive officer has made or we believe will make to our success;
-
- The transferability of the executive officer's managerial skills to other potential employers;
-
- The relevance of the executive officer's experience to other potential employers, particularly in the payments industry;
and
-
- The readiness of the executive officer to assume a more significant role with another potential employer.
Require performance goals to be achieved in order for the majority of the target pay levels to be earned.
Our executive compensation program emphasizes pay for performance. Performance is measured based on achievement of company performance
goals established by our board of directors relative to our board of directors approved annual business plan. The goals for our company and individual measures are established so that target
attainment is not assured. The attainment of payment for performance at target or above will require strong company performance and significant effort on the part of our executives.
99
Table of Contents
Offer the same comprehensive benefits package to all full-time employees.
We provide a competitive benefits package to all full-time employees which includes health and welfare benefits, such as
medical, dental, vision care, disability insurance, life insurance benefits, and a 401(k) savings plan. We have no structured executive perquisite benefits (e.g., club memberships or company
vehicles) for any executive officer, including the named executive officers.
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by both our executive officers and our stockholders as fair
and equitable. In addition to conducting analyses of market pay levels and considering individual circumstances related to each executive officer, we also consider the pay of each executive officer
relative to each other executive officer and relative to other members of our management team. We have designed the total compensation programs to be consistent for our executive management team.
100
Table of Contents
Components of our Executive Compensation Programs
Overall, our executive compensation programs are designed to be consistent with the objectives and principles set forth above. The
basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation program.
|
|
|
|
|
|
Element
|
|
Characteristics
|
|
Purpose
|
|
Base salary |
|
Fixed annual cash compensation; all executives are eligible for periodic increases in base salary based on performance. |
|
Keep our annual compensation competitive with the market for skills and experience necessary to meet the requirements of the executive's role with us. |
|
Annual cash bonus awards |
|
Performance-based annual cash incentive earned based on company performance against target performance levels. |
|
Motivate and reward for the achievement and over-performance of our critical financial and strategic goals. Amounts earned for achievement of target performance levels based on our annual budget are designed to provide a
market-competitive pay package; potential for greater amounts are intended to motivate participants to achieve or exceed our financial performance goals and not to reward if performance goals are not met. |
|
Long-term equity incentive plan awards (stock options and restricted stock) |
|
Performance-based equity award which has value to the extent our common stock price increases over time; targeted at the median market pay level and/or competitive practices at peer companies. |
|
Align interest of management with stockholders; motivate and reward management to increase the stockholder value of the company over the long term. Vesting based on continued employment will facilitate retention; vesting
based on performance metrics further aligns interest of management with stockholders; provides change in control protection. |
|
Retirement savings opportunities |
|
Tax-deferred plan in which all employees can choose to defer compensation for retirement and a plan in which certain executives can choose to defer compensation on a basis that is not tax-qualified. |
|
Provide employees the opportunity to save for their retirement. Account balances are affected by contributions and investment decisions made by the employee. |
|
Health & welfare benefits |
|
Comparable health & welfare benefits (medical, dental, vision, disability insurance and life insurance) are available for all full-time employees. |
|
Provides benefits to meet the health and welfare needs of employees and their families. |
|
All pay elements are cash-based except for the long-term equity incentive program, which is an equity-based award. We
consider market pay practices and practices of peer companies in
101
Table of Contents
determining
the amounts to be paid, what components should be paid in cash versus equity, and how much of a named executive officer's compensation should be short-term versus
long-term.
In
general, compensation or amounts realized by executives from prior compensation from us, such as gains from previously awarded stock options or options awards, are not taken into
account in setting other elements of compensation, such as base pay, annual cash bonus awards, or awards of stock options under our long-term equity incentive program. With respect to new
executive officers, we take into account their prior base salary and annual cash incentive, as well as the contribution expected to be made by the new executive officer, the business needs and the
role of the executive officer with us. We believe that our executive officers should be fairly compensated each year relative to market pay levels and internal equity among executive officers.
Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation.
To
attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our stockholders, we provide a competitive total compensation
package. Total compensation is broken into three main categories:
-
- base salary;
-
- performance-based cash bonus awards; and
-
- long-term incentive equity-based awards.
Base Salary
We review on an annual basis salary ranges and individual salaries for our executive officers. We establish the base salary for each
executive officer based on a review of market pay levels as well as internal factors, such as the individual's performance and experience, and the pay of others on the executive team. We believe
competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us. In 2009, base salary accounted for
approximately 34% - 47% of the total compensation of our named executive officers.
The
base salaries paid to our named executive officers are set forth below in the Summary Compensation Table. See " Summary of Compensation." We believe that the base
salary paid to our executive officers during 2009 achieves our executive compensation objectives, compares favorably to the base salaries paid by other financial services companies and is consistent
with our emphasis on pay for performance.
Cash Incentive Awards
On an annual basis, our board upon the recommendation of the compensation committee adopts an executive bonus program. The executive
bonus program provides a financial incentive to executive employees, vice president level and above, to drive long-term growth and recurring profitability for the Company. In order to be eligible for
a bonus award under the plan, each eligible executive must have received a minimum individual performance rating by his or her direct supervisor (or, in the case of the CEO, by the board of directors)
and must be employed by the Company at the time of payout. If the executive's employment began after January 1 of the current plan year their bonus potential will be prorated over a 12-month
period of time.
Under
our annual executive bonus program, each executive is assigned a target bonus level expressed as a percentage of base salary. For 2009, the target bonus levels for our executives
102
Table of Contents
ranged
from 100% for our CEO to 15% for our Director level executives. The target bonus levels in 2009 for our named executive officers were as follows:
|
|
|
Officer
|
|
Target Bonus
|
Chief Executive Officer |
|
100% of Base Salary |
Chief Operating Officer |
|
60% of Base Salary |
Executive Vice President, Sales and Distribution |
|
50% of Base Salary |
Executive Vice President of Online Business Development |
|
50% of Base Salary |
General Counsel |
|
60% of Base Salary |
Payout
of the target level bonus is conditioned upon the Company achieving the corporate performance objectives set by the board of directors for each annual period. We have
historically used only one financial performance metric, earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation and non-recurring gains and
losses, or Adjusted EBITDA, to determine whether our executives are entitled to their target bonus. We have chosen Adjusted EBITDA as the single performance metric because we believe it appropriately
emphasizes creating long-term stockholder value through both top line revenue growth as well as profitability. We believe that basing payment of the bonuses on Adjusted EBITDA targets
creates incentives for the executive officers to grow the Company's customers and revenue while at the same time ensuring that the Company maintains strict cost control and the Company's growth is
profitable. Under the executive bonus program, our board of directors has the power to determine Adjusted EBITDA in its sole discretion and make adjustments up or down to reflect restructurings,
extraordinary or non-recurring items, discontinued operations and cumulative effects of accounting changes. Adjusted EBITDA is calculated by our board of directors after giving effect to
the earnings expense associated with the annual bonus payments. For 2009, the executive bonus program also included a condition that the Company must have 350,000 direct deposit accounts as of the end
of calendar year 2009 in order for executives to qualify for payout at the maximum level.
In
addition to setting a target Adjusted EBITDA at which the executives will receive their target bonus payouts, the board also sets a minimum Adjusted EBITDA threshold, below which the
executives will receive no payout, and a maximum Adjusted EBITDA target, at or above which the executives may receive more than their target bonuses. Depending upon whether the Company falls short of,
meets or exceeds the target Adjusted EBITDA set by the board under the executive bonus program, executives can earn more or less than their target bonus amounts. For 2009, target Adjusted EBITDA was
$43.6 million and the potential bonus payouts under various scenarios were as follows:
|
|
|
|
|
|
|
Adjusted EBITDA Performance
|
|
Adjusted EBITDA Target |
|
Corporate Goal |
|
Cash Bonus Payout |
Below Threshold |
|
Less than $37.1 million |
|
n/a |
|
No payout |
Between Threshold and Target |
|
$37.1 million - $43.6 million |
|
n/a |
|
50% of target bonus |
Between Target and Maximum |
|
$43.6 million - $50.1 million |
|
n/a |
|
100% of target bonus |
At or above Maximum |
|
At or above $50.1 million |
|
At least 350,000 direct deposit accounts |
|
150% of target bonus |
103
Table of Contents
Annual
cash incentive awards are determined at year-end based upon our performance against the board approved annual Adjusted EBITDA target and corporate goals. Our
compensation committee reviews and recommends the final bonus payout amounts and our board of directors approves the amounts before they are paid. Our compensation committee and our board of directors
may modify or terminate the annual executive bonus program at any time.
The
cash bonuses paid to our named executive officers are set forth below in the Summary Compensation Table. See " Summary of Compensation." We believe that the cash
bonuses paid to our executive officers during 2009 achieve our executive compensation objectives, compare favorably to the cash bonuses paid by other financial services companies and are consistent
with our emphasis on pay for performance.
Long-term Equity Incentive Compensation
We award long-term equity incentive grants to executive officers, including the named executive officers, as part of our
total compensation package. These awards are consistent with our pay for performance principles and align the interests of the executive officers with the interests of our stockholders.
Long-term equity incentives represent approximately 15% to 40% of each named executive officer's total compensation, depending on the executive's role with us. The compensation committee
reviews and recommends to the board of directors the amount of each award to be granted to each named executive officer and the board of directors approves each award. Long-term equity
incentive awards are made pursuant to our 2004 Plan.
Our
long-term equity incentive compensation has historically been exclusively in the form of options to acquire our common stock. The value of the stock options awarded is
dependent upon the performance of our common stock. The compensation committee and management believe that, given the Company's stage of development, stock options are the appropriate primary vehicle
to provide long-term incentive compensation to our executive officers. Beginning in 2010, we also awarded our executive officers, including our named executive officers, restricted stock
grants as part of the 2009 executive bonus program. The value of the restricted stock awards represents a relatively small percentage of the total value of the equity awards made to our
executive officers in 2010. Other types of long-term equity incentive awards may be considered in the future as a market for our common stock develops and our business strategy evolves.
Our
long-term equity incentive grants to executive officers generally fall into four categories: standard time-based option awards, performance-based option
awards, event-based option awards and restricted stock awards.
-
- Time-based stock option awards are earned on the basis of
continued service to us and generally vest over four years, with one fourth vesting one year after the date of grant and one fourth vesting on each of the next three anniversary dates of the date of
grant.
-
- Performance-based stock option awards are earned on the basis of two
conditions: a performance-based vesting condition and, to the extent the performance-based condition is met, a time-based vesting condition in which one fourth vests each year following
the date of grant if the executive remains continuously employed through the applicable vesting date. The performance-based vesting condition is generally achieved upon one of the following events: a
change in control (as defined in the 2004 Plan) prior to a certain date; a change in control where certain equity value targets are met; an initial public offering where certain equity value targets
are achieved following the initial public offering; or achievement of a certain level of Adjusted EBITDA. In the event a change in control has not occurred on or prior to the sixth anniversary of the
date of grant, the option will become 100% vested on the sixth anniversary of the date of grant subject to continued employment through such date.
104
Table of Contents
-
- Event-based stock option awards are earned in two tranches: 67% of the
option award vests in equal annual installments on each of the first four anniversaries of the date of grant and 33% of the option award vests upon the earlier of a change in control of the Company or
the second anniversary of the closing of an initial public offering, in each case subject to continued employment through the applicable vesting date.
-
- Restricted stock awards are issued to the participant on the date of
grant, subject to forfeiture if the participant's employment does not continue through the applicable vesting date. The restricted stock awards generally vest upon the earliest to occur of: the third
anniversary of the date of grant; the participant's termination by the Company without cause (provided that vesting in this scenario is prorated based on the number of days from the grant date through
the date of termination); the date that is six months following an initial public offering; and a change in control (as defined in the 2004 Plan).
See
" Employment Agreements, Severance Benefits and Change in Control Provisions" for a discussion of the change in control provisions related to stock options and restricted stock
awards.
Stock
option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price for a period of up to ten years under our 2004 Plan.
The exercise price of each stock option granted prior to this offering, with the exception of a July 2010 grant to our President with an exercise price based upon a negotiated employment agreement, is
based on the fair market value of our common stock on the grant date as determined by our board of directors. Following our initial public offering, all options will continue to be granted with an
exercise price equal to the fair market value of our common stock on the date of grant, but fair market value will be defined as the closing market price of a share of our common stock on the date of
grant.
Our
named executive officers and certain other employees receive an initial grant of stock options which are generally granted at the next board of directors meeting following the date
which their employment commences. Thereafter, individual determinations are made with respect to the number of stock options or restricted stock awards granted to executive officers. In making these
determinations, we consider our performance relative to the financial and strategic objectives set forth in the annual business plan, the previous year's individual performance of each executive
officer, each executive officer's base salary and target bonus amount and the market pay levels for the executive officer.
Generally,
we do not consider an executive officer's stock holdings or previous stock option grants in determining the number of stock options or restricted stock awards to be granted.
We believe that our executive officers should be fairly compensated each year relative to market pay levels of our peer group and relative to our other executive officers. Moreover, we believe that
our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation. We do not have any requirement that executive officers hold a specific
amount of our common stock or stock options.
Although
the compensation committee is the plan administrator for our 2004 Plan, all awards of stock options and restricted stock under the 2004 Plan are recommended by the compensation
committee and approved by our board of directors.
For
accounting purposes, we apply the guidance in Accounting Standards Board Accounting Standards Codification Topic 718, or ASC Topic 718, to record compensation expense for our stock
option grants. ASC Topic 718 is used to develop the assumptions necessary and the model appropriate to value the awards as well as the timing of the expense recognition over the requisite service
period, generally the vesting period, of the award.
105
Table of Contents
Other Benefits
Retirement savings opportunities
All of our employees, subject to certain age and length of service requirements, may participate in the NetSpend Corporation 401(k)
Plan, or 401(k) Plan. Generally, each employee may make pre-tax contributions of up to 100% of their eligible earnings up to the current Internal Revenue Service annual pre-tax
contribution limits. We provide this plan to help employees save some amount of their cash compensation for retirement in a tax efficient manner. We also make matching contributions equal to 100% of
the first 3% of the eligible earnings that an employee contributes to the 401(k) Plan and 50% of the next 2% of the eligible earnings that an employee contributes. We also have the ability to make
certain discretionary contributions under the 401(k) Plan. See " Employee Benefit Plans 401(k) Plan" below for a complete description of the 401(k) Plan.
In
mid-2009, we adopted the NetSpend Holdings, Inc. Deferred Compensation Plan, or Deferred Compensation Plan. The purpose of the plan is to attract and retain key
employees by providing eligible participants with an opportunity to defer receipt of a portion of their salary, bonus and other specified compensation. We do not match any contributions made by
eligible employees to the Deferred Compensation Plan but we do have the ability to make discretionary contributions to the Deferred Compensation Plan which may be credited to any participant. None of
our named executive officers participated in the Deferred Compensation Plan in 2009. See " Employee Benefit Plans Deferred Compensation Plan" below for a complete
description of the Deferred Compensation Plan.
Health and welfare benefits
All full-time employees, including our named executive officers, may participate in our health and welfare benefit
programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Stock Ownership Guidelines
Stock ownership guidelines have not been implemented by the compensation committee for our executive officers. Prior to our initial
public offering, the market for our stock was limited. We have chosen not to require stock ownership given the limited market for our securities. We will continue to periodically review best practices
and re-evaluate our position with respect to stock ownership guidelines.
Tax Deductibility of Executive Compensation
Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code which generally limits
the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation
becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.
106
Table of Contents
Summary of Compensation
The following table sets forth certain information with respect to compensation for the years ended December 31, 2007, 2008 and
2009 earned by or paid to our chief executive officer, our chief operating officer, who served as our principal financial officer in 2009, and our three other most highly compensated executive
officers, which are referred to as the named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and principal position
|
|
Year |
|
Salary |
|
Bonus
(1) |
|
Stock
Awards
(2) |
|
Option
Awards
(3) |
|
Non-equity
Incentive Plan
Compensation
(4) |
|
All Other
Compensation
(5) |
|
Total |
|
Daniel R. Henry(6) |
|
|
2009 |
|
$ |
400,000 |
|
$ |
|
|
$ |
181,924 |
|
$ |
|
|
$ |
400,000 |
|
$ |
186,339 |
|
$ |
1,168,263 |
|
|
Chief Executive Officer |
|
|
2008 |
|
|
366,667 |
|
|
|
|
|
|
|
|
7,392,816 |
|
|
187,500 |
|
|
8,519 |
|
|
7,955,502 |
|
Frank J. Cotroneo(7) |
|
|
2009 |
|
|
288,654 |
(11) |
|
|
|
|
|
|
|
217,000 |
|
|
|
|
|
570,909 |
|
|
1,076,563 |
|
|
Chief Operating Officer |
|
|
2008 |
|
|
200,000 |
|
|
50,000 |
|
|
|
|
|
1,687,143 |
|
|
125,000 |
|
|
330 |
|
|
2,062,473 |
|
Thomas A. Cregan(8) |
|
|
2009 |
|
|
275,000 |
|
|
190,000 |
|
|
50,028 |
|
|
217,000 |
|
|
137,500 |
|
|
140 |
|
|
869,668 |
|
|
Executive Vice President, Sales and Distribution |
|
|
2008 |
|
|
244,722 |
|
|
|
|
|
|
|
|
638,390 |
|
|
90,000 |
|
|
425 |
|
|
973,537 |
|
Anh Hatzopoulos(9) |
|
|
2009 |
|
|
312,500 |
|
|
43,750 |
|
|
71,064 |
|
|
217,000 |
|
|
156,250 |
|
|
140 |
|
|
800,704 |
|
|
Executive Vice President of Online Business Development |
|
|
2008 |
|
|
183,333 |
|
|
65,000 |
|
|
|
|
|
490,360 |
|
|
63,021 |
|
|
283 |
|
|
801,997 |
|
Christopher T. Brown(10) |
|
|
2009 |
|
|
275,000 |
|
|
|
|
|
75,044 |
|
|
75,950 |
|
|
165,000 |
|
|
140 |
|
|
591,134 |
|
|
General Counsel and |
|
|
2008 |
|
|
270,833 |
|
|
52,504 |
|
|
|
|
|
285,000 |
|
|
82,500 |
|
|
566 |
|
|
691,403 |
|
|
Secretary |
|
|
2007 |
|
|
219,952 |
|
|
129,532 |
|
|
|
|
|
162,500 |
|
|
115,187 |
|
|
566 |
|
|
627,737 |
|
- (1)
- For
2007, represents a discretionary bonus to Mr. Brown. For 2008, includes a retention bonus for Mr. Brown, a signing bonus for
Mr. Cotroneo and a discretionary bonus to Ms. Hatzopoulos based on 2008 performance. For 2009, represents a discretionary bonus to Ms. Hatzopoulos based on 2009 performance and a
relocation bonus for Mr. Cregan.
- (2)
- The
amounts in this column represent the grant date fair value of restricted stock awards granted in February 2010 based on 2009 performance, in each case
in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 718. Under SEC rules, the amounts shown exclude the impact of estimated forfeitures
related to service-based vesting conditions. The grant date fair value of restricted stock awards is calculated using the fair market value of the Company's common stock on the date of grant, as
determined by the board of directors. For additional information, see Note 11 to our consolidated financial statements. These amounts do not correspond to the actual value that will be
recognized by the executive.
- (3)
- The
amounts in this column represent the grant date fair value of stock option awards granted in 2007, 2008 and 2009, in each case in accordance with ASC
Topic 718. Under SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The grant date fair value of stock option awards in 2007
is calculated using the Black-Scholes option pricing model. The grant date fair value of stock option awards in 2008 and 2009 is calculated using the Binomial Lattice model. For additional
information, see Note 11 to our consolidated financial statements. These amounts do not correspond to the actual value that will be recognized by the executive.
- (4)
- The
amounts in this column represent the Executive Bonus Plan awards earned for 2007, 2008 and 2009, respectively. For additional information, please see
" Compensation Discussion and Analysis Components of our Executive Compensation Programs Cash
Incentive Awards."
- (5)
- Includes
for 2009 matching contributions under the 401(k) savings plan and life insurance premiums. For 2009, the Company made matching contributions to
Messrs. Henry and Cotroneo. Mr. Cregan, Mr. Brown and Ms. Hatzopoulos did not participate in the 401(k) savings plan in 2009. For Messrs. Henry and Cotroneo, these
amounts also include dividend equivalents of $176,399 and $35,561, respectively, for 2009. For Mr. Cotroneo, these amounts also include an aggregate payment of $525,409 of severance and other
benefits paid in December 2009 in connection with his resignation.
- (6)
- Mr. Henry's
employment with the Company commenced in January 2008.
- (7)
- Mr. Cotroneo's
employment with the Company commenced in May 2008, and he resigned effective December 16, 2009.
- (8)
- Mr. Cregan's
employment with the Company commenced in March 2008.
107
Table of Contents
- (9)
- Ms. Hatzopoulos'
employment with the Company commenced in May 2008.
- (10)
- Mr. Brown's
employment with the Company commenced in January 2007.
- (11)
- The
annual base salary of our current Chief Financial Officer, George W. Gresham, is $350,000.
Grants of Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards for the year ended
December 31, 2009 to the named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#) |
|
Exercise
or Base
Price of
Option
Awards
($/Share) |
|
Grant Date
Fair Value
of Stock
and
Option
Awards
(1) |
|
|
|
|
|
Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards |
|
|
|
Grant
Date |
|
Name
|
|
Threshold |
|
Target |
|
Maximum |
|
Daniel R. Henry |
|
|
|
|
$ |
200,000 |
|
$ |
400,000 |
|
$ |
600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/24/10 |
(3) |
|
|
|
|
|
|
|
|
|
|
48,128 |
|
|
|
|
|
|
|
$ |
181,924 |
|
Frank J. Cotroneo |
|
|
|
|
$ |
90,000 |
|
$ |
180,000 |
|
$ |
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/05/09 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
$ |
3.47 |
|
$ |
217,000 |
|
Thomas A. Cregan |
|
|
|
|
$ |
68,750 |
|
$ |
137,500 |
|
$ |
206,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/05/09 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
$ |
3.47 |
|
$ |
217,000 |
|
|
|
|
02/24/10 |
(3) |
|
|
|
|
|
|
|
|
|
|
13,235 |
|
|
|
|
|
|
|
$ |
50,028 |
|
Anh Hatzopoulos |
|
|
|
|
$ |
78,125 |
|
$ |
156,250 |
|
$ |
234,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/05/09 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
$ |
3.47 |
|
$ |
217,000 |
|
|
|
|
02/24/10 |
(3) |
|
|
|
|
|
|
|
|
|
|
18,800 |
|
|
|
|
|
|
|
$ |
71,064 |
|
Christopher T. Brown |
|
|
|
|
$ |
82,500 |
|
$ |
165,000 |
|
$ |
247,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/05/09 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000 |
|
$ |
3.47 |
|
$ |
75,950 |
|
|
|
|
02/24/10 |
(3) |
|
|
|
|
|
|
|
|
|
|
19,853 |
|
|
|
|
|
|
|
$ |
75,044 |
|
- (1)
- The
amounts in this column represent the grant date fair value of equity awards granted in 2009, in accordance with ASC Topic 718. Under SEC rules,
the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts do not correspond to the actual value that will be recognized by the executive.
- (2)
- On
February 5, 2009, certain key employees of the Company were granted stock option awards under the 2004 Plan. These awards vest in four equal
annual installments on each of the first four anniversaries of the grant date, subject to the named executive officer's continued employment with the Company through the applicable vesting date.
- (3)
- On
February 24, 2010, certain key executives of the Company were granted restricted stock awards under the 2004 Plan. These awards were granted by
the board of directors in connection with the awards under the Executive Bonus Plan for 2009, and represented approximately 45% of the total payout under the Executive Bonus Plan for each such
executive. For more information on the Executive Bonus Plan, see " Compensation Discussion and Analysis Components of our Executive Compensation
Programs Cash Incentive Awards." The restricted stock awards vest upon the earlier of: (i) February 24, 2013; (ii) the named executive officer's termination
by the company without cause, other than a termination due to disability; (iii) the date that is six months following an initial public offering (as defined in the 2004 Plan); and (iv) a
change in control (as defined below under " Employment Agreements, Severance Benefits and Change in Control Provisions Severance Benefits and Change in Control
Provisions Change in Control Payments"), subject to the named executive officer's continued employment through the applicable vesting date or event.
Employment Agreements, Severance Benefits and Change in Control Provisions
We have entered into management employment agreements with each of our named executive officers. Each of these agreements provide for
certain severance payments and some provide for change in control payments. These arrangements were designed to ensure retention of our senior executive team. Details of each named executive officer's
employment agreement and severance arrangement, including estimates of amounts payable under certain circumstances if the executive's employment is terminated or we experience a change in control, are
described below. In addition, we have provided a description of our employment agreement and severance arrangement with our current Chief Financial Officer. Although we believe these arrangements are
an important feature to ensure the focus and retention of our executives, our board of directors and compensation committee do not consider them to be material factors in the determination of the
executives' overall compensation.
108
Table of Contents
In
addition, we have entered into certain stock option and restricted stock agreements in connection with the long-term equity incentive awards granted to our named
executive officers. As discussed in " Employee Benefit Plans Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock
Plan Change in Control," our 2004 Plan generally provides that 25% of unvested stock options, excluding performance-based stock options, and 100% of unvested restricted stock
granted under the plan will automatically vest upon the occurrence of a change in control. As more fully described below, the percentage of unvested options which automatically vests upon a change in
control may differ based upon provisions contained in the named executive officer's stock option agreement.
Employment Agreements
Named Executive Officers
Daniel R. Henry. Mr. Henry's current annual base salary is $400,000, and his maximum bonus under our executive bonus
program is 150% of his
annual base salary. Mr. Henry's employment is at will and may be terminated at any time, with or without formal cause. As discussed in " Severance Benefits and Change in
Control Provisions" below, if Mr. Henry is terminated under certain circumstances, we have agreed to make certain severance payments and provide certain benefits.
Frank J. Cotroneo. Mr. Cotroneo's annual base salary as of December 2009 was $300,000, and his maximum bonus under our
executive bonus
program was 90% of his annual base salary. Mr. Cotroneo resigned effective December 2009. As discussed in " Release Agreement" below, Mr. Cotroneo was given certain
severance payments and benefits in accordance with a release agreement entered into between Mr. Cotroneo and us.
Thomas A. Cregan. Mr. Cregan's current annual base salary is $300,000, and his maximum bonus under our executive bonus
program is 105% of his
annual base salary. In addition, Mr. Cregan's employment agreement provides that he is eligible to receive a special bonus in 2010 of up to $100,000 upon the achievement of certain sales goals.
Mr. Cregan's employment is at will and may be terminated at any time, with or without formal cause. As discussed in " Severance Benefits and Change in Control Provisions"
below, if Mr. Cregan is terminated under certain circumstances, we have agreed to make certain severance payments and provide certain benefits.
Anh Hatzopoulos. Ms. Hatzopoulos' current annual base salary is $350,000, and her maximum bonus
under our executive bonus program is 105% of her annual base salary. Ms. Hatzopoulos' employment is at will and may be terminated at any time, with or without formal cause. As discussed in
" Severance Benefits and Change in Control Provisions" below, if Ms. Hatzopoulos is terminated under certain circumstances, we have agreed to make certain severance payments
and provide certain benefits.
Christopher T. Brown. Mr. Brown's current annual base salary is $325,000, and his maximum bonus under our executive
bonus program is 90% of
his annual base salary. Mr. Brown's employment is at will and may be terminated at any time, with or without formal cause. As discussed in " Severance Benefits and Change in
Control Provisions" below, if Mr. Brown is terminated under certain circumstances, we have agreed to make certain severance payments and provide certain benefits.
Current Chief Financial Officer
George W. Gresham. Mr. Gresham was appointed as our Chief Financial Officer in April 2010.
Mr. Gresham's employment
agreement provides that his annual base salary will be $350,000, and his maximum bonus under our executive bonus program is 105% of his annual base salary.
109
Table of Contents
Mr. Gresham's
employment is at will and may be terminated at any time, with or without formal cause.
In
the event that Mr. Gresham's employment is terminated by us without cause or by Mr. Gresham for good reason, in addition to payments related to accrued and unpaid
expenses, salary, bonus and benefits, Mr. Gresham is entitled to an amount equal to 100% of his annual base salary, payable over the 12-month period following the date of
termination, and the target-level bonus that he would have received for the then-current fiscal year in which he was terminated. Mr. Gresham would also be entitled to contributory
payments towards his health coverage under COBRA for up to 12 months following any such termination. In the event that Mr. Gresham's employment is terminated by us for cause or by
Mr. Gresham for any reason other than for good cause or in connection with his death or disability, Mr. Gresham would be entitled to payments related to accrued and unpaid expenses,
salary and benefits.
In
connection with his employment, Mr. Gresham was also granted options to purchase Class A Common Stock. A portion of the stock option award vests automatically upon a
change in control and the remaining portion also vests upon a change in control, but only if such portion is not assumed by the surviving company or if Mr. Gresham's employment is terminated
under certain circumstances following such change in control.
Mr. Gresham's
severance and change in control payments are subject to perpetual confidentiality obligations and the execution of a general release by Mr. Gresham. The
payments and benefits are also subject to a covenant not to compete with us, a covenant not to solicit our employees, a covenant not to solicit our customers or suppliers and a covenant not to furnish
any services similar to those furnished to us during Mr. Gresham's tenure with us to any of our customers or accounts, in each case for a period of one year following termination.
Mr. Gresham's employment agreement also contains customary provisions which allow for the waiver of the terms and conditions thereof only by a written instrument signed by the party waiving
compliance.
Release Agreement
Mr. Cotroneo resigned effective December 16, 2009. In connection with his resignation, we entered into a release
agreement with Mr. Cotroneo on December 24, 2009 pursuant to which he agreed to release all claims against the Company in exchange for certain severance payments. Mr. Cotroneo
received a severance payment of $513,061, as well as premium reimbursement for health coverage under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") for 12 months valued at
$12,348. In addition, the exercisability of 142,858 stock option awards granted to Mr. Cotroneo was extended through December 16, 2010.
Severance Benefits and Change in Control Provisions
Termination by us without cause, or termination by named executive officer for good reason
Our management employment agreements typically provide that if we terminate a named executive officer's employment other than for
cause, or if a named executive
officer terminates his employment for good reason, the named executive officer is entitled to severance payments (less applicable withholding taxes) equal to:
-
- with respect to Mr. Henry, an amount equal to 200% of his annual base salary, payable in one lump sum;
-
- with respect to Mr. Cregan, an amount equal to 100% of his annual base salary, payable over the 12-month period
following the date of termination and any bonus that he would have received for the then-current fiscal year in which he was terminated, pro-rated based on the number of months elapsed in such fiscal
year prior to the date of termination;
110
Table of Contents
-
- with respect to Ms. Hatzopoulos, an amount equal to 100% of her annual base salary, payable over the 12-month
period following the date of termination, and any bonus that she would have received for the then-current fiscal year in which she was terminated, pro-rated based on the number
of months elapsed in such fiscal year prior to the date of termination; and
-
- with respect to Mr. Brown, an amount equal to 100% of his annual base salary, payable over the 12-month period
following the date of termination and an amount equal to his target bonus for the then-current fiscal year in which he was terminated, payable in one lump sum.
In
addition, upon any such termination, all named executive officers would receive payments related to accrued and unpaid expenses, salary, bonus and benefits. Mr. Henry,
Mr. Cregan and Ms. Hatzopoulos are entitled to contributory payments towards such named executive officer's health coverage under COBRA for up to 18 months following termination
in the case of Mr. Henry, and for up to 12 months following termination for Mr. Cregan and Ms. Hatzopoulos. Mr. Brown is entitled to continued
pre-termination health benefits for up to 12 months. Mr. Henry's employment agreement also provides that, in the event any payment or benefit received by Mr. Henry in
connection with a termination of his employment would constitute a "parachute
payment" within the meaning of Internal Revenue Code Section 280G or any similar or successor provision to 280G, then we will reimburse Mr. Henry on a "grossed-up" basis for
any income taxes attributable to Mr. Henry by reason of such payment or reimbursements.
Further,
certain of Mr. Henry's stock option awards provide that if we terminate his employment for other than cause, or if he terminates his employment for good reason, prior to
a change in control or an initial public offering, 25% of his stock option award, to the extent unvested on such date, will vest upon such termination.
The
foregoing payments and benefits are subject to perpetual confidentiality obligations and the execution of a general release by the named executive officers. The payments and
benefits are also subject to covenants not to compete with us, covenants not to solicit our employees and covenants not to solicit our customers or suppliers, in each case for a period of one year
following termination and, in the case of Ms. Hatzopoulos, subject to certain exceptions based on applicable California law. In addition, in the case of Mr. Cregan, Mr. Brown and
Ms. Hatzopoulos, their severance payments are subject to a post-termination one-year covenant not to furnish any services similar to those furnished to us during such
named executive officer's tenure with us to any of our customers or accounts. Each management employment agreement contains customary provisions which allow for the waiver of the terms and conditions
thereof only by a written instrument signed by the party waiving compliance.
"Cause"
is generally defined under the management employment agreements to include:
-
- the commission of a felony or other offense involving moral turpitude or any crime relating to such named executive
officer's employment;
-
- a material violation of such named executive officer's employment agreement which is not cured within the applicable cure
period (from 14 to 20 days) following reasonable notice of such violation;
-
- the commission of an act of fraud, theft or personal dishonesty with regard to us or any subsidiary;
-
- the failure to perform such named executive officer's duties or the performance of such duties in a grossly negligent
manner or with willful malfeasance;
-
- the repeated failure to observe material policies which apply to our executives; and
111
Table of Contents
-
- the violation of any state or federal law relating to sexual harassment or age, sex or other prohibited discrimination.
"Good
reason" is generally defined under the management employment agreements to include a violation of such employment agreement by us in a material respect, a material reduction in
the executive's responsibilities and a sale or transfer of all or substantially all of our assets to another entity that does not assume our obligations under such employment agreement, in each case
subject to a 30-day cure period.
The
following table summarizes the potential maximum payments that the named executive officers would have been entitled to receive if their employment had been terminated by us without
cause, or by the named executive officers for good reason, on December 31, 2009 prior to any change in control. The amounts reflected in the table assume (i) that there were no accrued
and unpaid expenses, salary, bonus or benefits for any named executive officer, and (ii) compliance with all conditions relating to the receipt and/or continued receipt of such payments and
benefits. Acceleration values are based upon the per share fair market value of the shares of our common stock underlying options as of December 31, 2009 of $3.78, as determined by our board of
directors, minus the exercise price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Base Salary |
|
Bonus |
|
Equity
Acceleration |
|
Benefits |
|
Total |
|
Daniel R. Henry |
|
$ |
800,000 |
|
$ |
|
|
$ |
88,581 |
|
$ |
18,522 |
|
$ |
907,103 |
|
Thomas A. Cregan(1) |
|
$ |
275,000 |
|
$ |
|
|
$ |
|
|
$ |
4,521 |
|
$ |
279,521 |
|
Anh Hatzopoulos(2) |
|
$ |
350,000 |
|
$ |
367,500 |
|
$ |
|
|
$ |
4,521 |
|
$ |
722,021 |
|
Christopher T. Brown(3) |
|
$ |
275,000 |
|
$ |
110,000 |
|
$ |
|
|
$ |
5,406 |
|
$ |
390,406 |
|
- (1)
- Mr. Cregan's
amended employment agreement effective as of June 2010 provides for an additional severance payment in an amount equal to his bonus for
the then-current fiscal year upon his termination by us without cause, or by him for good reason.
- (2)
- Amounts
are based on the severance and change in control benefits provided in Ms. Hatzopoulos' employment agreement entered into in
April 2010. Prior to such date, Ms. Hatzopoulos would not have been contractually entitled to any such benefits.
- (3)
- Mr. Brown's
amended employment agreement effective as of September 2010 increases the amount payable to Mr. Brown upon his termination by us
without cause or by him for good reason from 40% of his annual base salary to an amount equal to his target bonus for the then-current fiscal year, which is currently 60% of his annual base salary.
Termination by us for cause or by named executive officer for other than good reason, death or disability
We are not obligated to make any cash payment or provide any benefit to our named executive officers if their employment is terminated
by us for cause or by the named executive officer without good reason, other than the payment of accrued and unpaid expenses, salary and benefits and, in the case of Mr. Henry and
Mr. Brown, accrued and unpaid bonus for the fiscal year preceding the year of termination.
We
are generally not obligated to make any cash payment or provide any benefit to our named executive officers if they are terminated due to death or disability, other than the payment
of accrued and unpaid expenses, salary and benefits and, in the case of Mr. Henry and Mr. Brown, accrued and unpaid bonus for the fiscal year preceding the year of termination. In the
event of termination due to death or disability, Mr. Henry (or in the case of death, his estate) is entitled to a lump-sum payment (less applicable withholding taxes) equal to 200%
of his annual base salary and
112
Table of Contents
to
contributory payments towards his health coverage under COBRA for up to 18 months following termination. Severance payments and benefits upon such a termination are subject to the same
covenants described above applicable to severance payments and benefits upon termination by us other than for cause or termination for good reason prior to a change in control.
Further,
certain of Mr. Henry's stock option awards provide that, in the event of Mr. Henry's termination due to death or disability prior to a change in control or an
initial public offering, 25% of his stock option award, to the extent unvested on such date, will vest upon such termination.
Assuming
that there are no accrued and unpaid expenses, salary, bonus or benefits for any named executive officer, our named executive officers would not have received any payments in
connection with the termination of their employment by us for cause, or by the named executive officers for other than good reason, on December 31, 2009. In addition, assuming the
aforementioned items, our named executive officers would not have received any payments in connection with the termination of their employment upon their death or disability on December 31,
2009, except that, Mr. Henry (or in the case of death, his estate) would have been entitled to receive a lump-sum payment and contributory payments towards his health coverage under
COBRA equal to $800,000 and $18,522, respectively, subject to Mr. Henry's compliance with all conditions relating to the receipt and/or continued receipt of such payments and benefits.
Change in Control Payments
Management Employment Agreements. Upon a change in control, the management employment agreements of the named executive
officers generally do not
provide for termination or severance benefits or payments in addition to those described above. However, in the event of termination without cause or termination for good reason in connection with, or
within 12 months following, a change in control, Mr. Cregan and Ms. Hatzopoulos are entitled to receive an amount equal to 70%
of their respective annual base salary, payable in one lump sum, in lieu of any pro-rata bonus that would otherwise be payable for the then-current fiscal year if such
termination had not been in connection with a change in control. The severance payments and benefits payable to Mr. Cregan and Ms. Hatzopoulos upon such a termination are subject to the
same covenants described above applicable to severance payments and benefits upon termination by us other than for cause or termination for good reason prior to a change in control.
Equity Award Agreements. In addition to the foregoing payments pursuant to our named executive officers' employment
agreements, the named executive
officers' stock option and restricted stock agreements typically provide for acceleration of vesting in connection with a change in control, or provide for a performance vesting condition that
contemplates a change in control. The equity incentive grants awarded to our named executive officers provide for one or more variations with regard to change in control vesting conditions or
acceleration, as more fully set forth below:
-
- Time-based stock option awards provide for two variations of
acceleration upon a change in control:
-
- Mr. Henry has been granted an award that provides that 100% of the award will immediately vest upon a change in
control; and
-
- Ms. Hatzopoulos, Mr. Brown and Mr. Cregan have been granted awards that provide that (i) 25%
of the awards immediately vest upon a change in control and (ii) 100% of the awards vest if there is a change in control and (A) the award is not assumed or substituted in connection
with the change in control or (B) the award is assumed or substituted and the named executive officer is terminated other than for cause, disability or death (or, in addition, in the case of
one of Mr. Brown's awards, his
113
Table of Contents
-
- Performance-based option awards provide for two variations of acceleration
upon a change in control:
-
- Ms. Hatzopoulos, Mr. Brown and Mr. Cregan have been granted awards that provide for acceleration upon
a performance condition and a time condition as follows: (i) with regard to the performance-based vesting condition, such condition will be considered to be achieved upon (A) the
consummation of a change in control which occurs on or prior to December 31, 2011 or (B) the consummation of a change in control which occurs after December 31, 2011 where our
equity is valued at $1.3 billion and (ii) with regard to the time-based vesting condition, 100% will immediately vest if the performance-based vesting condition has been
achieved and (A) the award is not being assumed or substituted in connection with the change in control or (B) the award is assumed or substituted and the named executive officer is
terminated other than for cause, disability or death within 12 months following the change in control; and
-
- Mr. Henry has been granted an award that provides for acceleration upon a performance condition and a time
condition as follows: (i) with regard to the performance-based vesting condition, (A) such condition will be considered to be achieved in 10% increments upon the consummation of a change
in control where our equity is valued at (1) $837 million, (2) $976 million, (3) $1.116 billion, (4) $1.255 billion, (5) $1.395 billion,
(6) $1.534 billion, (7) $1.674 billion or (8) $1.813 billion, and the final 20% (and thus 100% in the aggregate) of the performance-based vesting condition
will be achieved if our equity is valued at $2.441 billion in connection with a change in control or (B) 40% of such condition will be considered achieved upon any change in control, but
excluding any change in control the pursuit of which is approved by Mr. Henry, prior to February 5, 2012, and (ii) with regard to the time-based vesting condition,
100% will immediately vest to the extent that the performance-based vesting condition has been achieved and (A) the award or portion thereof is not being assumed or substituted in connection
with the change in control or (B) the award or portion thereof is assumed or substituted and the named executive officer is terminated other than for cause or disability, or the named executive
officer terminates their employment for good reason, within 12 months following the change in control.
The
change in control vesting conditions and acceleration provided above are subject, in each case, to the continued service of the named executive officer holding the award through the
applicable vesting date. In addition, the awards are subject to the same covenants described above applicable to severance payments and benefits upon termination by us other than for cause or
termination for good reason. The change in control vesting conditions and acceleration, which are tied in any case to our equity value as of a certain date, are adjusted in the appropriate cases for
certain strategic transactions.
A
"change in control" occurs under the management employment agreements and, unless otherwise noted below, under the stock option and restricted stock agreements on the earlier
of:
-
- the consummation of a merger, reorganization, consolidation or sale or other transfer of all or substantially all of our
assets or of all or substantially all of the combined voting power of our then-outstanding voting securities, excluding, however, transactions where a majority of the direct or indirect
beneficial owners of us or any new entity following such transaction
114
Table of Contents
The
following table summarizes the potential maximum payments that the named executive officers would have been entitled to receive if their employment had been terminated by us without
cause, or by the named executive officers for good reason, on December 31, 2009, following the consummation of a change in control. The amounts reflected in the table assume (i) that
there were no accrued and unpaid expenses, salary, bonus or benefits for any named executive officer, (ii) that each named executive officer was terminated without cause following a change in
control which valued our equity at $1.8 billion, such that 100% of all awards held by each named executive officer were vested on the termination date, and (iii) compliance with all
conditions relating to the receipt and/or continued receipt of such payments and benefits. Acceleration values are based upon the per share fair market value of the shares of our common stock
underlying options as of December 31, 2009 of $3.78, as determined by our board of directors, minus the exercise price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Base Salary |
|
Bonus |
|
Equity Acceleration |
|
Benefits |
|
Total |
|
Daniel R. Henry |
|
$ |
800,000 |
|
$ |
|
|
$ |
1,026,550 |
|
$ |
18,522 |
|
$ |
1,845,072 |
|
Thomas A. Cregan(1) |
|
$ |
275,000 |
|
$ |
137,500 |
|
$ |
121,750 |
|
$ |
4,521 |
|
$ |
538,771 |
|
Anh Hatzopoulos(2) |
|
$ |
350,000 |
|
$ |
245,000 |
|
$ |
121,750 |
|
$ |
4,521 |
|
$ |
721,271 |
|
Christopher T. Brown(3) |
|
$ |
275,000 |
|
$ |
110,000 |
|
$ |
54,680 |
|
$ |
5,406 |
|
$ |
445,086 |
|
- (1)
- Mr. Cregan's
amended employment agreement effective as of June 2010 increases the amount payable to Mr. Cregan upon his termination by
us without cause following a change in control from 50% of his annual base salary to 70% of his annual base salary.
- (2)
- Base
salary, bonus and benefit amounts are based on the severance and change in control benefits provided in Ms. Hatzopoulos' employment agreement
entered into in April 2010. Prior to such date, Ms. Hatzopoulos would not have been contractually entitled to any such benefits.
- (3)
- Mr. Brown's
amended employment agreement effective as of September 2010 increases the amount payable to Mr. Brown upon his termination by us
without cause following a change in control from 40% of his annual base salary to an amount equal to his target bonus for the then-current fiscal year, which is currently 60% of his annual base
salary.
Employee Benefit Plans
Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock Plan
Our Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock Plan, or the 2004 Plan, was adopted by
our board of directors in April 2010.
Administration. Our 2004 Plan is administered by the compensation committee of our board of directors. As plan administrator,
the compensation
committee has full authority to interpret the 2004 Plan and all awards thereunder and adopt, amend and rescind such rules as it deems appropriate for the administration of the 2004 Plan. The
compensation committee has full authority under the 2004 Plan to grant awards in its discretion and dictate the terms and conditions of such awards.
115
Table of Contents
Eligibility. All of our employees, consultants and non-employee directors are eligible to be granted awards by the
compensation
committee under our 2004 Plan. An employee, consultant or non-employee director granted an award is a participant under our 2004 Plan.
Number of Shares Available for Issuance. The maximum number of shares of our Class A Common Stock that are authorized
for issuance under the
2004 Plan currently is 20,459,980. Shares issued under the 2004 Plan may be treasury shares or authorized but unissued shares. As of June 30, 2010, options to purchase an aggregate of
11,168,708 shares of Class A Common Stock were outstanding under our 2004 Plan. As of June 30, 2010, 1,843,479 shares of our Class A Common Stock remained available for
future option or restricted stock grants under our 2004 Plan.
In
the event any award granted under the 2004 Plan is forfeited, any restricted stock is repurchased by the Company or any stock options are terminated, expire or are cancelled without
having been fully exercised, the number of shares no longer subject to such award shall be released from such award and shall thereafter be available under the 2004 Plan for the grant of additional
awards.
Upon
the occurrence of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the administrator of the 2004 Plan
may ratably adjust the aggregate number and affected class of securities available under the 2004 Plan.
Types of Awards. The compensation committee may grant the following types of awards under the
2004 Plan: stock options and restricted stock. Stock options awarded under the 2004 Plan may be nonqualified stock options or incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, or the Code. With the exception of incentive stock options, the compensation committee may grant, from time to time, any of the types of awards under the 2004 Plan to our
employees, consultants and non-employee directors. Incentive stock options may only be granted to our employees. Restricted Stock granted under the 2004 Plan is subject to repurchase
rights and restrictions on transfer.
Stock Options. Stock option awards under the 2004 Plan consist of the right to acquire shares of our Class A Common
Stock at a fixed price
for a fixed period of time and generally are subject to a vesting requirement set by the compensation committee. A stock option may be in the form of a nonqualified stock option or an incentive stock
option under the 2004 Plan. The exercise price of a stock option is set by the compensation committee but, with respect to incentive stock options, cannot be less than 100% of the fair market value of
the underlying stock on the date of grant, or, in the case of incentive stock options granted to an employee who owns 10% or more of the total combined voting power of all classes of our stock (a "10%
owner"), the exercise price cannot be less than 110% of the fair market value of the underlying stock on the date of grant. The term of a stock option may not exceed ten years, or, in the case of
incentive stock options granted to a 10% owner, five years. Except in the case of a termination of service in connection with a participant's death or disability or a termination of service for cause,
a participant's vested and exercisable stock options will generally be exercisable for 90 days following a termination of service. Unvested stock options will terminate on a participant's
termination of service, unless otherwise provided for by the compensation committee.
Exercise of Stock Options. Stock options may be exercised upon the satisfaction of the applicable vesting requirement or,
in the discretion of the
compensation committee, at any time prior to the complete termination of such stock option. The exercise price is due upon the exercise of the option. At the time of any stock option grant, the
compensation committee must specify that the exercise price may be paid in one or more of the following forms (i) in cash or by check, (ii) in shares of our Class A Common Stock
or convertible preferred stock previously acquired by the
116
Table of Contents
optionee
(that meet a six month holding period requirement) based on the shares' fair market value as of the exercise date or (iii) by cashless exercise through a broker.
Restricted Stock. Restricted stock awards under the 2004 Plan are awards of shares of our Class A Common Stock that are
subject to vesting,
transferability and repurchase conditions, as determined by the compensation committee. The conditions for vesting may include, among other things, continued service or achievement of applicable
performance goals. Restricted stock granted under
the 2004 Plan may not be sold, pledged or otherwise transferred, subject to limited exceptions. We have the right, but not the obligation, to repurchase any unvested restricted stock awarded under the
2004 Plan perpetually. The repurchase price for unvested restricted stock is the lower of the fair market value on the date of the participant's termination of service or the price paid by the
participant for such shares of restricted stock.
Change in Control. Our 2004 Plan provides for stock option and restricted stock acceleration upon the consummation of a
change in control. The
compensation committee has the authority under the 2004 Plan to modify the acceleration of any stock option or restricted stock awards or make such adjustments and/or settlements it deems appropriate
and consistent with such plan's purposes. A change in control occurs under the 2004 Plan upon the first to occur of: (i) the consummation of a merger, reorganization, consolidation or sale or
other transfer of all or substantially all of our assets or of all or substantially all of the combined voting power of our then-outstanding voting securities, excluding, however,
transactions where a majority of the owners of us or any new entity following such transaction consist of all or substantially all of our owners prior to such transaction, and (ii) the approval
by the holders of a majority of our outstanding voting securities of our liquidation or dissolution.
Unless
otherwise provided in a participant's stock option agreement, upon a change in control, 25% of a participant's option award shall be accelerated and vested, subject to the
continued employment or service of the participant through the date of the change in control. If not terminated in connection with the change in control, the remainder of the participant's stock
option award shall continue to vest in accordance with its original vesting schedule. The stock option acceleration provisions of the 2004 Plan are only applicable to stock options which vest based
solely on a participant's continued employment or service with us (i.e. excludes performance-based options). All unvested and/or unexercised stock options not assumed or substituted in connection with
a change in control terminate and are no longer exercisable. Upon the consummation of a change in control, the 2004 Plan also provides that 100% of the unvested portion of any restricted stock award
shall be accelerated and immediately vested. For a discussion of the change in control provisions under our named executive officer's stock option and restricted stock agreements, please see
" Employment Agreements, Severance Benefits and Change in Control Provisions" above.
Amendment and Discontinuance; Term. Subject to certain exceptions, our board of directors may amend, modify or terminate our
2004 Plan at any time,
with or without prior notice to or consent of any person. Our stockholders must approve any amendment that would require the approval of stockholders under applicable law or in order to comply with
the regulations promulgated by the SEC under Section 16(b) of the Exchange Act or with Section 422 of the Code or the regulations promulgated thereunder. Further, subject to exceptions,
any amendment that would adversely affect a participant's rights to outstanding awards cannot be made without such participant's consent. Unless terminated earlier by our board of directors in its
sole discretion, our 2004 Plan will expire on May 4, 2014.
117
Table of Contents
401(k) Plan
Our 401(k) Plan is a deferred savings retirement plan intended to qualify for favorable tax treatment under Section 401(a) of
the Internal Revenue Code. All of our employees are generally eligible to participate in the 401(k) Plan subject to certain eligibility requirements, including requirements relating to age and length
of service. Under the 401(k) Plan, each employee may make pre-tax contributions of up to 100% of their eligible earnings up to the current statutorily prescribed annual limit on
pre-tax contributions under the Code. Employees who are 50 years of age or older may contribute additional amounts based on the statutory limits for catch-up
contributions. We also make safe-harbor matching contributions equal to 100% of the first 3% of the eligible earnings that an employee contributes to the 401(k) Plan and 50% of the next 2%
of the eligible earnings that an employee contributes. In addition, we have the ability to make certain other discretionary contributions to certain eligible employees under the 401(k) Plan, subject
to established limits and a vesting schedule. Pre-tax contributions by employees and any employer contributions that we make to the 401(k) Plan and the income earned on those contributions
are generally not taxable to employees until withdrawn. Employer contributions that we make to the 401(k) Plan are generally deductible when made. Employee contributions are held in trust as required
by law. An employee's interest in his or her pre-tax deferrals, including, with the exception of certain discretionary contributions, any matching contributions made by us, is 100% vested
when contributed. An employee's interest in discretionary contributions generally vest over a three-year period. For the years ended December 31, 2007, 2008 and 2009, the Company matched
employee contributions under the 401(k) Plan in the amounts of approximately $0.3 million, $0.5 million and $0.7 million, respectively. No discretionary contributions were made
during 2007, 2008 or 2009.
Deferred Compensation Plan
We adopted our deferred compensation plan in 2009 to attract and retain key employees by providing eligible participants with an
opportunity to defer receipt of a portion of their compensation. The deferred compensation plan is administered under the supervision of the compensation committee. Eligible participants may defer
portions of their base salary, bonus, commissions and other cash and equity-based compensation approved by the compensation committee. All amounts deferred by a participant are 100% vested at all
times. We do not match any contributions made by participants to the deferred compensation plan but we do have the ability to make discretionary contributions to the deferred compensation plan which
may
be credited to any participant and which vest in accordance with a vesting schedule established by the compensation committee. Participants are entitled to receive the vested portions of their
deferred compensation and any earnings thereon, if any, upon certain events set forth in the plan. The compensation committee determines which investment options will be available under the plan, one
of which may be an investment in our stock, and the participant has the ability to allocate portions of their deferrals in accordance with the procedures outlined in the plan and subject to the plan's
limitations. The deferred compensation plan is not intended to meet the qualification requirements of Internal Revenue Code Section 401(a), but is intended to meet the requirements of Internal
Revenue Code Section 409A. The plan is unfunded for federal tax purposes and is intended to be an unfunded arrangement for eligible employees who are part of a select group of management or
highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. We did not make any discretionary contributions to, and none of our named executive
officers participated in, the deferred compensation plan in 2009.
118
Table of Contents
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect to outstanding equity awards at December 31, 2009 with respect
to the named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable |
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable |
|
Equity
Incentive
Plan
Awards;
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) |
|
Option
Exercise
Price
($) |
|
Option
Expiration
Date |
|
Daniel R. Henry |
|
|
354,324 |
|
|
1,062,969 |
(1) |
|
|
|
$ |
3.53 |
|
|
03/10/2018 |
|
|
|
|
|
|
|
|
|
|
3,043,231 |
(2) |
$ |
3.53 |
|
|
03/10/2018 |
|
Frank J. Cotroneo |
|
|
142,858 |
|
|
|
|
|
|
|
$ |
3.53 |
|
|
12/16/2010 |
|
Thomas A. Cregan |
|
|
12,500 |
|
|
37,500 |
(3) |
|
|
|
$ |
3.45 |
|
|
05/07/2018 |
|
|
|
|
12,500 |
|
|
37,500 |
(3) |
|
200,000 |
(4) |
$ |
3.45 |
|
|
07/09/2018 |
|
|
|
|
|
|
|
100,000 |
(5) |
|
|
|
$ |
3.47 |
|
|
02/04/2019 |
|
Anh Hatzopoulos |
|
|
25,000 |
|
|
75,000 |
(6) |
|
200,000 |
(4) |
$ |
3.45 |
|
|
05/07/2018 |
|
|
|
|
|
|
|
100,000 |
(5) |
|
|
|
$ |
3.47 |
|
|
02/04/2019 |
|
Christopher T. Brown |
|
|
244,791 |
|
|
5,209 |
(7) |
|
|
|
$ |
1.29 |
|
|
05/01/2017 |
|
|
|
|
51,562 |
|
|
23,438 |
(8) |
|
100,000 |
(4) |
$ |
3.53 |
|
|
03/10/2018 |
|
|
|
|
|
|
|
35,000 |
(5) |
|
|
|
$ |
3.47 |
|
|
02/04/2019 |
|
- (1)
- Vests
as to one third on each of February 5, 2010, 2011 and 2012, provided that upon consummation of this offering, vesting will be accelerated as to
one third and the remaining one third will vest on February 5, 2011.
- (2)
- These
options are earned on the basis of two conditions: a performance-based vesting condition and, to the extent the performance-based condition is met, a
time-based vesting condition in which one fourth vests each year following the date of grant if the executive remains continuously employed through the applicable vesting date. The
performance-based vesting condition is achieved in 10% increments upon the consummation of a change in control where our equity is valued at (A) $837 million, (B) $976 million,
(C) $1.116 billion, (D) $1.255 billion, (E) $1.395 billion, (F) $1.534 billion, (G) $1.674 billion or
(H) $1.813 billion, with the final 20% (and thus 100% in the aggregate) of the performance-based vesting condition being achieved if our equity is valued at $2.441 billion in
connection with a change in control (as defined above under " Employment Agreements, Severance Benefits and Change in Control
Provisions Severance Benefits and Change in Control Provisions Change in Control Payments.") In the event a change in
control has not occurred on or prior to the sixth anniversary of the date of grant, the option will become 20% vested on the sixth anniversary of the date of grant subject to continued employment
through such date.
- (3)
- Vests
as to one third on each of March 1, 2010, 2011 and 2012.
- (4)
- These
options are earned on the basis of two conditions: a performance-based vesting condition and, to the extent the performance-based condition is met, a
time-based vesting condition in which one fourth vests each year following the date of grant if the executive remains continuously employed through the applicable vesting date. The
performance-based
119
Table of Contents
vesting
condition is achieved upon one of the following events: a change in control (as defined in the 2004 Plan) occurs on or prior to December 31, 2011; a change in control occurs after
December 31, 2011 and certain equity value targets are met; if an initial public offering is consummated and the equity value target is achieved following the initial public offering; or if an
EBITDA hurdle of $85 million is achieved for the fiscal year ending December 31, 2011, or $85 million plus a cumulative increase of 10% per year, compounding annually, in any
subsequent fiscal year. In the event a change in control has not occurred on or prior to the sixth anniversary of the date of
grant, the option will become 100% vested on the sixth anniversary of the date of grant subject to continued employment through such date.
- (5)
- Vests
as to one quarter on each of February 5, 2010, 2011, 2012 and 2013.
- (6)
- Vests
as to one third on each of February 1, 2010, 2011 and 2012.
- (7)
- Vested
in full on January 15, 2010.
- (8)
- Vests
as to 18,750 shares on December 15, 2010 and the remaining 4,688 shares vest on February 15, 2011.
Option Exercises
None of our named executive officers exercised any stock option or restricted stock awards during the year ended December 31,
2009.
Pension Benefits
We do not have any plan that provides for payments or other benefits at, following, or in connection with, retirement.
Non-qualified Deferred Compensation
None of our named executive officers participated in a plan that provides for the deferral of compensation on a basis that is not
tax-qualified during 2009, and we did not have any such plan prior to 2009.
Compensation of Directors
Members of our board of directors who are not our employees and are not affiliated with Oak or JLL may receive compensation for
serving on our board of directors. Our objectives for director compensation are to remain competitive with the compensation paid to directors of comparable companies while adhering to corporate
governance best practices with respect to such compensation, and to reinforce our practice of encouraging stock ownership. Our non-employee director compensation
includes:
-
- an annual retainer of $25,000 plus $15,000 if such member serves as the chairman of a committee of the board of directors
or plus $65,000 if such member serves as chairman of the board of directors;
-
- an initial grant of 50,000 options to purchase common stock; and
-
- an annual grant of 25,000 options to purchase common stock.
120
Table of Contents
The
following table sets forth certain information with respect to our non-employee director compensation during the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned
or Paid in Cash
($) |
|
Option
Awards
($)(1) |
|
Total
($) |
|
Ann H. Lamont |
|
|
|
|
|
|
|
|
|
|
Daniel M. Schley |
|
|
40,000 |
|
|
54,250 |
|
|
94,250 |
|
Thomas McCullough |
|
|
40,000 |
|
|
54,250 |
|
|
94,250 |
|
Francisco Rodriguez |
|
|
|
|
|
|
|
|
|
|
Alexander Castaldi |
|
|
|
|
|
|
|
|
|
|
H. Eugene Lockhart |
|
|
180,000 |
(2) |
|
54,250 |
|
|
234,250 |
|
- (1)
- Mr. Schley,
Mr. McCullough and Mr. Lockhart each received a grant of 25,000 stock options on February 5, 2009, which vest in
three equal installments on February 5, 2010, 2011 and 2012. Pursuant to a consulting agreement entered into with Mr. Lockhart in January 2010, his options will continue to vest through
February 5, 2012. The grant date fair value of the option awards is calculated using the fair market value of our common stock on the date of grant, as determined by the board of directors.
- (2)
- Consists
of $90,000 in board fees paid to Mr. Lockhart, who served as the chairman of the board of directors and $90,000 paid to Mr. Lockhart
under a prior consulting agreement pursuant to which Mr. Lockhart provided certain advisory services to us. Mr. Lockhart resigned from the board of directors effective January 2010.
121
Table of Contents
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of shares of our common stock as of August 20,
2010 by:
-
- each of our directors;
-
- each of our named executive officers;
-
- all of our current executive officers and directors as a group;
-
- each person known by us to beneficially own more than 5% of our outstanding shares of common stock; and
-
- each selling stockholder.
The percentage of beneficial ownership for the following table is based on an aggregate of 85,179,718 shares of our common stock, including 10,509,197 shares of Class B common
stock, outstanding as of August 20, 2010. The table assumes that all Class A Common Stock will become shares of common stock effective upon consummation of this offering. The percentage
of beneficial ownership after the offering is based on shares of our common stock outstanding after this offering, including
the shares of common stock that we are
selling in this offering. The company and the selling stockholders have granted an option to the underwriters to purchase up to an aggregate of additional shares of our
common stock.
Beneficial
ownership is determined under the rules and regulations of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock
that the stockholder has a right to acquire within 60 days of August 20, 2010 through the exercise of any option or warrant. The percentage ownership of the outstanding shares of common
stock, however, is based on the assumption, expressly required by the rules and regulations of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported
has exercised options or warrants into shares of our common stock.
122
Table of Contents
Unless
otherwise indicated, the principal address of each of the stockholders below is c/o NetSpend Corporation, 701 Brazos Street, Austin, Texas 78701.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares beneficially
owned prior
to offering |
|
Shares being
offered hereby |
|
Shares beneficially
owned after offering |
|
Name of Beneficial Owner
|
|
Number |
|
Percent |
|
|
|
Number |
|
Percent |
|
Directors and executive officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel R. Henry(1) |
|
|
806,776 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Frank Cotroneo(2) |
|
|
142,857 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Thomas A. Cregan(3) |
|
|
188,235 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Anh Hatzopoulos(4) |
|
|
93,800 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Christopher T. Brown(5) |
|
|
345,790 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Francisco Rodriguez(6) |
|
|
27,415,297 |
|
|
32.2 |
% |
|
|
|
|
|
|
|
|
|
Thomas McCullough(7) |
|
|
42,000 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Ann H. Lamont(8) |
|
|
39,597,723 |
|
|
46.5 |
% |
|
|
|
|
|
|
|
|
|
Daniel M. Schley(9) |
|
|
242,000 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Alexander Castaldi(10) |
|
|
27,415,297 |
|
|
32.2 |
% |
|
|
|
|
|
|
|
|
|
Andrew Adams(11) |
|
|
39,597,723 |
|
|
46.5 |
% |
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (14 persons) |
|
|
69,358,342 |
|
|
80.0 |
% |
|
|
|
|
|
|
|
|
|
Five percent stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oak Investment Partners(12) |
|
|
39,597,723 |
|
|
46.5 |
% |
|
|
|
|
|
|
|
|
|
JLL Partners(13) |
|
|
27,415,297 |
|
|
32.2 |
% |
|
|
|
|
|
|
|
|
|
Millennium Finance Co. VII, LLC(14) |
|
|
4,762,649 |
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
Other selling stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Represents
less than one percent.
- (1)
- Includes
50,000 shares of Class A Common Stock, 708,648 shares of Class A Common Stock issuable upon exercise of options granted under our
2004 Plan, and 48,128 shares of restricted Class A Common Stock issued under our 2004 Plan.
- (2)
- Includes
142,857 shares of Class A Common Stock issuable upon exercise of options granted under our 2004 Plan. Mr. Cotroneo resigned as our
Chief Financial Officer effective December 2009.
- (3)
- Includes
100,000 shares of Class A Common Stock, 75,000 shares of Class A Common Stock issuable upon exercise of options granted under our
2004 Plan, and 13,235 shares of restricted Class A Common Stock issued under our 2004 Plan.
- (4)
- Includes
75,000 shares of Class A Common Stock issuable upon exercise of options granted under our 2004 Plan and 18,800 shares of restricted
Class A Common Stock issued under our 2004 Plan.
- (5)
- Includes
325,937 shares of Class A Common Stock issuable upon exercise of options granted under our 2004 Plan and 19,853 shares of restricted
Class A Common Stock issued under our 2004 Plan.
- (6)
- Includes
16,906,100 shares of Class A Common Stock and 10,509,197 shares of Class B Common Stock held by Skylight Holdings I,
LLC, which is controlled by JLL Partners Fund IV, L.P. and JLL Partners V, L.P. Mr. Rodriguez is an affiliate of the JLL entities and may be deemed to be the beneficial owner of
the shares held by Skylight Holdings I, LLC. Mr. Rodriguez disclaims beneficial ownership of the shares held by Skylight Holdings I, LLC. The shares to be sold by Skylight
Holdings I, LLC in this offering are all shares of Class B common stock that will automatically convert into shares of common stock upon sale in this offering. The shares of
Class B common stock held by Skylight Holdings I, LLC after this offering
123
Table of Contents
will
continue to be non-voting shares of Class B common stock until converted into common stock in accordance with the terms of our certificate of incorporation. See "Description of
Capital Stock."
- (7)
- Includes
42,000 shares of Class A Common Stock issuable upon exercise of options granted under our 2004 Plan.
- (8)
- Includes
38,972,079 shares of Class A Common Stock held by Oak Investment Partners X, LP and 625,644 shares of Class A Common Stock
held by Oak X Affiliates Fund, LP. Ms. Lamont is a managing member of each of these entities and may be deemed to be the beneficial owner of the shares held by each of these entities.
Ms. Lamont disclaims beneficial ownership of the shares held by Oak Investment Partners X, LP and Oak X Affiliates Fund, LP.
- (9)
- Includes
200,000 shares of Class A Common Stock and 42,000 shares of Class A Common Stock issuable upon exercise of options granted
under our 2004 Plan.
- (10)
- Includes
16,906,100 shares of Class A Common Stock and 10,509,197 shares of Class B Common Stock held by Skylight Holdings I, LLC,
which is controlled by JLL Partners Fund IV, L.P. and JLL Partners V, L.P. Mr. Castaldi is an affiliate of the JLL entities and may be deemed to be the beneficial owner of the
shares held by Skylight Holdings I, LLC. Mr. Castaldi disclaims beneficial ownership of the shares held by Skylight Holdings I, LLC. The shares to be sold by Skylight Holdings
I, LLC in this offering are all shares of Class B common stock that will automatically convert into shares of common stock upon sale in this offering. The shares of Class B common
stock held by Skylight Holdings I, LLC after this offering will continue to be non-voting shares of Class B common stock until converted into common stock in accordance with
the terms of our certificate of incorporation. See "Description of Capital Stock."
- (11)
- Includes
38,972,079 shares of Class A Common Stock held by Oak Investment Partners X, LP and 625,644 shares of Class A Common Stock
held by Oak X Affiliates Fund, LP. Mr. Adams is an officer of Oak Management Corporation, which acts as the investment advisor to each of the Oak entities, and may be deemed to be the
beneficial owner of the shares held by each of these entities. Mr. Adams disclaims beneficial ownership of the shares held by Oak Investment Partners X, LP and Oak X Affiliates
Fund, LP.
- (12)
- The
principal address of Oak Investment Partners is One Gersham Island, Westport, CT 06880. Includes 38,972,079 shares of Class A Common Stock held
by Oak Investment Partners X, LP and 625,644 shares of Class A Common Stock held by Oak X Affiliates Fund, LP.
- (13)
- The
principal address of JLL Partners is 450 Lexington Avenue, 31st Floor, New York, NY 10017. Includes 16,906,100 shares of Class A Common
Stock and 10,509,197 shares of Class B Common Stock held by Skylight Holdings I, LLC, which is controlled by JLL Partners Fund IV, L.P. and JLL Partners V, L.P. The shares
to be sold by Skylight Holdings I, LLC in this offering are all shares of Class B common stock that will automatically convert into shares of common stock upon sale in this offering. The
shares of Class B common stock held by Skylight Holdings I, LLC after this offering will continue to be non-voting shares of Class B common stock until converted into
common stock in accordance with the terms of our certificate of incorporation. See "Description of Capital Stock."
- (14)
- The
principal address of Millennium Finance Co. VII, LLC is 747 Third Avenue, 38th Floor, New York, NY 10017. Includes 2,722,393
shares of Class A Common Stock held by the Roy Sosa 2008 Retained Annuity Trust No. 1 and 2,040,256 shares of Class A Common Stock held by the Bertrand Sosa Retained Annuity Trust
No. 1. In 2009, the trusts pledged the shares of Class A Common Stock held by them as collateral to secure a loan made to the trusts by Millennium Finance Co. VII, LLC and
granted a proxy to vote all such shares to Millennium Finance Co. VII, LLC. Accordingly, Millennium Finance Co. VII, LLC may be deemed to be the beneficial owner of the
shares held by the Roy Sosa 2008 Retained Annuity Trust No. 1 and the Bertrand Sosa Retained Annuity Trust No. 1.
124
Table of Contents
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Other than compensation agreements and other arrangements which are described in the "Executive Compensation" section of this
prospectus and the transactions described below, since January 1, 2007, there has not been and there is not currently proposed, any transaction or series of similar transactions to which we
were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of five percent or more of any class of our capital stock or
any member of their immediate family had or will have a direct or indirect material interest.
We
believe that we have executed all of the transactions set forth below on terms no less favorable to us than we could have obtained from unaffiliated third parties. All of the
transactions set forth below were approved or ratified by a majority of our board of directors. In connection with this offering, we plan to adopt a written policy that requires all future
transactions between us and any related persons (as defined in Item 404 of Regulation S-K) or their affiliates, in which the amount involved is equal to or greater than $120,000, be
approved in advance by our audit committee.
Transactions with Our Executive Officers, Directors and 5% Stockholders
In 2008, we 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 the suit to add Futeh Kao and Mattrix Group, L.L.C, or, collectively, the
defendants. In this lawsuit, we alleged breach of fiduciary duties, breach of contractual and common-law duties of confidentiality, breach of contractual non-solicitation,
misappropriation of our trade secrets and our confidential and proprietary information, breach of noncompetition agreements, and engagement in a civil conspiracy. In 2009, we entered into a settlement
agreement with the defendants, pursuant to which, among other things, we agreed to dismiss the lawsuit and release the defendants from certain claims. In connection with the settlement agreement,
Rogelio Sosa, who was our former founder, executive officer and director, transferred and assigned to us 200,000 shares of our Class A Common Stock. At the time of the transaction,
Mr. Sosa beneficially owned in excess of five percent of our outstanding Class A Common Stock. The value of the shares assigned to us by Mr. Sosa was approximately $600,000.
Prior
to our acquisition of Skylight on July 15, 2008, Skylight was indirectly owned by JLL Partners Fund IV, LP and JLL Partners Fund V, LP, or the JLL Funds,
which also own approximately 97% of ACE Cash Express, or ACE, one of our largest distributors. As a result of the Skylight transaction, the JLL Funds became the beneficial owner of more than five
percent of our outstanding Class A Common Stock and Class B Common Stock. In addition, two of our directors, Francisco Rodriguez and Alexander Castaldi, are managing directors of JLL
Partners, Inc., an affiliate of the JLL Funds, and limited partners of the general partnerships that control the JLL Funds. For the years ended December 31, 2007, 2008, and 2009 and the six
months ended June 30, 2010, we incurred expenses from transactions with ACE of $11.1 million, $17.1 million, $23.0 million and $15.6 million, respectively. For the
years ended December 31, 2007, 2008, and 2009 and the six months ended June 30, 2010, we recorded revenues from transactions with ACE of $1.4 million, $1.6 million,
$2.9 million and $2.3 million, respectively. As of June 30, 2010, approximately $2.3 million was payable to ACE.
Oak
Investment Partners X, LP and Oak X Affiliates Fund, LP, or the Oak Funds, own in excess of 10% of Sutherland Global Services, Inc., or Sutherland, one of our external
customer service providers. Oak is a beneficial owner of more than five percent of our outstanding Class A Common Stock. In addition, one of our directors, Ann Lamont, is a managing member of
the Oak Funds, and another one of our directors, Andrew Adams, is an officer of Oak Management Corporation, an affiliate of the Oak Funds. For the years ended December 31, 2007, 2008 and 2009
and the six
125
Table of Contents
months
ended June 30, 2010, we incurred expenses from transactions with Sutherland of $4.5 million, $7.3 million, $5.9 million and $3.5 million, respectively. As of
June 30, 2010, approximately $1.3 million was payable to Sutherland.
During
each of the years ended December 31, 2008 and 2009 and the six months ended June 30, 2010, we reimbursed our current CEO, Mr. Henry, for expenses incurred by
Mr. Henry in connection with his use of an airplane owned by Birardi Investments, LLC, a company that is 50% owned by Mr. Henry. Mr. Henry used the airplane for business
purposes. For the years ended December 31, 2008 and 2009 and the six months ended June 30, 2010, we incurred expenses of approximately $0.2 million, $0.2 million and
$0.2 million, respectively, in connection with Mr. Henry's use of the airplane.
In
July 2007, we issued and sold 50,000 shares of Class A Common Stock at $3.24 per share to Mr. Henry, who was at the time of such purchase a member of our board of
directors, in exchange for cash in an aggregate amount equal to $162,000.
126
Table of Contents
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the total amount of our authorized capital stock will consist of 240,000,000 shares of common
stock, par value $0.001 per share, of which, 225,000,000 shares will be designated common stock, par value $0.001 per share, and 15,000,000 shares will be designated Class B common stock, par
value $0.001 per share. The discussion herein describes our capital stock, certificate of incorporation and bylaws as anticipated to be in effect upon the completion of this offering. We currently
have two classes of common stock Class A common stock and Class B common stock. Upon consummation of this offering, our certificate of incorporation will be amended to
reflect the reclassification of our Class A Common Stock into common stock. All shares of our Class B common stock will automatically convert into shares of common stock on a
one-for-one basis upon the earlier of (1) approval by certain state money transmitter regulators of the acquisition by Skylight Holdings, JLL Partners and any of
JLL Partners' affiliates of 25% or more of the direct or indirect voting control of our subsidiary, NetSpend Corporation, and (2) the date on which Skylight Holdings, JLL Partners or any
of JLL Partners' affiliates cease to own or control 25% or more of our voting securities (assuming conversion of the Class B common stock into common stock). In addition, each share of
Class B common stock will automatically convert into one share of common stock upon the sale, disposition or transfer to a person other than Skylight Holdings, JLL Partners or any of JLL
Partners' affiliates. The following summary of certain provisions of our capital stock describes certain material provisions of, but does not purport to be complete and is subject to and qualified in
its entirety by, our certificate of incorporation and bylaws to be in effect at the completion of this
offering, which are filed as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of the Delaware General Corporation Law.
Common Stock
As of June 30, 2010, assuming the reclassification of all outstanding shares of our Class A Common Stock into shares of
our common stock, which will occur upon the completion of this offering, there were 84,411,040 shares of our common stock, which includes 10,509,197 shares of Class B common stock,
outstanding that were held of record by 202 stockholders. Holders of our common stock will be entitled to one vote for each share of common stock held of record for the election of directors and on
all matters submitted to a vote of stockholders. Holders of our Class B common stock do not have the right to vote, unless otherwise required by law. There will be no cumulative voting rights.
Holders of our common stock and Class B common stock will be entitled to receive dividends ratably, if any, as may be declared by our board of directors out of legally available funds, subject
to any preferential dividend rights of any preferred stock then outstanding. Upon our dissolution, liquidation or winding up, holders of our common stock and Class B common stock will be
entitled to share ratably in our net assets legally available after the payment of all our debts and other liabilities, subject to the preferential rights of any preferred stock then outstanding.
Holders of our common stock and Class B common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock
and Class B common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Except as described below in "Certain Anti-Takeover Provisions of Our Certificate of Incorporation and Bylaws", a majority vote of common stockholders is generally required to take action
under our certificate of incorporation and bylaws.
Preferred Stock
No shares of preferred stock are currently outstanding. Upon the completion of this offering, our board of directors will be
authorized, without action by the stockholders, to designate and issue
127
Table of Contents
up to an aggregate of 10,000,000 shares of preferred stock in one or more series. Our board of directors can fix the rights, preferences and privileges of the shares of each series and any of its
qualifications, limitations or restrictions. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other
rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in
connection with possible future financings and acquisitions and other corporate purposes could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of
our company and might harm the market price of our common stock. Our board of directors will make any determination to issue such shares based on its judgment as to our company's best interests and
the best interests of our stockholders. We have no current plans to issue any shares of preferred stock.
Warrants
Upon the completion of this offering, we will have no outstanding warrants to purchase shares of our capital stock.
Registration Rights
We have provided to certain of our stockholders and optionholders "demand" registration rights, "piggyback" registration rights
(meaning holders may request that their shares be covered by a registration statement that we are otherwise filing) and S-3 registration rights. Following consummation of this offering, these
registration rights will be contained in a registration rights agreement, among us, NetSpend Corporation and certain of our stockholders and optionholders. All of these registration rights are subject
to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a requested registration
within 180 days following the effective date of any offering of our securities, including this offering. These registration rights with respect to an individual holder will expire when such
holder is able to sell all of its shares pursuant to Rule 144 of the Securities Act in any three-month period.
Demand Registration Rights
At any time after 180 days after the completion of this offering, the holders
of shares of common stock are
entitled to certain demand registration rights, pursuant to which they may require us to file one or more registration statements at our expense. We may postpone the filing of a registration statement
for up to 120 days in any 12-month period if our board of directors determines in good faith that the filing would be materially detrimental to us.
Piggyback Registration Rights
If at any time after the completion of this offering we propose to register any of our securities, the holders
of
shares of common stock are entitled to include shares of their common stock in such registration, subject to certain exceptions. We are required to use our best efforts to effect any such
registration.
S-3 Registration Rights
The holders of shares of common stock are entitled to demand
registration rights pursuant to which they may require us
to file one or more registration statements on Form S-3 with respect to their shares of common stock, provided that we are eligible to file a registration statement on Form S-3 and such
stockholder holds in excess of 450,000 shares of common stock, and we are required to use our best efforts to effect any such registration. We may postpone the
128
Table of Contents
filing
of a registration statement for up to 90 days in any 12-month period if our board of directors determines in good faith that the filing would be materially detrimental to us.
We
will pay all registration expenses, other than underwriting discounts and commissions, and the reasonable fees and expenses of not more than one independent counsel for the
stockholders in connection with any demand, piggyback or S-3 registration. The stockholders agreement contains customary indemnification provisions, pursuant to which we are obligated to indemnify the
selling stockholders in the event of material misstatements or omissions in the registration statement attributable to us.
Certain Anti-Takeover Provisions of Our Certificate of Incorporation and Bylaws
Upon the completion of this offering, our certificate of incorporation and bylaws will include a number of provisions that may have
the effect of delaying, deferring or
preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors
rather than pursue non-negotiated takeover attempts. These provisions include the items described below.
Board Composition and Filling Vacancies
In accordance with our certificate of incorporation, our board of directors will be divided into three classes serving staggered
three-year terms, with one class being elected each year. As a result, approximately one-third of the board of directors is elected each year. Our certificate of incorporation
also provides that directors may be removed with or without cause by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore,
any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board of directors, may only be filled by the affirmative vote of a majority
of our directors then in office even if less than a quorum. These provisions may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by
filling the vacancies created by such removal with its own nominees.
No Written Consent of Stockholders
Our certificate of incorporation will provide that all stockholder actions are required to be taken by a vote of the stockholders at
an annual or special meeting and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and
would prevent the amendment of our bylaws or removal of directors by our stockholders without holding a meeting of stockholders. Any amendment to this provision of our certification of incorporation
must be approved by not less than 80% of the outstanding shares entitled to vote on the amendment.
Meetings of Stockholders
Our certificate of incorporation and bylaws will provide that only a majority of the members of our board of directors then in office
may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our bylaws will
limit the business
that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.
Advance Notice Requirements
Our bylaws will establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for
election as directors or new business to be brought before meetings of our stockholders. These procedures will provide that notice of stockholder
129
Table of Contents
proposals
must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal
executive offices not less than 90 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in the bylaws.
Amendment to Certificate of Incorporation and Bylaws
As required by the Delaware General Corporation Law, any amendment of our certificate of incorporation must first be adopted by a
majority of our board of directors and must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class
entitled to vote thereon as a class, except that the amendment of the provisions relating to board composition, limitation of liability and the amendment of our certificate of incorporation must be
approved by not less than 75% of the outstanding shares entitled to vote on the amendment and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class and the
amendment of the provisions relating to stockholder action by written consent must be approved by not less than 80% of the outstanding shares entitled to vote on the amendment. Our bylaws may be
amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the affirmative vote of at least 75% of
the outstanding shares entitled to vote on the amendment, or, if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the
outstanding shares entitled to vote on the amendment, in each case voting together as a single class.
Undesignated Preferred Stock
Our certificate of incorporation provides for 10,000,000 authorized shares of preferred stock. The existence of authorized but
unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our
board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights
of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and
preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of
shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in
control of us.
Section 203 of the Delaware General Corporation Law
Upon the completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation
Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a three-year period
following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes, among other things, a
merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates,
owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation's voting stock. Under Section 203, a business
130
Table of Contents
combination
between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:
-
- before the stockholder became interested, the board of directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder;
-
- upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares
owned by persons who are directors and also officers and employee stock plans, in some instances; or
-
- at or after the time the stockholder became interested, the business combination was approved by the board of directors of
the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
Section 203
defines a business combination to include:
-
- any merger or consolidation involving the corporation and the interested stockholder;
-
- any sale, lease, exchange, mortgage, pledge, transfer or other disposition involving the interested stockholder of 10% or
more of the assets of the corporation;
-
- subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
-
- subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share
of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and
-
- the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
Limitation of Liability and Indemnification of Directors
Our certificate of incorporation will include provisions that limit the personal liability of our officers and directors for monetary
damages for breach of their fiduciary duties as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law. The Delaware General Corporation Law does not
permit a provision in a corporation's certificate of incorporation that would eliminate such liability (i) for any breach of their duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for any unlawful payment of a dividend or unlawful stock repurchase or
redemption, as provided in Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.
While
these provisions provide directors with protection from awards for monetary damages for breaches of their duty of care, they do not eliminate such duty. Accordingly, these
provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. The provisions described above
apply to an officer of a corporation only if he or she is a director of such corporation and is acting in his or her capacity as director, and do not apply to the officers of the corporation who are
not directors.
Our
bylaws will provide that, to the fullest extent permitted by the Delaware General Corporation Law, we may indemnify our directors, officers and employees and agents. In addition, we
intend to enter into indemnification agreements with each of our executive officers and directors
131
Table of Contents
pursuant
to which we will agree to indemnify each such executive officer and director to the fullest extent permitted by the Delaware General Corporation Law. These agreements, among other things,
will provide for indemnification of our directors for expenses, judgments, fines and settlement amounts incurred by any such person in any action or proceeding arising out of such person's services as
an officer or director. We believe these provisions and agreements are necessary to attract and retain qualified persons as executive officers and directors. At present, there is no pending litigation
or proceeding involving any of our directors or executive officers in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in
a claim for such indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BNY Mellon Shareholder Services.
NASDAQ Listing
We have applied to list our common stock on the Nasdaq Stock Market, LLC under the symbol "NTSP".
132
Table of Contents
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our common stock and a liquid trading market for our common stock
may not develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options or warrants in the public market
after this offering, or the anticipation of those sales, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity
securities. We have applied to have our common stock listed on the Nasdaq Stock Market, LLC under the symbol "NTSP".
Upon
the completion of this offering, we will have shares of common stock outstanding, after giving effect to the issuance
of shares of common stock
offered in this offering. The remaining shares of common stock held by existing stockholders were issued and sold by us in reliance on
exemptions from the registration requirements of
the Securities Act. Of these shares, shares will be subject to "lock-up" agreements described below on the effective date of this offering.
Upon expiration of the
lock-up agreements, 180 days after the effective date of this offering, shares will become eligible for sale, subject in most cases to the
limitations of
Rule 144 under the Securities Act. In addition, holders of stock options and warrants could exercise such securities and sell certain of the shares issued upon exercise as described below.
|
|
|
|
|
Days after date of this prospectus
|
|
Shares eligible
for sale |
|
Comments |
Date of this prospectus |
|
|
|
Shares sold in this offering |
Date of this prospectus |
|
|
|
Freely tradable shares saleable under Rules 144 and 701 that are not subject to lock-up |
90 days |
|
|
|
Shares saleable under Rules 144 and 701 that are not subject to lock-up |
180 days |
|
|
|
Lock-up released; shares saleable under Rules 144 and 701 |
Thereafter |
|
|
|
Restricted securities held for one year or less |
Rule 144
In general and subject to the lock-up agreements described below, under Rule 144, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our common stock for at least six months and who was not one of our affiliates at any time during the three months preceding
a sale would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is available. A person who has beneficially owned shares of our common
stock for at least six months and who was one of our affiliates at any time during the three months preceding a sale would be
entitled to sell within any three-month period only a number of shares of common stock that does not exceed the greater of:
-
- one percent of the number of shares of our common stock then outstanding, which will equal
approximately
shares immediately after this offering; or
-
- the average weekly trading volume in our common stock on the Nasdaq Stock Market during the four calendar weeks preceding
the date of filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144 with respect to the sale.
133
Table of Contents
In
general and subject to the lock-up agreements described below, under Rule 144, beginning 90 days after the date of this prospectus, a person who has
beneficially owned shares of our common stock for at least one year and who was not one of our affiliates during the three months preceding a sale would be entitled to sell an unlimited number of
shares of our common stock without regard to whether public information about us is available. A person who was an affiliate during the three months preceding a sale would remain subject to the volume
restrictions described above.
Sales
under Rule 144 by our affiliates are also subject to certain manner of sale and notice requirements and the availability of current public information about us.
Rule 701
In general and subject to the lock-up agreements described below, under Rule 701 under the Securities Act certain
of our employees, consultants, directors, officers and advisors who purchased shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date
of this offering are eligible to resell such shares 90 days after the effective date of this offering under Rule 144 without being required to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144.
Lock-Up Agreements
We expect that the holders of substantially all of our currently outstanding capital stock will agree that, without the prior written
consent of Goldman, Sachs & Co., they will not, during the period ending 180 days after the date of this prospectus, subject to exceptions specified in the lock-up
agreements, offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant
to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock or enter
into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock. Further, these holders have agreed that, during this period,
they will not make any demand for, or exercise any right with respect to, the registration of our common stock or any security convertible into or exercisable or exchangeable for our common stock. The
180-day lock-up period may be extended under specified circumstances. The lock-up restrictions, specified exceptions and the circumstances under which the 180-day
lock-up period may be extended are described in more detail under "Underwriting".
Registration Rights
Subject to the lock-up agreements described above, upon the completion of this offering, the holders
of
shares of our common stock will have certain rights with respect to the registration of such shares under the Securities Act. After registration pursuant to these rights, these shares will become
freely tradable without restriction under the Securities Act. See "Description of Capital Stock Registration Rights".
Stock Options and Warrants
As of June 30, 2010, assuming the conversion of all options to purchase shares of our Class A Common Stock into options
to purchase shares of our common stock, which will occur upon the completion of this offering, we had outstanding options to purchase 11,168,708 shares of our common stock, of which options to
purchase 3,275,568 shares of our common stock were vested as of June 30, 2010. As of June 30, 2010, assuming the conversion of all warrants to purchase shares of our
Class A Common Stock into warrants to purchase shares of our common
134
Table of Contents
stock,
we had warrants to purchase 722,597 shares of our common stock, all of which, to the extent not exercised, will terminate upon consummation of this offering. Immediately after the
completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance
under our 2004 Plan. See "Executive Compensation Employee Benefit Plans Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restriced
Stock Plan" for additional information about this plan. Accordingly, shares of our common stock registered under the registration statements will be available for sale in the open market, subject to
Rule 144 volume limitations applicable to affiliates and subject to any vesting restrictions and lock-up agreements applicable to these shares.
135
Table of Contents
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following discussion summarizes the material U.S. federal income and estate tax consequences for non-U.S. holders (as
defined below) of holding and disposing of our common stock. This discussion is based upon existing U.S. tax law, including legislation, regulations, administrative rulings and court decisions, as in
effect on the date of this prospectus, all of which are subject to change, possibly with retroactive effect.
For
purposes of this discussion:
-
- a "non-U.S. holder" is any holder of our common stock that is other than (1) an individual citizen or
resident of the United States, (2) a corporation or any other entity taxable as a corporation created or organized in or under the laws of the United States or of a state of the United States
or the District of Columbia, (3) a trust (i) in respect of which a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust or (ii) that was in existence on August 20, 1996 and validly elected to continue to be treated as a domestic trust,
(4) an estate that is subject to U.S. tax on its worldwide income from all sources or (5) a partnership or any other entity taxable as a partnership; and
-
- the term "U.S. tax" means U.S. federal income tax under the Internal Revenue Code.
The
discussion assumes that holders hold our common stock as capital assets. This summary does not address the alternative minimum tax consequences, any U.S. state or local tax
consequences, or any foreign tax consequences of the purchase, ownership and disposition of our common stock. Moreover, this summary does not address all aspects of U.S. federal income and estate tax
consequences that may be applicable to holders in light of their particular circumstances, or to holders subject to special treatment under U.S. federal income or estate tax law, such
as:
-
- real estate investment trusts;
-
- partnerships or other pass-through entities and investors in such entities;
-
- tax-exempt organizations;
-
- financial institutions, insurance companies and broker-dealers;
-
- holders who hold our common stock as part of a hedge, straddle, wash sale, synthetic security, conversion transaction or
other integrated investment comprised of our common stock and one or more other investments;
-
- mutual funds;
-
- traders in securities who elect to apply a mark-to-market method of accounting;
-
- holders who acquired our common stock in compensatory transactions;
-
- holders who are subject to the alternative minimum tax; or
-
- holders who are or have previously been engaged in the conduct of a trade or business in the U.S. or who have ceased to be
U.S. citizens or to be taxed as resident aliens.
If
a partnership (or any other entity or arrangement treated as a partnership for U.S. tax purposes) holds our common stock, the tax treatment of a partner in such partnership generally
will depend on the status of the partner and the activities of the partnership. Such a partner should consult its own tax advisors with respect to the tax consequences of being a partner in a
partnership that purchases, owns, or disposes of our common stock.
136
Table of Contents
This summary is not a substitute for an individual analysis of the tax consequences of holding or disposing of our common stock. Investors considering the
purchase of our common stock
are urged to consult a tax advisor as to the tax consequences of holding or disposing of our common stock, including any consequences arising from their particular facts and circumstances, any federal
estate or gift tax consequences and any tax consequences arising under state, local or foreign law.
Distributions on Common Stock
We do not expect to pay dividends in the foreseeable future. However, if we do pay a dividend on our common stock, such distribution
to a non-U.S. holder will be treated for U.S. tax purposes (1) first, as a dividend to the extent of our current or accumulated earnings and profits, as determined under general
U.S. tax principles, (2) second, as a non-taxable recovery of such holder's tax basis in that common stock, which causes a reduction in such tax basis to the extent thereof (thereby
increasing the amount of gain, or decreasing the amount of loss, to be recognized by the holder on a subsequent disposition of our common stock), and (3) finally, as gain realized in respect of
such common stock.
Dividends
paid to a non-U.S. holder will be subject to withholding of U.S. tax at a 30% rate, or if a tax treaty applies, a lower rate specified by the treaty, unless the
dividends are effectively connected with the non-U.S. holder's conduct of a trade or business in the United States (and, if an income tax treaty applies, are attributable to a permanent
establishment of the non-U.S. holder in the United States). Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income
tax treaty. Dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business in the United States (and, if an income tax treaty applies, are attributable to
a permanent establishment of the non-U.S. holder in the United States), are taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons. In that
case, we will not have to withhold U.S. tax if the non-U.S. holder complies with applicable certification and disclosure requirements by furnishing us with a properly completed and
executed Internal Revenue Service, or IRS, Form W-8ECI. In addition, a "branch profits tax" may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on
dividends received by a foreign corporation that are effectively connected with its conduct of a trade or business in the United States.
Under
applicable U.S. Treasury regulations, a non-U.S. holder (including, in the case of certain non-U.S. holders that are tax transparent entities, such as
partnerships, the owner or owners of these entities) will generally be required to satisfy certain certification requirements as set forth on IRS Form W-8BEN (or other applicable
form) in order to claim a reduced rate of withholding pursuant to an applicable income tax treaty. A non-U.S. holder that is eligible for a reduced rate of withholding under an income tax
treaty may obtain a refund or credit of any excess amount withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. holders should consult their tax advisors
regarding their entitlement to benefits under an income tax treaty and the manner of claiming the benefits of such treaty.
Sales or Dispositions of Common Stock
A non-U.S. holder generally will not be subject to U.S. tax on gain recognized on a disposition of our common stock
unless:
-
- the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United
States (and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States); in these cases, the gain will be taxed
on a net income basis at the rates and in the manner applicable to U.S.
137
Table of Contents
Generally,
a corporation is a United States real property holding corporation if the fair market value of its United States real property interests equals or exceeds 50% of the sum of
the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. The tax relating to stock in a United States real property holding
corporation generally will not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock,
provided that our common stock was regularly traded on an established securities market. We believe that we currently are not, and do not expect to become, a United States real property holding
corporation for U.S. tax purposes.
Withholdable Payments to Foreign Financial Entities and Other Foreign Entities
Under recently enacted legislation, a 30% withholding tax would be imposed on certain payments that are made after December 31,
2012 to "foreign financial institutions" and certain other non-U.S. entities. The legislation generally would impose the withholding tax on dividends on, or gross proceeds from the sale or
other disposition of, our common stock paid to a foreign financial institution or to a foreign non-financial entity, unless (i) in the case of a foreign financial institution, an
agreement is in effect between the foreign financial institution and the U.S. Treasury, under which the foreign financial institution agrees to undertake certain diligence and reporting obligations,
or the foreign financial institution satisfies other requirements prescribed by the U.S. Treasury, or (ii) in the case of a foreign non-financial entity, the foreign
non-financial entity either certifies that it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner.
Information Reporting and Backup Withholding
Generally, we must report annually to the IRS and to you the amount of dividends paid to you, your name and address, and the amount,
if any, of tax withheld. Copies of the information returns reporting those dividends and amounts withheld may also be made available to the tax authorities in the country in which you reside under the
provisions of any applicable tax treaty or exchange of information agreement. A non-U.S. holder will be exempt from backup withholding tax on dividends it receives from us if such
non-U.S. holder properly provides a Form W-8BEN certifying that such stockholder is a non-U.S. holder or otherwise meets documentary evidence requirements
for establishing that such stockholder is a non-U.S. holder or otherwise qualifies for an exemption.
Information
reporting and backup withholding generally will not apply if a non-U.S. holder sells our common stock outside the United States through a non-U.S.
office of a non-U.S. broker and the sales proceeds are paid to such stockholder outside the United States. However, U.S. information reporting will generally apply to a payment of sale
proceeds, even if that payment is made outside the United States, if a non-U.S. holder sells our common stock through a non-U.S. office of a broker that is a U.S. person for
U.S. tax purposes or has certain specified relationships or connections with the United States unless the broker has documentary evidence in its files that the non-U.S. holder is a
non-U.S. person and certain other conditions are met, or the non-U.S. holder otherwise
138
Table of Contents
establishes
an exemption. In such circumstances, backup withholding will not apply unless the broker has actual knowledge that the seller is not a non-U.S. holder.
If
a non-U.S. holder receives payments of the proceeds of a sale of our common stock to or through a U.S. office of a broker, the payment is subject to both U.S. backup
withholding and information reporting unless such non-U.S. holder properly provides a Form W-8BEN certifying that such stockholder is a non-U.S. person or
otherwise establishes an exemption.
A
non-U.S. holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed such stockholder's U.S. tax liability by timely filing
a properly completed claim for refund with the IRS.
U.S. Federal Estate Tax
Shares of our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as
defined for United States federal estate tax purposes) at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or
other treaty provides otherwise, and therefore may be subject to U.S. federal estate tax.
Investors considering the purchase of our common stock are urged to consult their own tax advisors as to the specific tax consequences of holding our common
stock, including tax return reporting requirements, the applicability and effect of U.S. federal, state, local and other applicable tax laws, and the effect of any proposed changes in the tax
laws.
139
Table of Contents
UNDERWRITING
The company, the selling stockholders and the underwriters named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated are joint representatives of the underwriters.
|
|
|
Underwriters
|
|
Number of Shares |
Goldman, Sachs & Co. |
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated |
|
|
William Blair & Company, L.L.C. |
|
|
SunTrust Robinson Humphrey, Inc. |
|
|
Wells Fargo Securities, LLC |
|
|
Duncan-Williams, Inc. |
|
|
Knight Capital Markets LLC |
|
|
Houlihan Lokey Capital, Inc. |
|
|
|
|
|
Total |
|
|
|
|
|
The
underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this
option is exercised.
If
the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional shares from the
company and the selling stockholders. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The
following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by the company and the selling stockholders. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to purchase an additional shares.
|
|
|
|
|
|
|
|
Paid by the Company
|
|
No Exercise |
|
Full Exercise |
|
Per Share |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Paid by the Selling Stockholders
|
|
No Exercise |
|
Full Exercise |
|
Per Share |
|
$ |
|
|
$ |
|
|
Total |
|
$ |
|
|
$ |
|
|
Shares
sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the
underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial
public offering
price, the representatives may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the
underwriters' right to reject any order in whole or in part.
140
Table of Contents
The
company and its officers, directors, and holders of substantially all of the company's common stock, including the selling stockholders, have agreed with the underwriters, subject
to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. This agreement does not apply to any existing
employee benefit plans. See "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions.
The
180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day
restricted period the company issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the 180-day restricted period, the company
announces that it will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding
paragraph
will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release of the announcement of the material news or material event.
Prior
to this offering, there has been no public market for the shares. The initial public offering price will be negotiated among the company and the representatives. Among the factors
to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be the company's historical performance, estimates of the business
potential and earnings prospects of the company, an assessment of the company's management and the consideration of the above factors in relation to market valuation of companies in related
businesses.
The
company has applied to list the common stock on the Nasdaq Stock Market, LLC under the symbol "NTSP".
A
prospectus in electronic format may be made available on the web sites maintained by one or more underwriters participating in this offering. The representatives may agree to allocate
a portion of the shares to underwriters for their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions
on the same basis as other allocations.
In
connection with this offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the company and the selling stockholders in this offering. The underwriters may
close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional
shares pursuant to the option granted to them. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that
could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to
the completion of this offering.
141
Table of Contents
The
underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the
representatives has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Purchases
to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a
decline in the market price of the company's stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions
may be effected on the Nasdaq Stock Market, in the over-the-counter market or otherwise.
In
relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and
agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
- (a)
- to
legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is
solely to invest in securities;
- (b)
- to
any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance
sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
- (c)
- to
fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of
the representatives for any such offer; or
- (d)
- in
any other circumstances which do not require the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.
For
the purposes of this provision, the expression an "offer of shares to the public" in relation to any shares in any Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that
Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant
implementing measure in each Relevant Member State.
Each
underwriter has represented and agreed that:
- (a)
- it
has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in
investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA
does not apply to the company, and
142
Table of Contents
- (b)
- it
has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or
otherwise involving the United Kingdom.
The
shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder,
or (iii) in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to
do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the
meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
This
prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the
offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act,
Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275
of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where
the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of
which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an
accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the
beneficiaries' rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except:
(1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified
in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
The
shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has
agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in
Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan,
except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and
ministerial guidelines of Japan.
This
document as well as any other material relating to the shares which are the subject of the offering contemplated by this prospectus (the "Shares") does not constitute an issue
prospectus pursuant to Articles 652a and/or 1156 of the Swiss Code of Obligations. The Shares will not be
143
Table of Contents
listed
on the SIX Swiss Exchange and, therefore, the documents relating to the Shares, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing
rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The Shares are being offered in Switzerland by way of a private placement,
i.e. to a small number of selected investors only, without any public offer and only to investors who do not purchase the Shares with the intention to distribute them to the public. The
investors will be individually approached by the company from time to time. This document as well as any other material relating to the Shares is personal and confidential and does not constitute an
offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be
distributed or made available to other persons without the express consent of the company. It may not be used in connection with any other offer and shall in particular not be copied and/or
distributed to the public in (or from) Switzerland.
This
prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority ("DFSA"). This prospectus is intended for
distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for
reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility
for this prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own
due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
The
principal underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.
The
company and the selling stockholders estimate that their share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately
$ .
The
company and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
The
underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment
banking,
financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have,
from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the company, for which they received or will receive customary fees and
expenses.
In
the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and
equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and
short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the company. The underwriters and their respective affiliates
may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they
acquire, long and/or short positions in such securities and instruments.
144
Table of Contents
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon for us by Baker Botts L.L.P., Austin, Texas, and
for the underwriters by Sullivan & Cromwell LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of NetSpend Holdings, Inc. and subsidiaries as of December 31, 2008
and 2009, and for each of the years in the three-year period ended December 31, 2009, have been included herein and in the registration statement in reliance upon the reports of
KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The
financial statements of Skylight Financial, Inc. as of July 14, 2008 and for the period from January 1, 2008 to July 14, 2008 included in the
registration statement have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (File Number 333-168127)
under the Securities Act with respect to the shares of common stock we are offering. This prospectus, which constitutes part of the registration statement, does not contain all of the information
included in the registration statement and exhibits. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits and schedules.
Statements contained in this prospectus about the contents of any contract or any other document are not necessarily complete and, in each instance, we refer you to the copy of the contract or other
documents filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.
Upon
the effectiveness of our registration statement, we will be subject to the informational requirements of the Exchange Act and will file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission. We will make available through our website at www.netspend.com annual reports, quarterly reports, current reports and
amendments thereto as reasonably practicable after filing with the Securities and Exchange Commission. You can read our Securities and Exchange Commission filings, including the registration
statement, over the Internet at the Securities and Exchange Commission's website at www.sec.gov. You may also read and copy any document we file with the Securities and Exchange Commission at its
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.
145
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Page |
NetSpend Holdings, Inc. consolidated financial statements |
|
|
|
Report of independent registered public accounting firm |
|
F-2 |
|
Consolidated balance sheets as of December 31, 2008 and 2009 |
|
F-3 |
|
Consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009 |
|
F-4 |
|
Consolidated statements of changes in stockholders' equity for the years ended December 31, 2007, 2008 and
2009 |
|
F-5 |
|
Consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009 |
|
F-6 |
|
Notes to consolidated financial statements |
|
F-7 |
NetSpend Holdings, Inc. unaudited condensed consolidated financial statements |
|
|
|
Unaudited condensed consolidated balance sheets as of December 31, 2009 and June 30, 2010 |
|
F-43 |
|
Unaudited condensed consolidated statements of operations for the six months ended June 30, 2009 and
2010 |
|
F-44 |
|
Unaudited condensed consolidated statement of changes in stockholders' equity for the six months ended June 30,
2010 |
|
F-45 |
|
Unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2009 and
2010 |
|
F-46 |
|
Notes to unaudited condensed consolidated financial statements |
|
F-47 |
Skylight Financial, Inc. financial statements |
|
|
|
Report of independent certified public accountants |
|
F-65 |
|
Balance sheet as of July 14, 2008 |
|
F-66 |
|
Statement of operations for the period from January 1, 2008 through
July 14, 2008 |
|
F-67 |
|
Statement of stockholders' equity for the period from January 1, 2008
through July 14, 2008 |
|
F-68 |
|
Statement of comprehensive loss for the period from January 1, 2008 through
July 14, 2008 |
|
F-69 |
|
Statement of cash flows for the period from January 1, 2008 through
July 14, 2008 |
|
F-70 |
|
Notes to financial statements |
|
F-71 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
NetSpend Holdings, Inc.:
We
have audited the accompanying consolidated balance sheets of NetSpend Holdings, Inc. and subsidiaries as of December 31, 2008 and 2009, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 2009. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NetSpend Holdings, Inc. and
subsidiaries as of December 31, 2008 and 2009, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.
/s/
KPMG LLP
Austin,
Texas
July 15, 2010
F-2
Table of Contents
NetSpend Holdings, Inc.
Consolidated Balance Sheets
As of December 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands, except share and per share data)
|
|
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21,490 |
|
$ |
21,154 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $30 as of December 31, 2008 and $50 as of Decenber 31, 2009 |
|
|
5,550 |
|
|
4,513 |
|
|
Prepaid card supply |
|
|
2,179 |
|
|
1,783 |
|
|
Prepaid expenses |
|
|
1,703 |
|
|
2,357 |
|
|
Other current assets |
|
|
1,019 |
|
|
1,845 |
|
|
Income tax receivable |
|
|
2,172 |
|
|
2,375 |
|
|
Deferred tax assets |
|
|
6,713 |
|
|
2,872 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
40,826 |
|
|
36,899 |
|
Property and equipment, net |
|
|
13,224 |
|
|
24,441 |
|
Goodwill |
|
|
128,567 |
|
|
128,567 |
|
Intangible assets |
|
|
32,372 |
|
|
28,981 |
|
Other assets |
|
|
1,758 |
|
|
3,397 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
216,747 |
|
$ |
222,285 |
|
|
|
|
|
|
|
Liabilities & Stockholders' Equity |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable (includes $473 and $609 of related party payables at December 31, 2008 and 2009, respectively) |
|
$ |
5,351 |
|
$ |
3,444 |
|
|
Accrued expenses (includes $2,463 and $2,593 of accrued related party expenses at December 31, 2008 and 2009, respectively) |
|
|
22,181 |
|
|
21,531 |
|
|
Cardholders' reserve |
|
|
1,319 |
|
|
1,620 |
|
|
Deferred revenue |
|
|
1,946 |
|
|
2,158 |
|
|
Long-term debt, current portion |
|
|
9,375 |
|
|
21,513 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
40,172 |
|
|
50,266 |
|
Long-term debt, net of current portion |
|
|
76,875 |
|
|
51,979 |
|
Deferred tax liabilities |
|
|
11,058 |
|
|
10,318 |
|
Other non-current liabilities |
|
|
297 |
|
|
370 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
128,402 |
|
|
112,933 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
|
Class A common stock, $0.001 par value; 150,000,000 shares authorized; outstanding: (at December 31, 2008 77,131,910 shares issued less
1,300,000 shares held in treasury and at December 31, 2009 77,198,193 shares issued less 1,870,000 shares held in treasury) |
|
|
77 |
|
|
77 |
|
|
Class B common stock, $0.001 par value; 15,000,000 shares authorized; outstanding: (at December 31, 2008 10,043,137 shares issued and at December 31, 2009 10,244,609 shares issued) |
|
|
10 |
|
|
10 |
|
|
Treasury stock at cost |
|
|
(4,293 |
) |
|
(5,704 |
) |
|
Additional paid-in capital |
|
|
115,027 |
|
|
119,484 |
|
|
Accumulated deficit |
|
|
(22,476 |
) |
|
(4,515 |
) |
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
88,345 |
|
|
109,352 |
|
|
|
|
|
|
|
|
|
Total liabilities & stockholders' equity |
|
$ |
216,747 |
|
$ |
222,285 |
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
Table of Contents
NetSpend Holdings, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
(in thousands,
except per share data) |
|
Operating Revenues (includes related party revenues of $1,440 in 2007, $1,590 in 2008, and $2,897 in 2009) |
|
$ |
128,597 |
|
$ |
183,170 |
|
$ |
225,000 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
Direct operating costs (includes related party expenses of $15,552 in 2007, $24,408 in 2008 and $28,903 in 2009) |
|
|
57,294 |
|
|
80,216 |
|
|
106,572 |
|
Salaries, benefits, and other personnel costs |
|
|
21,288 |
|
|
35,034 |
|
|
46,668 |
|
Advertising, marketing, and promotion costs |
|
|
9,380 |
|
|
11,999 |
|
|
13,803 |
|
Other general and administrative costs (includes related party expenses of $0 in 2007, $211 in 2008 and $157 in 2009) |
|
|
10,101 |
|
|
21,051 |
|
|
22,074 |
|
Depreciation and amortization |
|
|
5,251 |
|
|
8,899 |
|
|
10,297 |
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
26,285 |
|
|
|
|
Settlement gains |
|
|
|
|
|
|
|
|
(10,229 |
) |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
103,314 |
|
|
183,484 |
|
|
189,185 |
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
25,283 |
|
|
(314 |
) |
|
35,815 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
876 |
|
|
384 |
|
|
32 |
|
Interest expense |
|
|
(2,065 |
) |
|
(4,408 |
) |
|
(5,170 |
) |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(1,189 |
) |
|
(4,024 |
) |
|
(5,138 |
) |
Income (loss) before income taxes |
|
|
24,094 |
|
|
(4,338 |
) |
|
30,677 |
|
Provision for income taxes |
|
|
9,368 |
|
|
7,307 |
|
|
12,503 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
|
|
|
|
|
|
|
|
Net income (loss) per share for class A and class B common stock: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
Diluted |
|
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
See
accompanying notes to the consolidated financial statements.
F-4
Table of Contents
NetSpend Holdings, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
Convertible
Preferred Stock |
|
Class A
Common Stock |
|
Class B
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
Total
Stockholders'
Equity
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Accumulated
Deficit
|
|
|
|
|
(in thousands, except share data) |
|
Balances at December 31, 2006 |
|
|
43,797,723 |
|
$ |
44 |
|
|
1,323,106 |
|
$ |
1 |
|
|
6,110,000 |
|
$ |
6 |
|
|
|
|
$ |
|
|
$ |
66,966 |
|
$ |
853 |
|
$ |
67,870 |
|
Cumulative effect of adoption of FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(231 |
) |
|
(231 |
) |
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400,000 |
) |
|
(1,116 |
) |
|
|
|
|
|
|
|
(1,116 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754 |
|
|
|
|
|
754 |
|
Exercise of options for common stock |
|
|
|
|
|
|
|
|
4,653,371 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,368 |
|
|
|
|
|
3,373 |
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,227 |
|
|
|
|
|
2,227 |
|
Exercise of options for preferred stock |
|
|
1,010,000 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
|
|
253 |
|
Exercise of warrants for common stock |
|
|
|
|
|
|
|
|
2,198,344 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,812 |
|
|
|
|
|
3,814 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,778 |
) |
|
(15,348 |
) |
|
(56,126 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,726 |
|
|
14,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
44,807,723 |
|
$ |
45 |
|
|
8,174,821 |
|
$ |
8 |
|
|
6,110,000 |
|
$ |
6 |
|
|
(400,000 |
) |
$ |
(1,116 |
) |
$ |
36,601 |
|
$ |
|
|
$ |
35,544 |
|
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900,000 |
) |
|
(3,177 |
) |
|
|
|
|
|
|
|
(3,177 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,473 |
|
|
|
|
|
2,473 |
|
Exercise of options for common stock |
|
|
|
|
|
|
|
|
1,022,965 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,226 |
|
|
|
|
|
1,227 |
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
37 |
|
Exercise of warrants for common stock |
|
|
|
|
|
|
|
|
23,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
37 |
|
Common stock issued for acquisitions |
|
|
|
|
|
|
|
|
16,992,555 |
|
|
17 |
|
|
10,043,137 |
|
|
10 |
|
|
|
|
|
|
|
|
93,822 |
|
|
|
|
|
93,849 |
|
Conversion of shares at acquisition |
|
|
(44,807,723 |
) |
|
(45 |
) |
|
50,917,723 |
|
|
51 |
|
|
(6,110,000 |
) |
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,169 |
) |
|
(10,831 |
) |
|
(30,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,645 |
) |
|
(11,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
|
|
$ |
|
|
|
77,131,910 |
|
$ |
77 |
|
|
10,043,137 |
|
$ |
10 |
|
|
(1,300,000 |
) |
$ |
(4,293 |
) |
$ |
115,027 |
|
$ |
(22,476 |
) |
$ |
88,345 |
|
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(570,000 |
) |
|
(1,411 |
) |
|
|
|
|
|
|
|
(1,411 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,484 |
|
|
|
|
|
4,484 |
|
Exercise of options for common stock |
|
|
|
|
|
|
|
|
66,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
|
|
125 |
|
Tax shortfall associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152 |
) |
|
|
|
|
(152 |
) |
Vesting of restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend equivalents paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213 |
) |
|
(213 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,174 |
|
|
18,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
|
|
|
$ |
|
|
|
77,198,193 |
|
$ |
77 |
|
|
10,244,609 |
|
$ |
10 |
|
|
(1,870,000 |
) |
$ |
(5,704 |
) |
$ |
119,484 |
|
$ |
(4,515 |
) |
$ |
109,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
Table of Contents
NetSpend Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
(in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
14,726 |
|
$ |
(11,645 |
) |
$ |
18,174 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,251 |
|
|
8,899 |
|
|
10,297 |
|
|
Goodwill and acquired intangible asset impairment |
|
|
|
|
|
26,285 |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
133 |
|
|
631 |
|
|
476 |
|
|
Gain on settlement |
|
|
|
|
|
|
|
|
(1,192 |
) |
|
Stock-based compensation |
|
|
754 |
|
|
2,473 |
|
|
4,484 |
|
|
Tax benefit associated with stock options |
|
|
(2,227 |
) |
|
(37 |
) |
|
(18 |
) |
|
Provision for cardholder losses |
|
|
2,572 |
|
|
2,362 |
|
|
4,930 |
|
|
Deferred income taxes |
|
|
460 |
|
|
2,465 |
|
|
3,101 |
|
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,527 |
) |
|
543 |
|
|
1,037 |
|
|
|
Income tax receivable |
|
|
(871 |
) |
|
(1,301 |
) |
|
(203 |
) |
|
|
Prepaid card supply |
|
|
1,963 |
|
|
(523 |
) |
|
396 |
|
|
|
Prepaid expenses |
|
|
(14 |
) |
|
(835 |
) |
|
(654 |
) |
|
|
Other current assets |
|
|
413 |
|
|
(606 |
) |
|
(826 |
) |
|
|
Other long-term assets |
|
|
147 |
|
|
(134 |
) |
|
(1,754 |
) |
|
|
Accounts payable and accrued expenses |
|
|
(3,685 |
) |
|
2,834 |
|
|
2,291 |
|
|
|
Cardholders' reserve |
|
|
(2,331 |
) |
|
(2,303 |
) |
|
(4,629 |
) |
|
|
Deferred revenue |
|
|
1,899 |
|
|
(4,228 |
) |
|
212 |
|
|
|
Other liabilities |
|
|
(109 |
) |
|
140 |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
15,554 |
|
|
25,020 |
|
|
36,195 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(5,716 |
) |
|
(10,715 |
) |
|
(14,616 |
) |
|
Purchase of intangible assets |
|
|
|
|
|
|
|
|
(125 |
) |
|
Net cash acquired from the acquisition of Skylight |
|
|
|
|
|
6,986 |
|
|
|
|
|
Net cash paid for the acquisition of Procesa |
|
|
|
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,716 |
) |
|
(4,115 |
) |
|
(14,741 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(56,126 |
) |
|
(25,000 |
) |
|
(5,000 |
) |
|
Dividend equivalents paid |
|
|
|
|
|
|
|
|
(213 |
) |
|
Proceeds from exercise of preferred stock options |
|
|
253 |
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock warrants |
|
|
3,814 |
|
|
37 |
|
|
|
|
|
Proceeds from exercise of common stock options |
|
|
3,373 |
|
|
1,227 |
|
|
125 |
|
|
Tax benefit associated with stock options |
|
|
2,227 |
|
|
37 |
|
|
18 |
|
|
Proceeds from issuance of long-term debt |
|
|
50,000 |
|
|
90,000 |
|
|
9,000 |
|
|
Issuance costs of long-term debt |
|
|
(800 |
) |
|
(1,230 |
) |
|
(361 |
) |
|
Principal payment on debt |
|
|
(2,000 |
) |
|
(91,450 |
) |
|
(25,140 |
) |
|
Cash purchase of treasury stock |
|
|
(1,116 |
) |
|
(3,177 |
) |
|
(219 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(375 |
) |
|
(29,556 |
) |
|
(21,790 |
) |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
9,463 |
|
|
(8,651 |
) |
|
(336 |
) |
Cash and cash equivalents at beginning of year |
|
|
20,678 |
|
|
30,141 |
|
|
21,490 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
30,141 |
|
$ |
21,490 |
|
$ |
21,154 |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,882 |
|
$ |
4,069 |
|
$ |
4,893 |
|
Cash paid for income taxes |
|
|
8,589 |
|
|
6,126 |
|
|
10,040 |
|
Non-cash investing activities |
|
|
|
|
|
|
|
|
|
|
Capital lease entered into for the purchase of software |
|
$ |
|
|
$ |
|
|
$ |
3,383 |
|
Stock issued for the acquisition of Skylight |
|
|
|
|
|
93,549 |
|
|
|
|
Stock issued for the acquisition of Procesa |
|
|
|
|
|
300 |
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2007, 2008 and 2009
NOTE 1: ORGANIZATION AND BUSINESS
NATURE OF OPERATIONS NetSpend Holdings, Inc. ("NetSpend" or the "Company"), based in Austin, Texas was formed as a
Delaware corporation on February 18, 2004. It was formed in connection with the recapitalization of one of the Company's current subsidiaries, NetSpend Corporation, which was founded in 1999.
The Company operates in one reportable business segment to provide general-purpose reloadable ("GPR") prepaid debit cards and alternative financial service solutions to underbanked consumers in the
United States. The Company's products empower underbanked consumers to become "self-banked" by providing FDIC-insured depository accounts with a menu of pricing and features
specifically tailored to their needs. The Company has built an extensive distribution and reload network comprised of financial service centers and other retail locations throughout the United States.
The
Company is an agent of FDIC-insured depository institutions that serve as issuers of the Company's products. The Company has agreements with Meta Payment Systems, a
division of Meta Financial Group ("Meta"), Inter National Bank ("INB"), U.S. Bank, and Sun Trust Bank (collectively, the "issuing banks") whereby the issuing banks issue MasterCard International
("MasterCard") or Visa USA, Inc. ("Visa") branded cards to customers. The Company's products may be used to purchase goods and services wherever MasterCard and Visa are accepted or to withdraw
cash via automatic teller machines ("ATMs").
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of NetSpend
Holdings, Inc. and its wholly owned subsidiaries, NetSpend Corporation, Skylight Financial, and NetSpend Payment Systems. All intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and reported amounts of revenues and expenses during the
reporting period. Among the more significant assumptions are those that relate to the valuation of goodwill and intangible assets, cardholders' reserve, legal contingencies, and stock-based
compensation. These accounting estimates reflect the best judgment of management. Actual results could significantly differ from management's estimates and judgments.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS The Company considers cash invested in interest-bearing deposits and short-term
investments with original maturities of three months or less at the date of purchase to be cash equivalents.
The
Company has established compensating balances at its issuing banks to offset overdrawn cardholder accounts. Some of these compensating balance accounts are included in the
Consolidated Balance Sheets as cash and cash equivalents because there are no contractual restrictions over deposits in these accounts. As of December 31, 2008 and 2009 these compensating
balances totaled $1.2 million.
F-7
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESTRICTED CASH Restricted cash is cash with statutory or contractual restrictions that prevent it from being used in the
Company's operations. Restricted cash is classified in other non-current assets on the Company's Consolidated Balance Sheets.
As
of December 31, 2008 and 2009, the Company had restricted cash of $0.3 million and $0.4 million, respectively.
ACCOUNTS RECEIVABLE Accounts receivable primarily represents amounts due from cardholders for service and card activation
fees and for interchange revenues related to merchant point of sale transactions. These receivables are generally settled by the issuing and merchant acquiring banks within a few days. Accounts
receivable are recorded net of the allowance for doubtful accounts. The Company records an allowance when it becomes probable that a receivable will not be collected, and receivables are written off
against the allowance when management makes the determination to cease collection efforts.
PREPAID CARD SUPPLY Prepaid card supply consists of costs incurred primarily for purchasing card stock, and the embossing,
encoding, packaging and shipping prepaid debit and gift cards. These costs are expensed to direct operating costs within the Consolidated Statements of Operations as the cards are shipped from the
Company's fulfillment warehouses into the distribution channel or to end customers.
UP-FRONT DISTRIBUTOR PAYMENTS Occasionally, NetSpend makes up-front contractual payments to
third-party distribution partners. The Company assesses each up-front payment to determine whether it meets the criteria of an asset (having a future benefit) as defined by
U.S. GAAP. If the asset criteria are met, the Company capitalizes the up-front payment and recognizes the amount ratably over the benefit period, generally the contract period. If
the contract requires the distributor's specific performance and no other conditions exist for the distributor to earn or retain the benefit, then the Company recognizes payments when the performance
conditions have been met and payment has been earned by the distributor. Up-front distributor payments are classified on the Consolidated Balance Sheets as other non-current
assets and are recorded as a direct operating cost in the Consolidated Statements of Operations.
PROPERTY AND EQUIPMENT, NET Property and equipment are stated at cost and depreciated using the straight-line
method over their estimated useful lives.
Property and equipment are assessed for impairment whenever events or circumstances indicate the carrying value of an asset group may not be fully recoverable by comparing the carrying value to total
future undiscounted cash flows. Impairment is recorded for long-lived assets equal to the excess of the carrying amount of the asset group over its estimated fair value. The Company did
not recognize impairment losses related to long-lived assets during the years ended December 31, 2007, 2008 or 2009.
Office
equipment and furniture and fixtures are depreciated over three to seven years, computer equipment is depreciated over three to five years, computer software is depreciated over
three years, and leasehold improvements are amortized over the shorter of their estimated useful life or the term of the related lease. When assets are sold or retired, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is credited or charged to income. Costs for repairs and maintenance are expensed as incurred.
F-8
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL Goodwill represents the excess of the purchase price of an acquired company over the fair value of assets acquired
and liabilities assumed. The Company evaluates goodwill for impairment annually or at an interim period if events occur or circumstances indicate it is more likely than not that the carrying value
exceeds the fair value of the associated reporting unit. The Company assigns goodwill to its reporting units for the purpose of impairment testing. The first step of the impairment test is to compare
the estimated fair value of the respective reporting unit with its carrying value. If the carrying value is less than fair value, no indication of impairment exists. If the carrying value is greater
than fair value, a second step in the impairment test is performed to determine the implied fair value of goodwill and the amount of impairment loss, if any.
During
each of the years ended December 31, 2007, 2008 and 2009, the Company performed its annual impairment evaluation and in 2007 and 2009 determined that the fair value of the
Company's goodwill exceeded its carrying value, so no impairment was deemed to exist. For the year ended December 31, 2008, the Company impaired its goodwill by $23.0 million (see
Note 6).
INTANGIBLE ASSETS Intangible assets with indefinite lives are evaluated for impairment annually, or at an interim period if
events occur or circumstances indicate it is more likely than not that the carrying value exceeds the fair value. Any excess carrying value over the fair value is recognized as an impairment loss.
Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate the carrying value exceeds future undiscounted cash flows of the associated
intangible asset.
During
each of the years ended 2007 and 2009, the Company performed its annual intangible asset impairment evaluation and determined that the fair values of the Company's intangible
assets exceeded their carrying values. During the year ended December 31, 2008, the Company impaired approximately $3.3 million of its acquired intangible assets (see Note 7).
As
of December 31, 2009, the weighted average amortization period for the Company's amortizable intangible assets is approximately eight years. Distributor and partner
relationships have a useful life of between eight and ten years, developed technology has a useful life of between five and seven years, license agreements have a useful life of twelve years, patents
and trademarks have a useful life of between twelve and fifteen years, and tradenames have indefinite lives. Finite lived intangible assets are amortized over the estimated useful lives of the assets
using the straight-line method.
On
July 15, 2008, the Company purchased Skylight Financial, Inc. ("Skylight"), a company in the prepaid card industry that is focused on the market for direct deposit
payroll accounts. The "Skylight" trade name is well known in the paycard industry and will continue to be leveraged to drive cash flows. Based on the reputation of the Skylight tradename and the
anticipated future benefits and cash flows the tradename is expected to contribute, the Company concluded that the tradename should be accounted for as an indefinite lived intangible asset. As part of
the Company's annual impairment test, the Company considers whether factors have changed and whether the tradename should be subject to amortization.
CARDHOLDERS' RESERVE The Company is exposed to transaction losses due to cardholder fraud and other losses resulting from
cardholder activity, and losses due to non-performance of third parties. The Company establishes a cardholders' reserve for estimated
F-9
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
losses
arising from processing customer transactions, debit card overdrafts, chargebacks for unauthorized card use, and merchant-related chargebacks due to non-delivery of goods or
services. These reserves are established based upon historical loss and recovery rates, and cardholder activity for which specific losses can be identified. The cardholders' reserve was approximately
$1.3 million and $1.6 million at December 31, 2008 and 2009, respectively. The provision for cardholder losses is included in direct operating costs in the Consolidated Statements
of Operations.
Establishing
the reserve for transaction losses is an inherently uncertain process, and ultimate losses may vary from the current estimate. The Company regularly updates its reserve
estimate as new facts become known and events occur that may impact the settlement or recovery of losses.
LITIGATION In the normal course of business, the Company is at times subject to pending and threatened legal actions and
proceedings. It is the Company's policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal or regulatory matters, as well as ranges of probable losses. A
determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue and consultation with the Company's internal and external legal
counsel. The Company records reserves related to certain legal matters for which it is probable that a loss will be incurred and the range of such loss can be reasonably estimated. Management
discloses facts regarding material matters assessed as reasonably possible and the associated potential exposure, if estimable. The Company expenses legal costs as incurred.
INCOME TAXES The Company recognizes tax benefits or expenses on the temporary differences between the financial reporting
and tax bases of its assets and liabilities. Deferred tax assets and liabilities are measured using statutory enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The Company is required to adjust its deferred tax assets and liabilities in the period in which tax rates or the provisions of the
income tax laws change. Valuation allowances are established when necessary to reduce deferred tax assets to the amount for which recovery is deemed more likely than not. The Company's policy is to
classify interest and penalties associated with uncertain tax positions as a component of income tax expense.
STOCK-BASED COMPENSATION The Company has one stock-based employee compensation plan. Through December 31, 2007, the Company
measured stock options at fair value on the date of grant using the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. Beginning in 2008, and going
forward, the Company measures stock options at fair value on the date of grant using the Binomial Lattice model for determining fair value. The Company determined this model better reflects the
characteristics of the employee share option in estimating fair value, particularly in light of the complexity of awards granted in 2008 and 2009. Compensation expense for graded vested awards is
recognized on a straight-line basis over the requisite service period, net of estimated forfeitures. The Company considers many factors when estimating expected forfeitures, including
types of awards, employee class and historical experience. The Company presents excess tax benefits from the exercise of stock options as financing cash flows.
F-10
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE Basic earnings (loss) per common share excludes dilution for potential common stock issuances and is
calculated by dividing net income (loss) available to common stockholders by the weighted average common stock issued and outstanding for the period. Diluted earnings per common share is calculated by
dividing net income by the weighted average number of common shares issued and outstanding for the period plus amounts representing the dilutive effect of stock options, warrants, restricted stock and
convertible preferred stock, as applicable. The Company calculates basic and diluted earnings (loss) per common share
using the treasury stock method, the as-if-converted method, and the two-class method, as applicable.
REVENUE RECOGNITION The Company generates revenue from compensation for the services provided to its issuing banks
resulting from service fees and interchange revenue. Revenue is recognized when there is persuasive evidence of an arrangement, services have been rendered, the price is fixed or determinable and
collectability is reasonably assured.
Cardholders
are charged fees in connection with the products and services provided, as follows:
-
- Transactions Cardholders are typically charged a fee for each PIN and signature-based purchase transaction
made using their GPR cards, unless the cardholder is on a monthly or annual service plan, in which case the cardholder is instead charged a monthly or annual subscription fee, as applicable.
Cardholders are also charged fees for ATM withdrawals and other transactions conducted at ATMs.
-
- Customer Service and Maintenance Cardholders are typically charged fees for balance inquiries made through
the Company's customer service. Cardholders are also charged a monthly maintenance fee after a specified period of inactivity.
-
- Additional Products and Services Cardholders are charged fees associated with additional products and
services offered in connection with certain GPR cards, including MetaBank's iAdvance line of credit, overdraft protection through the Company's issuing banks, a variety of bill payment
options, and card-to-card transfers of funds through the Company's customer service.
-
- Other Cardholders are charged fees in connection with the activation of the Company's GPR cards and
the gift cards at retailers.
Revenue
resulting from the service fees charged to cardholders described above is recognized when the fees are charged because the earnings process is substantially complete, except for revenue
resulting from the activation of the Company's cards and annual subscription fees.
Revenue resulting from the activation of cards is recognized ratably, net of commissions paid to distributors, over the average account life, which is approximately one year for GPR cards and
three months for gift cards. Revenue resulting from annual subscription fees is recognized ratably over the annual period to which the fees relate.
Revenues
also include fees charged to retail distributors in connection with the reload of the Company's GPR cards. Revenue resulting from the reload of GPR cards is
recognized when the fee is charged.
F-11
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenues
also include fees charged in connection with program management and processing services the Company provides for private-label programs, as well as fees charged to one of the
Company's issuing banks based on interest earned on cardholder funds. Under the Company's current arrangement with such issuing bank, the Company would only be entitled to receive interest on
cardholder funds if market interest rates rose significantly above certain specified levels. Revenue resulting from these fees is recognized when the Company has fulfilled its obligations under the
underlying service agreements.
The
Company earns interchange revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using the Company's prepaid debit cards.
Interchange fees are fixed by the card associations and network organizations. Interchange revenues are recognized net of sponsorship, licensing and processing fees charged by the card associations
and network organizations for services they provide in processing purchase transactions routed through their networks. Interchange revenue is recognized during the period that the purchase
transactions occur. Also included in interchange revenue are fees earned from branding agreements with cardholder associations and network organizations.
DIRECT OPERATING COSTS Direct operating costs consist of internal and external customer service costs, commissions paid to
third-party distributors based on transaction volumes, ATM processing fees, card supply costs, fraud and other losses related to the Company's card programs, customer verification costs and fees paid
to the card issuing banks.
SALARIES, BENEFITS AND OTHER PERSONNEL COSTS Salaries, benefits and other personnel costs primarily consist of expenses
related to non-customer service employee wages, bonuses, equity-based compensation and benefits, including 401(k) match and employee health insurance. Salaries, benefits and other
personnel costs related to customer service employees are included in direct operating costs in the Consolidated Statements of Operations.
ADVERTISING COSTS The Company expenses advertising costs as they are incurred except for direct-response advertising, which
is capitalized and amortized over its expected period of future benefit. Direct-response advertising consists of web based advertising costs paid for new funded customer accounts. These capitalized
costs are amortized over the average account life, which is approximately one year.
As
of December 31, 2008 and 2009, $0.3 million and $1.0 million, respectively, of capitalized direct response advertising costs were included in other current assets on
the Consolidated Balance Sheets.
SIGNIFICANT CONCENTRATIONS Financial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. A significant portion of the Company's cash is deposited in cash and money market funds at large depository institutions, many
of which have received 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. Accounts receivable at December 31, 2008 and 2009 are primarily receivables due from cardholders for service and card activation fees and for interchange revenues
due from card associations related to merchant point of sale transactions.
F-12
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cardholder
funds and deposits related to the Company's products are held in trust at FDIC insured issuing banks for the benefit of the cardholders. The Company has four primary issuing
banks; however, Meta is the Company's preferred issuing bank and holds a majority of cardholder funds. The failure of any of these issuing banks could have a material adverse effect on the Company's
business.
In
addition, the Company derived approximately one third of its revenues during the years ended December 31, 2007, 2008 and 2009, respectively, from GPR cards sold through
one of its third-party distributors, ACE Cash Express, Inc. ("ACE"). The Company's current distribution agreement with ACE is effective through March of 2016.
FAIR VALUE OF ASSETS AND LIABILITIES Fair value is defined in U.S. GAAP as the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities,
the Company considers the principal or most advantageous
market in which it would transact and considers assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restriction, and risk of nonperformance.
The
Company's financial instruments include cash, cash equivalents, accounts receivable, accounts payable and borrowings under the term loan and revolving credit facility. As of
December 31, 2008 and 2009, the fair values of cash, cash equivalents, accounts receivable, accounts payable and borrowings under the revolving credit facility approximated carrying values
because of the short-term nature of these instruments.
Borrowings
under the Company's term loan are variable interest rate borrowings that bear annual interest at the greater of 6% or an adjusted market rate (see Note 9). As of
December 31, 2008 and 2009, the fair value of borrowings under the term loan approximated its carrying value based on prevailing market rates for borrowings with similar ratings and maturities.
As
of December 31, 2009 there was no required fair value measurement for assets and liabilities measured at fair value on a non-recurring basis.
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements or changes in existing accounting pronouncements may have a significant effect on the results of operations, the financial condition, or the net worth of
the Company's business operations.
In
December 2007, the Financial Accounting Standards Board ("FASB") issued revised guidance on accounting for business combinations. The Company's adoption of this revised guidance on
January 1, 2009 did not have an impact on the consolidated financial statements, and the effect of this guidance will depend on the nature and significance of business combinations occurring
after the effective date.
The
FASB guidance on fair value measurement and disclosures became effective January 1, 2008. However, in February 2008, the FASB delayed the effective date regarding fair value
measurement and disclosures of nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements, to
January 1,
F-13
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
2009.
The adoption of these provisions related to nonfinancial assets and nonfinancial liabilities on January 1, 2009 did not have a material impact on the consolidated financial statements.
In
April 2008, the FASB issued new requirements regarding the determination of the useful lives of intangible assets. These new requirements applied to intangible assets acquired after
January 1, 2009. The adoption of these new rules did not have a material impact on the consolidated financial statements.
In
June 2008, the FASB issued a new accounting standard on determining whether instruments granted in share-based payment transactions are participating securities prior to vesting and
therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method. Unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents are treated as a separate class of securities in calculating earnings per share. This new standard was effective for fiscal years
beginning after December 15, 2008. The adoption of this new standard did not have an impact on the consolidated financial statements.
In
November 2008, the FASB issued guidance on accounting for an asset acquired in a business combination or in an asset acquisition that an entity does not intend to actively use. The
Company adopted this guidance on January 1, 2009, and there was no impact upon adoption.
In
April 2009, the FASB issued an amendment to the revised business combination guidance regarding the accounting for assets acquired and liabilities assumed in a business combination
that arise from contingencies. There was no impact upon adoption and the effect of this guidance will depend on the nature and significance of business combinations occurring after the effective date.
In
April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying
transactions that are not orderly. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. The Company's adoption of this guidance had no
material impact on the consolidated financial statements.
In
May 2009, the FASB issued guidelines on accounting for subsequent events effective for interim and annual periods ending after June 15, 2009. The Company's adoption of these
guidelines had no impact on the consolidated financial statements.
In
July 2009, the FASB issued the FASB Accounting Standard Codification ("the Codification"). The Codification became the single source of authoritative nongovernmental
U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants ("AICPA"), Emerging Issues Task Force ("EITF") and related literature. The Codification eliminates the
previous U.S. GAAP hierarchy and establishes one level of authoritative U.S. GAAP. All other literature is considered non-authoritative. The Codification was effective for
interim and annual periods ending after September 15, 2009 and did not have an impact on the consolidated financial statements.
In
August 2009, the FASB issued guidance on the measurement of fair value. The Company's adoption of this guidance on October 1, 2009 had no impact on the consolidated financial
statements.
F-14
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 4: ACQUISITIONS
Skylight Financial
On July 15, 2008, pursuant to the terms of a merger agreement dated June 2, 2008, the Company consummated a stock
purchase of Skylight Financial, Inc. ("Skylight"). Skylight is a company in the financial services industry and its services include establishing direct deposit payroll accounts through
relationships with corporate clients, and issuance of debit cards to their employees. The total purchase price of approximately $98.0 million was comprised of 16,906,100 shares of NetSpend's
class A common stock, valued at $58.7 million, and 10,043,137 shares of NetSpend's class B common stock, valued at $34.8 million, along with approximately
$4.5 million of direct acquisition costs. The fair value of the NetSpend common stock issued of $93.5 million was determined using a combination of income and market valuation
approaches. Also in connection with the acquisition of Skylight, the Company retired $40.4 million of Skylight's existing debt which was funded through an amendment of the Company's existing
credit agreement with its senior creditors (see Note 9).
Under
the purchase method of accounting, the total purchase price is allocated to the acquired tangible and identifiable intangible assets and the assumed liabilities of Skylight based
upon their estimated fair values as of the date of the merger. Fair value for certain of the assets acquired (property and equipment and identified intangible assets) was estimated based upon cost,
income, and market approaches. For the majority of the remaining assets and liabilities, book value was deemed to approximate fair value due to the nature of the assets and liabilities. The following
represents the allocation of the aggregate purchase price of Skylight to the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Current assets |
|
$ |
13,335 |
|
Tangible and other non-current assets |
|
|
2,655 |
|
Identifiable intangible assets |
|
|
31,600 |
|
Goodwill |
|
|
99,208 |
|
Liabilities assumed |
|
|
(48,789 |
) |
|
|
|
|
|
|
$ |
98,009 |
|
|
|
|
|
Included
in the liabilities assumed are approximately $6.0 million of a long-term deferred tax liability, $2.4 million of other current liabilities, and
approximately $40.4 million of term debt and a related interest rate swap liability that the Company retired upon closing of the Skylight acquisition utilizing borrowings under the Company's
amended and restated credit facility (see Note 9).
F-15
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 4: ACQUISITIONS (Continued)
The
acquired intangible assets consist of the following, and are being amortized over their estimated economic life, where applicable, using the straight-line method:
|
|
|
|
|
|
Asset Class
|
|
Fair Value |
|
Weighted Average
Useful Life |
|
|
|
(in thousands of dollars) |
|
|
Developed technology |
|
$ |
1,700 |
|
7 years |
Distributor and partner relationships |
|
|
16,000 |
|
10 years |
Tradenames |
|
|
13,900 |
|
Indefinite |
|
|
|
|
|
|
|
$ |
31,600 |
|
|
|
|
|
|
|
Goodwill
represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed, and is not tax deductible.
Procesa International, LLC
On November 25, 2008 NetSpend acquired substantially all of the assets of Procesa International, LLC ("Procesa"), a
service provider for direct, cross-border, and cell phone top-up payment services for Latin America. The total purchase price for the Procesa assets of $0.7 million was comprised of
$0.4 million in cash and 86,455 shares of NetSpend's class A common stock valued at $0.3 million. The fair value of the Company's stock was determined using a combination of
income and market valuation approaches.
Under
the purchase method of accounting, the total purchase price is allocated to the acquired tangible and identifiable intangible assets of Procesa based upon their estimated fair
values as of
the date of the acquisition with any remaining value being allocated to goodwill. Fair value for certain of the assets acquired (developed technology and distributor and partner relationships) was
estimated based on income and market approaches. For the majority of the remaining assets, book value was deemed to approximate fair value due to the nature of the assets.
The
following represents the allocation of the aggregate purchase price of Procesa to the assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Current assets |
|
$ |
17 |
|
Tangible and other non-current assets |
|
|
136 |
|
Identified intangible assets |
|
|
277 |
|
Goodwill |
|
|
274 |
|
|
|
|
|
|
|
$ |
704 |
|
|
|
|
|
F-16
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 4: ACQUISITIONS (Continued)
The
acquired intangible assets consist of the following, and are being amortized over their estimated economic life, where applicable, using the straight-line method:
|
|
|
|
|
|
Asset Class
|
|
Fair Value |
|
Weighted Average
Useful Life |
|
|
|
(in thousands of dollars) |
|
|
Distributor and partner relationships |
|
$ |
277 |
|
10 years |
Goodwill
represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired, and is not tax deductible.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Computer and office equipment |
|
$ |
10,798 |
|
$ |
14,033 |
|
Computer software |
|
|
8,180 |
|
|
16,583 |
|
Furniture and fixtures |
|
|
1,232 |
|
|
1,317 |
|
Leasehold improvements |
|
|
1,499 |
|
|
1,609 |
|
Construction in progress |
|
|
3,223 |
|
|
9,387 |
|
|
|
|
|
|
|
|
|
|
24,932 |
|
|
42,929 |
|
Less: accumulated depreciation |
|
|
(11,708 |
) |
|
(18,488 |
) |
|
|
|
|
|
|
|
|
$ |
13,224 |
|
$ |
24,441 |
|
|
|
|
|
|
|
During
the years ended December 31, 2007, 2008 and 2009, the Company capitalized interest costs of $0, $0.1 million, and $0.2 million, respectively, related to
developed software.
Depreciation
expense for the years ended December 31, 2007, 2008 and 2009 was approximately $2.9 million, $5.7 million, and $6.8 million, respectively.
During
2009, the Company entered into a capital lease arrangement with a software provider for perpetual database licenses. The capital lease arrangement resulted in the recording of
$3.4 million in capitalized computer software, which is included in property and equipment on the Company's December 31, 2009 Consolidated Balance Sheet. In 2009, the Company recognized
$0.8 million of expense related to the amortization of the capital lease, which is included in depreciation and amortization expense on the Company's Consolidated Statement of Operations.
F-17
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 6: GOODWILL
A summary of the activity in goodwill for the years ended December 31, 2008 and 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Balance, beginning of year |
|
$ |
52,085 |
|
$ |
128,567 |
|
Goodwill associated with the acquisition of Skylight |
|
|
99,208 |
|
|
|
|
Goodwill associated with the acquisition of Procesa |
|
|
274 |
|
|
|
|
Impairment of goodwill |
|
|
(23,000 |
) |
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
128,567 |
|
$ |
128,567 |
|
|
|
|
|
|
|
The
Company's initial $52.1 million goodwill balance was recorded in 2004 through a recapitalization transaction pursuant to which NetSpend Holdings, as a newly formed holding
company incorporated in Delaware, acquired all of the capital stock of NetSpend Corporation. In 2008, the Company recorded additional goodwill of $99.5 million as a result of its acquisitions
of Skylight and Procesa (see Note 4).
Goodwill
is tested for impairment annually or if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below its carrying
value. The
determination of fair value used in the impairment evaluation is based on a combination of comparative market multiples and discounted cash flow analyses.
During
both of the years ended December 31, 2007 and 2009, the Company determined that none of the goodwill related to its reporting units was impaired.
During
2008, the Company determined that the carrying value of the Skylight reporting unit exceeded its fair value, indicating that goodwill was potentially impaired. As a result, the
Company initiated the second step of the goodwill impairment test which involves calculating the implied fair value of goodwill by allocating the fair value of the reporting unit to all assets and
liabilities of the reporting unit other than goodwill, and comparing it to the carrying amount of goodwill. The Company determined that the implied fair value of goodwill related to the Skylight
reporting unit was less than its carrying value by approximately $23.0 million, which was recorded as a goodwill impairment charge in 2008. The impairment was caused by declining market
conditions and the adverse business environment in which the Skylight reporting unit operates.
F-18
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 7: INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Weighted-Average
Useful Life |
|
|
2008 |
|
2009 |
|
|
|
|
|
(in thousands of dollars) |
|
|
Distributor and partner relationships |
|
$ |
26,426 |
|
$ |
26,426 |
|
9.2 years |
Tradenames |
|
|
10,615 |
|
|
10,615 |
|
Indefinite |
Developed technology |
|
|
7,261 |
|
|
7,261 |
|
5.5 years |
Other |
|
|
43 |
|
|
168 |
|
12.8 years |
|
|
|
|
|
|
|
|
|
|
44,345 |
|
|
44,470 |
|
|
Less: |
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
(11,973 |
) |
|
(15,489 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
32,372 |
|
$ |
28,981 |
|
|
|
|
|
|
|
|
|
During
the year ended December 31, 2008, the Company acquired $31.6 million of identifiable intangible assets during the Skylight acquisition and $0.3 million of
identifiable intangible assets during the Procesa acquisition. In 2008, the Company incurred an impairment charge of approximately $3.3 million reflecting the impairment of the Skylight
tradename as the carrying amount of the tradename exceeded its fair value. The impairment was due to declining market conditions and the adverse business environment in which the Skylight reporting
unit operates. This tradename continues to have an indefinite life as the Company continues to use the Skylight tradename on certain of its products.
During
the year ended December 31, 2009, the Company acquired a $0.1 million license to use certain patents related to card processors. The license will be amortized over
its twelve-year useful life.
Amortization
expense for the years ended December 31, 2007, 2008 and 2009 was $2.4 million, $3.2 million, and $3.5 million, respectively. At
December 31, 2009, estimated amortization expense for the next five years and thereafter is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
2010 |
|
$ |
3,250 |
|
2011 |
|
|
3,250 |
|
2012 |
|
|
2,404 |
|
2013 |
|
|
1,967 |
|
2014 |
|
|
1,641 |
|
thereafter |
|
|
5,854 |
|
|
|
|
|
|
|
$ |
18,366 |
|
|
|
|
|
F-19
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 8: ACCRUED EXPENSES
Accrued expenses at December 31, 2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Accrued dividends payable to shareholders |
|
$ |
5,085 |
|
$ |
84 |
|
Commissions payable to distributors |
|
|
4,222 |
|
|
4,972 |
|
Accrued wages and related personnel expenses |
|
|
3,722 |
|
|
5,819 |
|
Accrued income taxes |
|
|
766 |
|
|
754 |
|
Accrued marketing and professional fees |
|
|
3,086 |
|
|
2,306 |
|
Accrued processor and card association fees |
|
|
1,615 |
|
|
1,913 |
|
Accrued call center costs |
|
|
1,430 |
|
|
1,384 |
|
Accrued rent |
|
|
659 |
|
|
497 |
|
Accrued prepaid card supply costs |
|
|
306 |
|
|
818 |
|
Other accrued liabilities |
|
|
1,290 |
|
|
2,984 |
|
|
|
|
|
|
|
|
|
$ |
22,181 |
|
$ |
21,531 |
|
|
|
|
|
|
|
NOTE 9: DEBT
The Company's outstanding borrowings at December 31, 2008 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Term loan |
|
$ |
71,250 |
|
$ |
61,875 |
|
Revolving credit facility |
|
|
15,000 |
|
|
9,000 |
|
Capital lease |
|
|
|
|
|
2,617 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
86,250 |
|
|
73,492 |
|
Less: |
|
|
|
|
|
|
|
Current portion of term loan |
|
|
9,375 |
|
|
11,250 |
|
Current portion of credit facility |
|
|
|
|
|
9,000 |
|
Current portion of capital lease |
|
|
|
|
|
1,263 |
|
|
|
|
|
|
|
|
Long-term debt, current portion |
|
|
9,375 |
|
|
21,513 |
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
76,875 |
|
$ |
51,979 |
|
|
|
|
|
|
|
Term Loan and Revolving Credit Facility
On June 27, 2007, the Company entered into a credit agreement with a syndicate of banks with JP Morgan Chase as the
administrative agent. The credit agreement included a term loan (the "old term loan") in the amount of $20.0 million and a revolving credit facility (the "old revolving
F-20
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 9: DEBT (Continued)
credit
facility") of $30.0 million, which was collateralized by virtually all assets of NetSpend excluding intangible assets. The old term loan and old revolving credit facility bore interest
at JP Morgan Chase's prime rate plus 0.50%, which was 7.75% as of December 31, 2007.
In
connection with the acquisition of Skylight (see Note 4), the Company entered into an amended and restated credit agreement ("Amended and Restated Credit Facility") with a
syndicate of banks with JPMorgan Chase as the administrative agent. The Amended and Restated Credit Facility provides financing of $105.0 million, consisting of a $30.0 million revolving
credit facility ("revolving credit facility") and a $75.0 million term loan ("term loan"). The Amended and Restated Credit Facility is unconditionally guaranteed and secured by virtually all of
the assets of the Company's existing and future U.S. subsidiaries.
The
proceeds of the $75.0 million term loan and the Company's initial draw of $10.0 million under the revolving credit facility were utilized by the Company to fund the
purchase price and closing costs of the Skylight acquisition, including retiring $40.4 million of existing Skylight debt and refinancing the Company's existing outstanding borrowings of
$46.0 million. In connection with this transaction, the Company paid approximately $1.2 million in debt issuance costs which are included in other non-current assets in the
Consolidated Balance Sheets. Debt issuance costs are being amortized using the effective interest method over the term of the debt.
As
of December 31, 2008, $15.0 million was outstanding on the revolving credit facility and $71.3 million was outstanding on the term loan. Throughout 2009, the
Company repaid the $15.0 million outstanding balance on the revolving credit facility and $9.4 million of the outstanding term loan principal. In December 2009, the Company drew an
additional $9.0 million under the
revolving credit facility, which the Company repaid in January 2010. During the years ended December 31, 2008 and 2009, the weighted average interest rate for the term loan and the revolving
credit facility under the Amended and Restated Credit Facility was 6.3% and 6.0%, respectively.
During
2009 the Company also modified the terms of the Amended and Restated Credit Facility in order to increase its allowable debt, enhance its ability to increase capital investments
and pay the remaining $5.0 million of the $30.0 million dividend declared in 2008. In connection with this modification, the Company paid approximately $0.4 million in costs,
which are included in other non-current assets on the Consolidated Balance Sheet. The modification costs are being amortized using the effective interest method over the remaining term of
the debt.
The
revolving credit facility provides for and includes within its $30.0 million limit a $2.0 million swingline facility and commitments for up to $2.5 million in
letters of credit. The revolving credit facility may be utilized by the Company to provide ongoing working capital and for other general corporate purposes. As of December 31, 2009, the Company
was utilizing approximately $0.2 million of the available letters of credit.
The
term loan is repayable in quarterly installments commencing September 30, 2008 and maturing June 30, 2013. The revolving credit facility has a maturity of
July 15, 2013. The Company, at its option, may prepay any borrowings in whole or in part, without any prepayment penalty or premium. In addition, following the end of each fiscal year in which
the leverage ratio calculated as of such fiscal year end is greater than or equal to 1.75 to 1.00, the Company shall prepay the then
F-21
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 9: DEBT (Continued)
outstanding
term loans in an aggregate amount equal to 25% of the excess cash flow for such fiscal year.
Loans
under the Amended and Restated Credit Facility which are not within the swingline facility or letters of credit are designated, at the Company's election, as Eurodollar rate loans
or alternate base rate ("ABR") loans. Swingline loans shall be ABR loans. Eurodollar loans bear interest at the greater of 6.0% per annum or the adjusted LIBOR for the interest period in effect for
such borrowing plus a spread of 2.25% to 3.25% based on the Company's leverage ratio. ABR loans bear interest at the greater of 6.0% per annum or the alternate base rate plus a spread of 0.75% to
1.75% based on the Company's leverage ratio. At December 31, 2009, the weighted average interest rate for the term loan and the revolving credit facility under the Amended and Restated Credit
Facility was 6.0%.
Letters
of credit may be issued under the Amended and Restated Credit Facility for a period of up to one year and will have an expiration date of one year or five business days prior to
the revolving credit facility maturity date, which is July 15, 2013. Letters of credit bear interest at the rate per
annum applicable to Eurodollar revolving loans. The Company pays a participation fee with respect to any participation in letters of credit, which accrues at the applicable rate for Eurodollar
revolving loans on the average daily amount of such lender's letter of credit exposure from the effective date to the date on which such lender ceases to have any letter of credit and exposure. The
Company also pays the lending bank a fronting fee, which accrues at the rate of 0.25% per annum on the average daily amount of the letter of credit exposure from the effective date to the date on
which there ceases to be any letter of credit exposure, as well as the lending bank's standard fees. Participation fees and fronting fees accrued through and including the last day of March, June,
September, and December of each year are payable in arrears on the third business day following such day. In 2008, the Company did not incur any fronting or participation fees. During the year ended
December 31, 2009, the Company incurred less than $0.1 million in fronting and participation fees.
The
Company is required to pay a commitment fee to the administrative agent for the account of each lender, which accrues at a rate per annum equal to 0.50% on the average daily unused
amount of each commitment of such lender, and is payable in arrears three business days following the last day of each March, June, September, and December of each year and on the date on which the
applicable commitments terminate. During each of the years ended December 31, 2008 and 2009, the Company paid commitment fees of less than $0.1 million, which are included in other
general and administrative costs in the Consolidated Statements of Operations.
The
Amended and Restated Credit Facility contains certain financial and non-financial covenants and requirements, including a Leverage Ratio and Fixed Charge Ratio. The
Amended and Restated Credit Facility also provides for customary events of default as defined in the agreement, including failure to pay any principal or interest when due, failure to comply with
covenants, and default in the event of a change of control. The Company was in compliance with these covenants as of December 31, 2009.
F-22
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 9: DEBT (Continued)
Capital Lease
During the year ended December 31, 2009, the Company entered into a capital lease arrangement with a software provider for
perpetual database licenses. The capital lease arrangement resulted in the recording of $3.4 million on the Consolidated Balance Sheet, which was the present value of future payments under the
lease agreement discounted using an effective interest rate of 6.0%. The $3.4 million capital lease is included in capitalized software, which is a component of property and equipment on the
Consolidated Balance Sheet. As of December 31, 2009, approximately $2.6 million in principal payments remained payable on the capital lease.
Outstanding Balances and Availability
As of December 31, 2009, $61.9 million was outstanding on the term loan, with $11.3 million included in current
liabilities, and $9.0 million was outstanding on the revolving credit facility and included in current liabilities on the Consolidated Balance Sheets.
At
December 31, 2008 and 2009, the Company's term loan and revolving credit facility represents variable-rate debt that re-prices within one year.
Borrowings under the Company's term loan are variable interest rate borrowings that bear annual interest at the greater of 6% or an adjusted market rate. As of December 31, 2008 and 2009, the
fair value of borrowings under the term loan approximated its carrying value based on prevailing market rates for borrowings with similar ratings and maturities.
As
of December 31, 2009, the aggregate amounts of annual principal maturities of long-term debt and required payments under the capital lease are as follows:
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
Capital lease |
|
|
|
|
(in thousands of dollars) |
|
2010 |
|
$ |
20,250 |
|
$ |
1,392 |
|
2011 |
|
|
16,875 |
|
|
1,401 |
|
2012 |
|
|
22,500 |
|
|
|
|
2013 |
|
|
11,250 |
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70,875 |
|
$ |
2,793 |
|
|
|
|
|
|
|
F-23
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 9: DEBT (Continued)
The
following table presents the availability under the $30.0 million revolving credit facility as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Total available revolving credit facility |
|
$ |
30,000 |
|
|
Less: outstanding revolving credit loans |
|
|
(9,000 |
) |
|
Less: outstanding swingline loans |
|
|
|
|
|
Less: outstanding letters of credit |
|
|
(240 |
) |
|
|
|
|
Remaining availability under the revolving credit facility |
|
$ |
20,760 |
|
|
|
|
|
NOTE 10: STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
Prior to the Company's acquisition of Skylight on July 15, 2008, the Company was authorized to issue 64,000,000 shares of
$0.001 par value series A convertible preferred stock. The preferred stock had an aggregate liquidation preference of $1.24189 per share, conversion rights, voting rights, and dividend
participation rights on an as-if-converted basis for dividends declared by the board of directors on class A common stock. In 2007, the Company's board of directors
declared a dividend in the amount of $0.95 per share of series A preferred stock calculated on an as-if-converted to common stock basis. Cash dividends paid during the
year 2007 for series A preferred stock totaled approximately $42.6 million, of which approximately $31.0 million represented a liquidating dividend paid from capital in excess of
par value.
In
connection with the Skylight acquisition, all outstanding shares of series A preferred stock were converted into 44,807,723 shares of class A common stock. The
Company's articles of incorporation, as amended in July 2008, authorize the Company to issue 10,000,000 shares of $0.001 par value preferred stock. Prior to the conversion of series A preferred stock
to class A common stock, the board of directors declared a dividend in the amount of approximately $0.50 per share of series A preferred stock calculated on an as-if converted to common stock basis.
Cash dividends declared during 2008 for series A preferred stock totaled approximately $23.0 million.
Class A and B Common Stock
The Company has two classes of common stock. Each share of class B common stock is convertible, upon certain conditions, into
one share of class A common stock. The Company is authorized to issue 150,000,000 shares of $0.001 par value class A common stock and 15,000,000 shares of $0.001 par value class B
common stock, (collectively "common stock").
In
2007, the Company's board of directors declared a dividend in the amount of $0.95 per share of class A and B common stock. Cash dividends paid during the year 2007 for
class A and B common stock totaled approximately $13.5 million, of which approximately $9.8 million represented a liquidating dividend paid from capital in excess of par value.
F-24
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 10: STOCKHOLDERS' EQUITY (Continued)
As
part of the purchase consideration related to the Company's acquisition of Skylight in July 2008 (see Note 4), the Company issued 16,906,100 shares of class A common
stock and 10,043,137 shares of class B common stock at the then-current fair market value of $3.47 per share. Also in connection with the acquisition, all previously outstanding
shares of class B common stock, totaling 6,110,000 shares, were automatically converted into shares of class A common stock, and the Company's board of directors declared a dividend
immediately prior to the acquisition totaling $30.0 million, of which approximately $23.0 million represented dividends associated with series A convertible preferred stock prior to its
conversion to class A common stock with the remaining $7.0 million representing dividends associated with the Company's common stock. The Company paid $25.0 million of the $30.0 million
dividend in 2008, and paid the remaining $5.0 million in 2009.
In
connection with the Procesa acquisition, in December 2008 (see Note 4) the Company issued 86,455 shares of class A common stock at the then-current fair
market value of $3.47 per share.
Treasury Stock Transactions
Treasury stock is accounted for under the cost method and is included as a component of stockholders' equity.
During
2007, the Company's board of directors approved the repurchase of 400,000 shares of class A common stock at the then-current fair market value from the
Company's then Chief Executive Officer ("CEO"). Total cash consideration paid to the former CEO was approximately $1.1 million. In 2008, the CEO separated from the Company. As a part of his
separation agreement, the Company repurchased an additional 900,000 shares of his class A common stock for approximately $3.2 million.
In
2009, the Company reached agreements with defendants named in the MPower litigation, settling all disputes and claims between the Company and the defendants (see Note 14). In
connection with the settlement, the Company assumed 570,000 shares of its outstanding class A common stock held by the defendants. The settlement transactions resulted in the Company's
non-cash acquisition of 400,000 shares of treasury stock, which is recorded as a
litigation settlement gain of $1.2 million on the Company's Consolidated Statement of Operations, and a $0.2 million cash purchase of 170,000 shares of treasury stock.
Dividend Equivalents
Certain employee stock options contain rights to dividend equivalents. The Company did not pay any dividend equivalents during 2007 or
2008. In 2009, the Company paid $0.2 million in cash dividend equivalents related to certain of its employee stock options. The dividend equivalents were paid when the underlying options
vested.
Warrants
During each of the years ended December 31, 2007, 2008 and 2009, the Company issued 20,000 warrants to purchase shares of
class A common stock to one of its distribution partners at a
F-25
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 10: STOCKHOLDERS' EQUITY (Continued)
weighted
average exercise price of $1.50 per share. In addition, in 2008 the Company issued an additional 22,346 warrants to purchase shares of class A common stock to a former executive based
on a separation agreement at an exercise price of $1.70 per share.
During
the years ended December 31, 2007 and 2008, respectively, 2,198,344 and 23,846 warrants were exercised resulting in additional paid in capital of approximately
$3.8 million and less than $0.1 million, respectively. No warrants were exercised in 2009.
A
summary of warrant activity for the twelve months ended December 31, 2007, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Term (Years) |
|
Warrants outstanding January 1, 2007 |
|
|
2,866,527 |
|
$ |
1.70 |
|
|
7.3 |
|
|
Granted |
|
|
20,000 |
|
|
1.50 |
|
|
|
|
|
Exercised |
|
|
(2,198,344 |
) |
|
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2007 |
|
|
688,183 |
|
$ |
1.69 |
|
|
6.3 |
|
|
Granted |
|
|
42,346 |
|
|
1.61 |
|
|
|
|
|
Exercised |
|
|
(23,846 |
) |
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2008 |
|
|
706,683 |
|
$ |
1.69 |
|
|
5.2 |
|
|
Granted |
|
|
20,000 |
|
|
1.50 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2009 |
|
|
726,683 |
|
$ |
1.69 |
|
|
4.3 |
|
|
|
|
|
|
|
|
|
Exercisable and outstanding December 31, 2009 |
|
|
726,683 |
|
$ |
1.69 |
|
|
4.3 |
|
The
fair values of awards were valued at the date grant using the Black-Scholes option pricing model using the following average assumptions for the years ended December 31,
2007, 2008, and 2009:
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
Expected volatility |
|
60% |
|
40% |
|
60% |
Expected dividend yield |
|
|
|
|
|
|
Expected term |
|
5 years |
|
3.5 to 5 years |
|
5 years |
Risk free rate |
|
4.6% |
|
2.1% to 2.3% |
|
1.7% |
Weighted average fair value per warrant at issuance date |
|
$1.50 |
|
$1.81 |
|
$1.80 |
F-26
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 11: SHARE BASED PAYMENT
Stock Incentive Plans
As of December 31, 2009, the Company has one stock-based compensation plan, the 2004 Stock Option Plan (the "Plan"). The Plan
provides for the grant of stock options and other stock-based awards to key employees, directors, and consultants, including executive officers. The total number of shares that may be issued under the
Plan is 18,459,980 subject to adjustment in certain events. The exercise price of incentive stock options granted under the Plan will not be less than 100% of the fair market value of the underlying
shares on the date of grant, as determined under the Plan. The maximum term of these options is ten years from the date of grant.
Under
the Plan, standard options vest over a four-year period, with 25% vesting on each of the first four anniversaries of the grant date. Unless otherwise provided in the
stock option agreement, upon a change in control, 25% of a participant's option award shall be accelerated and vested, subject to the continued employment or service of the option holder through the
date of the change in control. Options granted to members of the board of directors vest over a three year period, in three annual installments on each of the first three anniversaries of the grant
date, of 34%, 33%, and 33%, respectively. In the event of a change of control of the Company, the director options become 100% vested if both a change in control occurs and in connection with such
change in control, or within twelve months following such change in control, the director is removed from the board. Generally, the Company expenses the grant-date fair value, net of
estimated forfeitures, over the vesting period on a straight-line basis. In 2007, 2008 and 2009 the Company issued 1.4 million, 4.1 million and 1.2 million, standard
options, respectively.
The
Company also issues performance-based options to purchase common stock that carry service, market, and performance conditions different from the Company's standard stock option
agreements. The vesting of these options is dependent upon both continued employment with the Company over a four-year period and the Company's achievement of a determined equity value
hurdle in an initial public offering or change of control. If the Company does not achieve the determined equity hurdle, then the options will vest 100% after six years of continued employment with
the Company. In 2008 and 2009, the Company issued 5.4 million and 0.1 million performance-based options, respectively. The Company did not issue any performance-based options in 2007.
Options
with the following characteristics were outstanding as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Prices
|
|
Number of
Shares |
|
Weighted
Average
Remaining
Contractual
Life (Years) |
|
Weighted
Average
Exercise Price |
|
Number
Exercisable |
|
Weighted
Average
Exercise Price |
|
$0.25 $1.29 |
|
|
959,004 |
|
|
6.0 |
|
$ |
1.06 |
|
|
852,554 |
|
$ |
1.03 |
|
2.79 |
|
|
112,105 |
|
|
7.1 |
|
|
2.79 |
|
|
75,085 |
|
|
2.79 |
|
3.45 |
|
|
1,123,125 |
|
|
8.4 |
|
|
3.45 |
|
|
148,188 |
|
|
3.45 |
|
3.47 |
|
|
1,695,095 |
|
|
9.1 |
|
|
3.47 |
|
|
159,708 |
|
|
3.47 |
|
3.53 |
|
|
5,827,632 |
|
|
8.0 |
|
|
3.53 |
|
|
691,245 |
|
|
3.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,716,961 |
|
|
8.0 |
|
$ |
3.26 |
|
|
1,926,780 |
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 11: SHARE BASED PAYMENT (Continued)
Stock Option Activities
The fair value of the stock options granted under the employee stock incentive plan during the years ended December 31, 2007,
2008 and 2009 was $1.4 million, $15.6 million and $4.6 million, respectively.
The
following table presents a summary of stock option activity for the years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Weighted
Average
Exercise Price |
|
Weighted
Average
Remaining
Contractual
Term |
|
Aggregate
Intrinsic Value |
|
Outstanding December 31, 2006 |
|
|
6,419,015 |
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,426,500 |
|
|
2.00 |
|
|
|
|
|
|
Exercised |
|
|
(4,653,371 |
) |
|
0.73 |
|
|
|
|
|
|
Expired |
|
|
(9,030 |
) |
|
0.88 |
|
|
|
|
|
|
Forfeited |
|
|
(135,512 |
) |
|
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007 |
|
|
3,047,602 |
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
9,527,874 |
|
|
3.51 |
|
|
|
|
|
|
Exercised |
|
|
(1,022,965 |
) |
|
1.23 |
|
|
|
|
|
|
Expired |
|
|
(295,201 |
) |
|
1.60 |
|
|
|
|
|
|
Forfeited |
|
|
(1,115,225 |
) |
|
2.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008 |
|
|
10,142,085 |
|
$ |
3.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,328,995 |
|
$ |
3.47 |
|
|
|
|
|
|
Exercised |
|
|
(66,283 |
) |
|
1.88 |
|
|
|
|
|
|
Expired |
|
|
(148,483 |
) |
|
1.03 |
|
|
|
|
|
|
Forfeited |
|
|
(1,539,353 |
) |
|
3.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009 |
|
|
9,716,961 |
|
$ |
3.26 |
|
8.0 years |
|
$ |
2,409,483 |
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009 |
|
|
7,291,211 |
|
$ |
3.18 |
|
7.9 years |
|
$ |
2,339,381 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
1,926,780 |
|
$ |
2.39 |
|
6.6 years |
|
$ |
2,131,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value in the table above represents the total pre-tax value, which is calculated as the difference between the Company's stock price on
December 31, 2009 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders
exercised their options on December 31, 2009. This amount changes based on the fair value of the Company's
stock. The intrinsic value of options exercised during 2007, 2008 and 2009 was, $3.9 million, $2.3 million and $0.1 million, respectively.
F-28
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 11: SHARE BASED PAYMENT (Continued)
Restricted Stock
Certain of the shares issued by the Company in connection with the Skylight acquisition were subject to forfeiture to the Company in
the event that the restricted shares held by such employees in Skylight Holdings, Inc. were forfeited, cancelled or otherwise did not vest. Generally, vesting of those restricted shares is tied
to continued service with the Company for terms ranging from three to five years. The Company has accounted for the shares that are subject to forfeiture to the Company as restricted stock. The fair
value of these shares was not included in the Skylight purchase price, and is being recognized as compensation expense on a straight-line basis as the forfeiture restrictions lapse over the three to
five year time period.
Activity
related to the Company's deemed restricted stock awards during the years ended December 31, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
Shares of Unvested
Restricted Stock
Outstanding |
|
Weighted Average
Grant Date
Fair Value |
|
Balance at December 31, 2007 |
|
|
|
|
$ |
|
|
Granted |
|
|
466,060 |
|
|
3.47 |
|
Vested |
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
466,060 |
|
$ |
3.47 |
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
Vested |
|
|
201,472 |
|
|
|
|
Forfeited |
|
|
2,515 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
262,073 |
|
$ |
3.47 |
|
|
|
|
|
|
|
|
Assumptions for Estimating Fair Value of Stock Option Grants
Through December 31, 2007, the Company used the Black-Scholes option pricing model for determining the estimated fair value for
stock-based awards. Beginning in January 2008 and going forward, the Company used the Binomial Lattice model for determining the estimated fair value for stock option awards as the Company has
determined the model better reflects the characteristics of the employee share options in estimating fair value, particularly in light of the complexity of the performance awards granted in 2008 and
2009. The Binomial Lattice model requires analysis of actual exercise behavior data and a number of assumptions including expected volatility, risk-free interest rate, expected dividends,
option cancellations, and forfeitures.
F-29
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 11: SHARE BASED PAYMENT (Continued)
The
following table summarizes information by quarter for stock options that the Company granted during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Options
Granted |
|
Weighted
Average
Exercise
Price |
|
Weighted Average
Fair Value per
Share of
Common Stock |
|
Intrinsic
Value |
|
January 1, 2009 - March 31, 2009 |
|
|
886,000 |
|
$ |
3.47 |
|
$ |
3.47 |
|
$ |
|
|
April 1, 2009 - June 30, 2009 |
|
|
315,495 |
|
|
3.47 |
|
|
3.47 |
|
|
|
|
July 1, 2009 - September 30, 2009 |
|
|
65,000 |
|
|
3.47 |
|
|
3.47 |
|
|
|
|
October 1, 2009 - December 31, 2009 |
|
|
62,500 |
|
|
3.47 |
|
|
3.47 |
|
|
|
|
On
each of the above dates, the Company granted employees stock options at exercise prices equal to the estimated fair value of the underlying common stock, as determined on a
contemporaneous basis by the board of directors.
The
following table summarizes the assumptions used to value options granted for the years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
Expected volatility |
|
43.0% |
|
44.5% 48.8% |
|
59.8% |
Expected dividend yield |
|
|
|
|
|
|
Expected term |
|
6.25 years |
|
6.0 9.3 years |
|
7.7 9.4 years |
Risk free rate |
|
4.6% 5.2% |
|
2.6% 4.0% |
|
3.3% |
The
expected term of employee stock options represents the weighted average period that the stock options are expected to remain outstanding. The Company derived the expected term
assumption based on its historical experience, while giving consideration to options that have lives less than the contractual terms and vesting schedules in accordance with guidance set by the FASB.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company's employee stock options. The volatility assumption is based on the
historical volatilities of comparable public companies. The dividend yield assumption is based on the Company's expectation of future dividend payouts.
Stock-Based Compensation Expense
During the years ended December 31, 2007, 2008 and 2009, the Company recorded total stock-based compensation expense of,
$0.8 million, $2.5 million and $4.5 million, respectively. Included in stock-based compensation expense for the year ended December 31, 2009 is $0.2 million related
to the accelerated vesting of certain stock option and restricted stock awards held by former executives and employees of the Company. The vesting of these options and restricted shares was
accelerated in accordance with the terms of the related employment
F-30
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 11: SHARE BASED PAYMENT (Continued)
agreements.
There were no expenses incurred during the years ended December 31, 2007 or 2008 associated with accelerated vesting.
As
of December 31, 2009, total unrecognized stock-based compensation costs related to stock options and restricted stock was $10.8 million, net of estimated forfeitures.
Unvested stock-based compensation costs will be recognized as the underlying stock options or restricted stock vest over a period of up to six years.
At
December 31, 2009, the Company's outstanding options had a weighted average remaining contractual term of 8.0 years. As of December 31, 2009, unrecognized
compensation cost related to stock options amounted to $10.1 million and is expected to be recognized over a weighted average period of 3.3 years. At December 31, 2009,
unrecognized stock-based compensation cost related to restricted stock amounted to $0.7 million and is expected to be recognized over a weighted average period of 2.1 years. The amount
of unrecognized stock-based compensation will be affected by any future stock option or restricted stock grants.
At
December 31, 2009, based on the Company's consideration of types of awards, employee class and historical experience, the Company has estimated annualized forfeiture rates of
8.0% for its options granted to executive officers, 10.0% for options granted to vice president and director level employees, and 12.5% for options granted to employees below director level. In 2007
and 2008, the Company had estimated annualized forfeiture rates of 3.0% for its options granted to executive officers, 10.0% for options granted to vice president and director level employees, and
23.6% for options granted to employees below director level. For 2009, the impact of the change in forfeiture rates decreased stock-based compensation expense and increased net income by
$0.4 million. The Company records additional expense when the actual forfeiture rate is lower than estimated, and records a recovery of prior expense if the actual forfeiture rate is higher
than estimated.
NOTE 12: EARNINGS PER SHARE
Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the number of weighted average common shares issued and
outstanding for the period. The Company calculates basic and diluted earnings (loss) per share using the treasury stock method, the if-converted method, and the two-class
method, as applicable.
The
Company has two classes of common stock. Each share of class B common stock is convertible to one share of class A common stock upon certain events. The rights,
including the liquidation and dividend rights, of the holders of class A and class B common stock are identical, except with respect to voting. As a result, the undistributed earnings
(loss) for each year are allocated based on the contractual participation rights of the class A and class B common shares as if the earnings for the year had been distributed. As the
liquidation and dividend rights are identical, the undistributed earnings (loss) are allocated on a proportionate basis. The Company assumes the conversion of class B common stock in the
computation of the diluted earnings (loss) per share of class A common stock.
Prior
to the conversion of convertible series A preferred stock to class A common stock in 2008, convertible series A preferred stockholders had rights to common
stock dividends on an
F-31
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 12: EARNINGS PER SHARE (Continued)
if-converted
basis. For purposes of calculating earnings per share, the preferred shares are considered participating securities. In calculating basic earnings (loss) per share in 2007 and
2008, earnings available to series A preferred shares are excluded from net income available to common stockholders.
In
2009, certain employees were granted options with rights to dividend equivalents. The options with dividend equivalent rights are considered participating securities to the extent
that the options
have vested. In calculating basic earnings (loss) per share using the two-class method, earnings available to participating securities are excluded from net income available to common
shareholders.
Diluted
earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares issued and outstanding for the
period plus amounts representing the dilutive effect of stock options, warrants, restricted stock and the conversion of convertible preferred stock, as applicable. The Company calculates dilutive
potential common shares using the treasury stock method, which assumes that the Company will use proceeds from the exercise of stock options and warrants to repurchase shares of common stock to hold
in its treasury stock reserves.
The
computation of diluted net loss per share for the years ended December 31, 2007 and 2008 excludes the impact of options outstanding to purchase 3.0 million and
10.1 million shares of common stock, respectively, warrants outstanding to purchase 0.7 million shares of common stock in each of the years ended December 31, 2007 and 2008, and
44.8 million shares of series A convertible preferred stock in the year ended December 31, 2007 because of the Company's net loss available to common stockholders in each of the
years ended December 31, 2007 and 2008.
During
the year ended December 31, 2009, the potential dilutive effect of 9.7 million stock options was excluded from the computation of diluted weighted average shares
outstanding because they were antidilutive. These excluded options could potentially dilute earnings per share in the future.
F-32
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 12: EARNINGS PER SHARE (Continued)
The
following is a reconciliation of the numerator (net income) and the denominator (weighted average number of common shares) used in the calculation of basic and diluted earnings
(loss) per share for the years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
Class A |
|
Class B |
|
Class A |
|
Class B |
|
Class A |
|
Class B |
|
|
|
|
(in thousands, except per share data) |
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,753 |
|
$ |
7,973 |
|
$ |
(9,680 |
) |
$ |
(1,965 |
) |
$ |
16,028 |
|
$ |
2,146 |
|
|
Less: Earnings distributed to participating securities |
|
|
(19,536 |
) |
|
(23,064 |
) |
|
(19,083 |
) |
|
(3,873 |
) |
|
(188 |
) |
|
(25 |
) |
Less: Undistributed earnings allocated to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings available to common stockholders |
|
$ |
(12,783 |
) |
$ |
(15,091 |
) |
$ |
(28,763 |
) |
$ |
(5,838 |
) |
$ |
15,772 |
|
$ |
2,111 |
|
Weighted-average shares outstanding used in basic calculation |
|
|
5,175 |
|
|
6,110 |
|
|
39,040 |
|
|
7,924 |
|
|
75,543 |
|
|
10,112 |
|
Basic earnings (loss) per share |
|
$ |
(2.47 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings available to common stockholders |
|
$ |
(12,783 |
) |
$ |
(15,091 |
) |
$ |
(28,763 |
) |
$ |
(5,838 |
) |
$ |
15,772 |
|
$ |
2,111 |
|
Add: Earnings distributed to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213 |
|
|
|
|
Add: Undistributed earnings allocated to participating securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
|
|
|
Add: Reallocation of undistributed earnings as a result of conversion of class B to class A shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,111 |
|
|
|
|
Add: Reallocation of undistributed earnings to class B shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(12,783 |
) |
|
(15,091 |
) |
|
(28,763 |
) |
|
(5,838 |
) |
|
18,174 |
|
|
2,138 |
|
Weighted-average shares outstanding used in in basic calculation: |
|
|
5,175 |
|
|
6,110 |
|
|
39,040 |
|
|
7,924 |
|
|
75,543 |
|
|
10,112 |
|
Weighted average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of class B to class A common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,112 |
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
|
|
Restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in diluted calculation |
|
|
5,175 |
|
|
6,110 |
|
|
39,040 |
|
|
7,924 |
|
|
86,733 |
|
|
10,205 |
|
Diluted earnings (loss) per share |
|
$ |
(2.47 |
) |
$ |
(2.47 |
) |
$ |
(0.74 |
) |
$ |
(0.74 |
) |
$ |
0.21 |
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 13: INCOME TAXES
The components of the provision for income taxes are as follows for the years ended December 31,
2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, |
|
|
|
2007 |
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
8,780 |
|
$ |
4,624 |
|
$ |
9,860 |
|
|
|
State |
|
|
681 |
|
|
194 |
|
|
1,040 |
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
9,461 |
|
|
4,818 |
|
|
10,900 |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(93 |
) |
|
2,516 |
|
|
1,614 |
|
|
|
State |
|
|
|
|
|
(27 |
) |
|
(11 |
) |
|
|
|
|
|
|
|
|
Total deferred |
|
|
(93 |
) |
|
2,489 |
|
|
1,603 |
|
|
|
|
|
|
|
|
|
Total provision |
|
$ |
9,368 |
|
$ |
7,307 |
|
$ |
12,503 |
|
|
|
|
|
|
|
|
|
Deferred
income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the
F-34
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 13: INCOME TAXES (Continued)
amounts
used for income tax purposes. Significant components of the Company's deferred taxes as of December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
2009 |
|
|
|
|
(in thousands of dollars) |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Current deferred tax assets |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
700 |
|
$ |
727 |
|
|
|
Accrued expenses |
|
|
1,853 |
|
|
2,100 |
|
|
|
Prepaid card supply costs |
|
|
1,478 |
|
|
30 |
|
|
|
Net operating loss and tax credit carryforwards |
|
|
2,682 |
|
|
15 |
|
|
|
|
|
|
|
|
Total current deferred tax assets |
|
|
6,713 |
|
|
2,872 |
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
59 |
|
|
65 |
|
|
|
Net operating loss and tax credit carryforwards |
|
|
523 |
|
|
471 |
|
|
|
Stock compensation |
|
|
255 |
|
|
1,091 |
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets |
|
|
837 |
|
|
1,627 |
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities |
|
|
|
|
|
|
|
|
Acquired intangibles |
|
|
(11,546 |
) |
|
(10,356 |
) |
|
Depreciation and amortization |
|
|
(349 |
) |
|
(1,589 |
) |
|
|
|
|
|
|
|
Total noncurrent deferred tax liabilities |
|
|
(11,895 |
) |
|
(11,945 |
) |
|
|
|
|
|
|
Net current deferred tax asset |
|
$ |
6,713 |
|
$ |
2,872 |
|
|
|
|
|
|
|
Net noncurrent deferred tax liability |
|
$ |
(11,058 |
) |
$ |
(10,318 |
) |
|
|
|
|
|
|
Upon
the tax-free acquisition of Skylight in 2008, the Company recorded a net deferred tax liability of approximately $5.2 million as part of purchase accounting. The
net deferred tax liability included deferred tax assets of $6.4 million related primarily to depreciable assets, accrued expenses, net operating loss and tax credit carryforwards, transaction
costs and deferred financing costs. The net deferred tax liability included deferred tax liabilities of approximately $11.6 million related primarily to depreciable assets and acquired
intangibles.
Under
the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may result in a limitation on the amount of net operating loss and credit
carryforwards which can be used in future years. As of December 31, 2009, the Company has approximately $8.6 million of federal net operating losses with limitations on the amount that
can be recognized in
any annual period. This limit will result in the expiration of approximately $8.3 million of the carryforwards prior to their utilization. As such, these amounts are not included in the table
above.
F-35
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 13: INCOME TAXES (Continued)
The
exercise of certain Company stock options results in compensation which is includable in the taxable income of the exercising option holder and deductible by the Company for federal
and state income tax purposes. Such compensation results from increases in the fair market value of the Company's common stock subsequent to the date of grant of the exercised stock options. Any
option related excess tax benefits (tax deduction greater than cumulative book deduction) are recorded as an increase to additional paid-in capital, while option related tax deficiencies
(cumulative book deduction greater than tax deduction) are recorded as a decrease to additional paid-in capital to the extent of the Company's additional paid-in capital option
pool, then to income tax provision. During the years ended December 31, 2007 and 2008, option-related tax deductions resulted in increases to additional paid-in capital of
$2.2 million and less than $0.1 million, respectively. During the year ended December 31, 2009, the shortfall related to the Company's stock-options resulted in a decrease to
additional paid-in-capital of $0.2 million.
The
Company's provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 35% to income (loss) before
income taxes for the years ended December 31, 2007, 2008 and 2009 primarily as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
|
2009 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
(35.0 |
)% |
|
35.0 |
% |
State taxes, net of federal benefit |
|
|
2.7 |
|
|
3.9 |
|
|
3.3 |
|
Permanent items |
|
|
0.1 |
|
|
0.7 |
|
|
0.2 |
|
Stock compensation |
|
|
0.5 |
|
|
6.9 |
|
|
2.8 |
|
Goodwill and intangible asset impairment |
|
|
|
|
|
185.6 |
|
|
|
|
Other |
|
|
0.6 |
|
|
6.3 |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
Provision for income tax |
|
|
38.9 |
% |
|
168.4 |
% |
|
40.7 |
% |
|
|
|
|
|
|
|
|
For
the year ended December 31, 2009, the total amount of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Balance as of January 1, 2009 |
|
$ |
1,892 |
|
Tax positions related to prior years: |
|
|
|
|
|
Additions |
|
|
85 |
|
|
Reductions |
|
|
(1,723 |
) |
Settlements |
|
|
(59 |
) |
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
195 |
|
|
|
|
|
Included
in the balance of unrecognized tax benefits at December 31, 2009 are approximately $0.1 million of tax benefits that, if recognized, would impact the effective
tax rate. Also included in the balance of unrecognized tax benefits at December 31, 2009 are $0.1 million of tax benefits that, if recognized, would result in adjustments to other tax
accounts, primarily deferred taxes.
F-36
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 13: INCOME TAXES (Continued)
The
Company's policy is to classify interest and penalties associated with these uncertain tax positions as a component of income tax expense. The Company had accrued penalties and
interest of approximately $0.1 million during each of the years ended December 31, 2008 and 2009.
The
Company is subject to taxation in the U.S. and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state examinations for tax
years before 2006 and 2005, respectively.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has commitments under operating lease agreements, principally a commitment for office space which extends through November
2011. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight-line method over the term of the lease. Equipment
lease terms generally cover a one-year period and are subject to renewal. Rent expense for the years ending December 31, 2007, 2008 and 2009 was $0.6 million,
$0.9 million and $1.5 million, respectively.
At
December 31, 2009, future minimum operating lease commitments under non-cancelable leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
2010 |
|
$ |
1,518 |
|
2011 |
|
|
1,031 |
|
2012 |
|
|
39 |
|
2013 |
|
|
4 |
|
|
|
|
|
Total minimum payments |
|
$ |
2,592 |
|
|
|
|
|
Service Agreements
The Company has agreements with various third-party vendors to provide card issuance services, card processing services, internet data
center services, and other consulting services. The remaining term of the agreements range from one to six years in length and require monthly payments. At December 31, 2009, future minimum
commitments under non-cancelable service agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
2010 |
|
$ |
7,130 |
|
2011 |
|
|
5,906 |
|
2012 |
|
|
3,643 |
|
2013 |
|
|
1,098 |
|
2014 |
|
|
958 |
|
Thereafter |
|
|
1,000 |
|
|
|
|
|
Total minimum payments |
|
$ |
19,735 |
|
|
|
|
|
F-37
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 14: COMMITMENTS AND CONTINGENCIES (Continued)
Guarantees
A significant portion of the Company's business is conducted through retailers that provide load and reload services to cardholders at
their retail locations. Members of the Company's distribution and reload network collect cardholders' funds and remit them by electronic transfer directly to the issuing banks for deposit in the
cardholder accounts. The Company does not take possession of cardholders' funds at any time during the settlement
process. The Company's issuing banks typically receive cardholders' funds no earlier than three business days after they are collected by the retailer. If any retailer fails to remit cardholders'
funds to the Company's issuing banks, the Company typically reimburses the issuing banks for such funds. The Company manages the settlement risk associated with this process through a formalized set
of credit standards, limiting load volumes for certain retailers, requiring certain retailers to maintain deposits on account, and by typically maintaining a right of offset of cardholders' funds
against commissions payable to retailers. The Company has not experienced any significant historical losses associated with settlement failures, and has not recorded a settlement guarantee liability
as of December 31, 2008 or 2009. As of December 31, 2008 and 2009, the Company's estimated gross settlement exposure was $13.2 and $11.0 million, respectively.
Cardholders
can incur charges in excess of the funds available in their card accounts, and are liable for the resulting overdrawn account balance. While the Company generally declines
authorization attempts for amounts that exceed the available balance in a cardholder's account, the application of card association and network organization rules and regulations, the timing of the
settlement of transactions and the assessment of subscription, maintenance or other fees, among other things, can result in overdrawn card accounts. The Company also provides, as a courtesy and at its
discretion, certain cardholders with a "cushion" which allows them to overdraw their card accounts. In addition, eligible cardholders may enroll in the issuing banks' overdraft protection programs
pursuant to which the issuing banks fund transactions that exceed the available balance in the cardholders' card accounts. The Company is responsible to the issuing banks for any losses associated
with these overdrawn account balances. As of December 31, 2008 and 2009, the Company's reserves intended to cover the risk that it may not recover cardholders' overdrawn account balances were
$1.3 million and $1.6 million, respectively. As of December 31, 2008 and 2009, cardholders' overdrawn account balances totaled $5.0 million and $4.1 million,
respectively.
Litigation
In October, 2007, Alexsam, Inc. ("Alexsam") filed suit against the Company in the District Court of Travis County, Texas,
419th Judicial District, asserting breach of a license agreement entered into between the Company and Alexsam in 2004. The license agreement was entered into by the parties following Alexsam's
assertion and subsequent dismissal without prejudice of a claim of patent infringement filed by Alexsam against the Company in 2003. Pursuant to the license agreement, NetSpend agreed to pay Alexsam
certain royalty payments if NetSpend changed its business process to allow NetSpend cards to be activated or recharged in a manner allegedly covered by the patents held by Alexsam. The parties
mediated the case in both 2008 and 2009, without reaching a settlement. In April 2009, NetSpend filed a motion for summary judgment, and following a hearing, the Court denied the motion without
comment. The Company is evaluating the
F-38
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 14: COMMITMENTS AND CONTINGENCIES (Continued)
possible
outcomes related to the litigation and has not accrued a contingent loss because a loss is not probable or reasonably estimable. The Company plans to contest vigorously Alexsam's claims.
MPower Litigation
In 2008, 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 the suit to add Futeh Kao and Mattrix Group, L.L.C (collectively,
"defendants"). In this lawsuit, the Company alleged breach of fiduciary duties, breach of contractual and common-law duties of confidentiality, breach of contractual
non-solicitation, misappropriation of the Company's trade secrets and confidential and proprietary information belonging to the Company, breach of noncompetition agreements, and engagement
in a civil conspiracy. Defendant Mitchell asserted counterclaims against the Company alleging breach of contract relating to consulting services and payment of certain dividends, as well as for
defamation. Mitchell sought actual and consequential damages and attorneys' fees.
In
2009, the Company reached agreements with the defendants, settling all disputes and claims between the Company and the defendants. In connection with the settlement, the Company
acquired 570,000 shares of its outstanding class A common stock held by certain of the defendants. The settlement transactions resulted in the Company's non-cash acquisition of
400,000 shares of class A common stock, which is recorded as a litigation settlement gain of $1.2 million in the Company's Consolidated Statement of Operations, and a $0.6 million
cash payment to Richard Child, which included the repurchase of 170,000 shares of class A common stock for $0.2 million.
Katz Letter
In 2008, the Company received a letter from Ronald A. Katz Technology Licensing, L.P. ("RAKTL"), which contained an offer for
the Company to acquire a license under the RAKTL portfolio of patents. The Company believes in the strength of its defenses related to potential allegations of the Company's infringement of RAKTL
patents. Should litigation arise in connection with the RAKTL patents, the Company intends to vigorously defend itself. Refer to Note 17 for additional discussion.
Recoveries
In 2009, the Company, in conjunction with two of its issuing banks, identified approximately $10.6 million of excess funds
related to several years of chargebacks and fee-related recoveries from card associations, much of which the Company had previously written off in its loss reserves. The Company had
previously recorded receivables of approximately $1.6 million associated with these items. As a result, the Company recorded a $9.0 million settlement gain in its Consolidated Statement
of Operations for the year ended December 31, 2009, the period in which the chargebacks and fee-related recoveries were settled.
F-39
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 14: COMMITMENTS AND CONTINGENCIES (Continued)
Other
In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. Management
believes that the outcomes of such actions or proceedings will not have a material effect on the Company's financial position, results of operations, cash flows or liquidity.
NOTE 15: EMPLOYEE BENEFIT PLAN
In 2002, NetSpend Corporation established a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees
who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation, not to exceed a federally specified maximum, on a pre-tax basis. The
Company may contribute to the program by matching funds based on a percentage of the employee's contribution, and is also permitted to make a profit-sharing contribution as determined annually at the
discretion of the board of directors. For the years ending December 31, 2007, 2008 and 2009, the 401(k) match made by the Company was approximately $0.3 million, $0.5 million and
$0.7 million, respectively. No profit-sharing contributions were made during 2007, 2008 or 2009.
In
2009, the Company established a deferred compensation plan under which certain employees have the option to defer a portion of their compensation. As of December 31, 2009, the
Company's liability with regard to the deferred compensation plan was less than $0.1 million.
NOTE 16: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In July 2007, the Company issued and sold 50,000 shares of class A common stock at $3.24 per share to Dan Henry, who is the Company's current CEO and was at the time of such
purchase a member of the Company's board of directors, in exchange for cash in an amount equal to $0.2 million.
Prior
to the acquisition of Skylight on July 15, 2008 (see Note 4), Skylight was owned by JLL Partners Fund IV, LP and JLL Partners Fund V, LP (collectively
"the JLL Funds"), which also own approximately 97% of ACE Cash Express, Inc. ("ACE"), the Company's largest distributor. As a result of the Skylight transaction, the JLL Funds became the beneficial
owner of more than five percent of the Company's outstanding class A common stock and class B common stock and the Company entered into an amended and restated independent agency
agreement with ACE through March 2016 related to the sale of the Company's gift and GPR cards. The Company incurred expenses from transactions with ACE of $11.1 million, $17.1 million
and $23.0 million for the years ended December 31, 2007, 2008 and 2009, respectively. Although revenues generated from cardholders acquired at ACE represent approximately one third of
the Company's revenues, the portion of those revenues earned from transactions directly with ACE were $1.4 million, $1.6 million, and $2.9 million for the years ended
December 31, 2007, 2008 and 2009, respectively. At December 31, 2008 and 2009, $1.8 million and $2.0 million, respectively, was payable to ACE.
Oak
Investment 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 beneficial owner of more than five percent of the Company's
F-40
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 16: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (Continued)
outstanding
Class A common stock. The Company incurred expenses from transactions with Sutherland of $4.5 million, $7.3 million and $5.9 million for the years ended
December 31, 2007, 2008 and 2009, respectively. At December 31, 2008 and 2009, $1.1 million and $1.2 million, respectively, was payable to Sutherland.
During
each of the years ended December 31, 2008 and 2009, the Company incurred expenses of approximately $0.2 million for charges related to the CEO's use of an airplane
owned by Birardi Investments, LLC ("Birardi"). Birardi is an airplane leasing company that is partially owned by the CEO.
NOTE 17: SUBSEQUENT EVENTS
The Company has evaluated its subsequent events through July 15, 2010.
On
January 8, 2010, the Company repaid the $9.0 million outstanding balance on its revolving credit line.
On
January 29, 2010, the Company purchased 150,000 shares of the common stock of Meta Financial Group, Inc. ("Meta") for a purchase price of $3.2 million. At the
conclusion of the purchase, the Company held approximately 4.9% of the issued and outstanding common stock of Meta. Commensurate with the investment, the Company renegotiated its program management
agreement, making Meta the preferred issuing bank for the majority of its card programs.
In
January 2010, the Company introduced a new card program in select retailers that provides a limited amount of overdraft protection to cardholders who opt in to the protection and
meet eligibility requirements. Meta is the issuing bank related to this cardholder feature. The agreement between Meta and the Company that underlies this feature requires the Company to retain cash
on hand at Meta to offset a portion of the negative balances and requires the Company to purchase a portion of the negative balances based upon the aging of those balances.
In
February 2010, the Company accelerated the vesting of certain restricted stock awards held by former executives and employees of the Company. The restricted shares were accelerated
in accordance with the terms of the related employment agreements. In addition, the Company modified the terms of certain options held by a former member of the Company's board of directors.
In
March 2010, the Company entered into an agreement to repurchase 1,500,000 shares of the Company's class A common stock from certain shareholders for approximately
$5.7 million.
In
2008, the Company received a letter from Ronald A. Katz Technology Licensing, L.P. ("RAKTL"), which contained an offer for the Company to acquire a license under the RAKTL portfolio
of patents. In 2010 the Company engaged in substantive discussions and negotiations with RAKTL, and the Company continued to evaluate potential defenses against any possible claims of infringement and
rights to indemnification from a third party service provider that has licensed RAKTL patents. Based upon subsequent discussions and licensing negotiations with RAKTL, and management's assessment of
potential defenses against any claims of infringement, the Company accrued a $4.0 million liability in the first quarter of 2010 related to this matter.
F-41
Table of Contents
NetSpend Holdings, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2007, 2008 and 2009
NOTE 17: SUBSEQUENT EVENTS (Continued)
In
April 2010, the Board approved modifications to the performance condition of all performance-based options, except those held by the CEO. Prior to the modification, the performance
condition was the Company's achievement of a pre-determined equity value hurdle in an initial public offering or change of control. In April 2010, the performance condition was modified to
be the earlier of 1) the Company's achievement of a determined equity value hurdle in an initial public offering, or 2) a change in control prior to December 31, 2011, or
3) the Company's achievement of a pre-determined earnings target.
As
a result of the modification, the Company recognized additional performance-based option expense of $0.2 million during the six months ended June 30, 2010 and the
future recognition period related to the unamortized performance-based option expense of $1.2 million was reduced from approximately four years to approximately two years.
In
April and May 2010, the Company granted a total of 1.5 million standard options and 0.5 million event based options. The standard options vest in four equal
annual installments on each of the four anniversaries of the grant date. The event based options 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 the Company during the legal
life of the option, the portion of the event based options subject to those conditions will be cancelled.
In
June 2010, during the course of negotiations with the Company's largest distributor, ACE Cash Express, Inc., or ACE, regarding possible modifications to the Company's distribution
agreement with ACE, ACE initiated arbitration alleging breach of the agreement based on certain activities of the Company's direct-to-consumer and online marketing programs and seeking, among other
things, termination of the agreement. On July 14, 2010, the parties dismissed and released with prejudice all claims in the proceeding, and the parties also agreed on the terms of certain
revisions of the agreement.
F-42
Table of Contents
NetSpend Holdings, Inc.
Condensed Consolidated Balance Sheets
As of December 31, 2009 and June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
June 30,
2010 |
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(in thousands,
except share and per-share data) |
|
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21,154 |
|
$ |
15,384 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $50 and $213, respectively |
|
|
4,513 |
|
|
5,001 |
|
|
Prepaid card supply |
|
|
1,783 |
|
|
1,423 |
|
|
Prepaid expenses |
|
|
2,357 |
|
|
2,701 |
|
|
Other current assets |
|
|
1,845 |
|
|
1,717 |
|
|
Income tax receivable |
|
|
2,375 |
|
|
|
|
|
Deferred tax assets |
|
|
2,872 |
|
|
4,579 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
36,899 |
|
|
30,805 |
|
Property and equipment, net |
|
|
24,441 |
|
|
24,212 |
|
Goodwill |
|
|
128,567 |
|
|
128,567 |
|
Intangible assets |
|
|
28,981 |
|
|
27,404 |
|
Long-term investment |
|
|
|
|
|
4,500 |
|
Other assets |
|
|
3,397 |
|
|
3,149 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
222,285 |
|
$ |
218,637 |
|
|
|
|
|
|
|
Liabilities & Stockholders' Equity |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable (includes $609 and $580 of related party payables as of December 31, 2009 and June 30, 2010, respectively) |
|
$ |
3,444 |
|
$ |
2,470 |
|
|
Income tax payable |
|
|
|
|
|
1,169 |
|
|
Accrued expenses (includes $2,593 and $3,021 of accrued related party expenses as of December 31, 2009 and June 30, 2010, respectively) |
|
|
21,531 |
|
|
24,729 |
|
|
Cardholders' reserve |
|
|
1,620 |
|
|
1,862 |
|
|
Deferred revenue |
|
|
2,158 |
|
|
1,576 |
|
|
Long-term debt, current portion |
|
|
21,513 |
|
|
12,551 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
50,266 |
|
|
44,357 |
|
Long-term debt, net of current portion |
|
|
51,979 |
|
|
45,694 |
|
Deferred tax liabilities |
|
|
10,318 |
|
|
9,574 |
|
Other non-current liabilities |
|
|
370 |
|
|
383 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
112,933 |
|
|
100,008 |
|
|
|
|
|
|
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
|
Class A common stock, $0.001 par value; 150,000,000 shares authorized; outstanding: (at December 31, 2009 77,198,193 issued less 1,870,000 held
in treasury and at June 30, 2010 77,331,810 issued less 3,370,000 held in treasury) |
|
|
77 |
|
|
77 |
|
|
Class B common stock, $0.001 par value, 15,000,000 shares authorized; outstanding: (at December 31, 2009 10,244,609 shares and at June 30, 2010 10,449,230 shares.) |
|
|
10 |
|
|
11 |
|
|
Treasury stock at cost |
|
|
(5,704 |
) |
|
(11,374 |
) |
|
Additional paid-in capital |
|
|
119,484 |
|
|
122,719 |
|
|
Accumulated other comprehensive income |
|
|
|
|
|
823 |
|
|
Retained earnings (accumulated deficit) |
|
|
(4,515 |
) |
|
6,373 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
109,352 |
|
|
118,629 |
|
|
|
|
|
|
|
|
|
Total liabilities & stockholders' equity |
|
$ |
222,285 |
|
$ |
218,637 |
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
F-43
Table of Contents
NetSpend Holdings, Inc.
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2009 and 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, |
|
|
|
2009 |
|
2010 |
|
Operating Revenues (includes $1,286 and $2,258 of related party revenues in 2009 and 2010, respectively) |
|
$ |
109,636 |
|
$ |
136,967 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
Direct operating costs (includes $14,840 and $19,094 of related party expenses in 2009 and 2010, respectively) |
|
|
51,826 |
|
|
63,017 |
|
|
Salaries, benefits and other personnel expenses |
|
|
23,557 |
|
|
26,583 |
|
|
Advertising, marketing and promotion costs |
|
|
6,173 |
|
|
7,369 |
|
|
Other general and administrative costs (includes $128 and $176 of related party expenses in 2009 and 2010, respectively) |
|
|
11,975 |
|
|
9,088 |
|
|
Depreciation and amortization |
|
|
5,144 |
|
|
6,075 |
|
|
Settlement (gains) and other losses |
|
|
(10,229 |
) |
|
4,300 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
88,446 |
|
|
116,432 |
|
|
|
|
|
|
|
Operating income |
|
|
21,190 |
|
|
20,535 |
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
Interest income |
|
|
27 |
|
|
46 |
|
|
Interest expense |
|
|
(2,753 |
) |
|
(2,057 |
) |
|
|
|
|
|
|
|
|
Total other expense |
|
|
(2,726 |
) |
|
(2,011 |
) |
|
|
|
|
|
|
Income before income taxes |
|
|
18,464 |
|
|
18,524 |
|
Provision for income taxes |
|
|
7,386 |
|
|
7,460 |
|
|
|
|
|
|
|
Net income |
|
$ |
11,078 |
|
$ |
11,064 |
|
|
|
|
|
|
|
Net income per share for class A and class B common stock: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
$ |
0.13 |
|
|
Diluted |
|
$ |
0.13 |
|
$ |
0.13 |
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
F-44
Table of Contents
NetSpend Holdings, Inc.
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock |
|
Class B
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
Accumulated
Other
Comprehensive
Income |
|
Retained
Earnings
(Accumulated
Deficit) |
|
|
|
|
|
Additional
Paid-in
Capital |
|
Total
Stockholders'
Equity |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
(in thousands of dollars, except share data) |
|
Balances at December 31, 2009 |
|
|
77,198,193 |
|
$ |
77 |
|
|
10,244,609 |
|
$ |
10 |
|
|
(1,870,000 |
) |
$ |
(5,704 |
) |
$ |
119,484 |
|
$ |
|
|
$ |
(4,515 |
) |
$ |
109,352 |
|
Repurchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500,000 |
) |
|
(5,670 |
) |
|
|
|
|
|
|
|
|
|
|
(5,670 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,010 |
|
|
|
|
|
|
|
|
3,010 |
|
Excercise of options for common stock |
|
|
133,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
181 |
|
Vesting of restricted stock |
|
|
|
|
|
|
|
|
204,621 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
44 |
|
Unrealized gain on available-for-sale investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823 |
|
|
|
|
|
823 |
|
Dividend equivalents paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
(176 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,064 |
|
|
11,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010 |
|
|
77,331,810 |
|
$ |
77 |
|
|
10,449,230 |
|
$ |
11 |
|
|
(3,370,000 |
) |
$ |
(11,374 |
) |
$ |
122,719 |
|
$ |
823 |
|
$ |
6,373 |
|
$ |
118,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
F-45
Table of Contents
NetSpend Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2009 and 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2009 |
|
June 30,
2010 |
|
|
|
|
(in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income |
|
$ |
11,078 |
|
$ |
11,064 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,144 |
|
|
6,075 |
|
|
Amortization of debt issuance costs |
|
|
218 |
|
|
265 |
|
|
Gain on settlement |
|
|
(1,192 |
) |
|
|
|
|
Stock-based compensation |
|
|
2,337 |
|
|
3,010 |
|
|
Tax benefit associated with stock options |
|
|
|
|
|
(44 |
) |
|
Provision for cardholder losses |
|
|
2,288 |
|
|
3,399 |
|
|
Deferred income taxes |
|
|
63 |
|
|
(2,918 |
) |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,943 |
|
|
(488 |
) |
|
|
Income tax receivable or payable |
|
|
6,470 |
|
|
3,588 |
|
|
|
Prepaid card supply |
|
|
(13 |
) |
|
360 |
|
|
|
Prepaid expenses |
|
|
(1,040 |
) |
|
(344 |
) |
|
|
Other current assets |
|
|
(477 |
) |
|
128 |
|
|
|
Other long-term assets |
|
|
(1,861 |
) |
|
(16 |
) |
|
|
Accounts payable and accrued expenses |
|
|
(1,248 |
) |
|
2,224 |
|
|
|
Cardholders' reserve |
|
|
(2,461 |
) |
|
(3,157 |
) |
|
|
Other liabilities |
|
|
523 |
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
21,772 |
|
|
22,577 |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(7,041 |
) |
|
(4,269 |
) |
|
Long-term investment |
|
|
|
|
|
(3,210 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,041 |
) |
|
(7,479 |
) |
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(5,000 |
) |
|
|
|
|
Dividend equivalents paid |
|
|
(213 |
) |
|
(176 |
) |
|
Proceeds from the exercise of stock options |
|
|
17 |
|
|
181 |
|
|
Tax benefit associated with stock options |
|
|
|
|
|
44 |
|
|
Principal payment on debt |
|
|
(3,750 |
) |
|
(15,247 |
) |
|
Treasury stock purchase |
|
|
(219 |
) |
|
(5,670 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(9,165 |
) |
|
(20,868 |
) |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
5,566 |
|
|
(5,770 |
) |
Cash and cash equivalents at beginning of period |
|
|
21,490 |
|
|
21,154 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
27,056 |
|
$ |
15,384 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,597 |
|
$ |
1,873 |
|
Cash paid for income taxes |
|
|
1,155 |
|
|
7,235 |
|
Capital lease entered into for the purchase of software |
|
|
3,383 |
|
|
|
|
See
accompanying notes to the unaudited condensed consolidated financial statements.
F-46
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
NATURE OF OPERATIONS NetSpend Holdings, Inc. ("NetSpend" or the "Company"), based in Austin, Texas was formed
as a Delaware corporation on February 18, 2004. It was formed in connection with the recapitalization of one of the Company's current subsidiaries, NetSpend Corporation, which was founded in 1999. The
Company operates in one reportable business segment to provide general purpose reloadable ("GPR") prepaid debit cards and alternative financial service solutions to underbanked consumers in the United
States. The Company's products empower underbanked consumers to become "self-banked" by providing FDIC-insured depository accounts with a menu of pricing and features specifically tailored to their
needs. The Company has built an extensive distribution and reload network comprised of financial service centers and other retail locations throughout the United States.
The
Company is an agent of FDIC-insured depository institutions that serve as the issuers of the Company's products. The Company has agreements with Meta Payment Systems, a division of
Meta Financial Group ("Meta"), Inter National Bank ("INB"), U.S. Bank, and Sun Trust Bank (collectively, the "issuing banks") whereby the issuing banks issue MasterCard International ("MasterCard") or
Visa USA, Inc. ("Visa") branded cards to customers. The Company's products may be used to purchase goods and services wherever MasterCard and Visa are accepted or to withdraw cash via automatic teller
machines ("ATMs").
BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of NetSpend
Holdings, Inc. ("NetSpend" or the "Company") and its subsidiaries (collectively, the "Company") do not include all information and footnotes necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company's significant accounting policies are
disclosed in the notes to the Company's Audited Consolidated Financial Statements for the year ended December 31, 2009. Therefore, the condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto contained in the Company's Audited Consolidated Financial Statements for the year ended December 31, 2009.
In
the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal, recurring nature considered necessary to be fairly
stated.
USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and reported amounts of revenues and expenses during the reporting period. These accounting estimates reflect the best judgment of management. Actual results could
significantly differ from management's estimates and judgments.
SIGNIFICANT CONCENTRATIONS Financial instruments that potentially expose the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts receivable. A significant portion of the Company's cash is deposited in cash and money market funds at large depository
institutions, many of which have received funds under the U.S.
F-47
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 1: BASIS OF PRESENTATION (Continued)
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.
Accounts
receivable at December 31, 2009 and June 30, 2010 are primarily receivables due from cardholders for service fees and for interchange revenues due from card associations
related to merchant point of sale transactions.
Cardholder
funds and deposits related to the Company's products are held at FDIC insured issuing banks for the benefit of the cardholders. The company uses four primary issuing banks;
however, Meta is the Company's preferred issuing bank and holds a majority of cardholder funds. The failure of any of the Company's issuing banks could have a material adverse effect on the Company's
business.
The
Federal Reserve Board recently amended Regulation E, limiting the ability of financial institutions to assess overdraft fees on a cardholder's account unless the cardholder opts in
for these services. Overdraft revenue pursuant to programs under which the cardholder was not required to opt in represented approximately 7% of the Company's operating revenues during the six months
ended June 30, 2010. While the impact of this change is difficult to assess, the Company expects its overdraft revenues pursuant to these programs to decline as a percentage of our operating revenues.
In
addition, the Company derives approximately one-third of its revenue from GPR cards sold through one of its third-party distributors, ACE Cash Express, Inc. ("ACE"). The Company's
current distribution agreement with ACE is effective through March 2016.
NOTE 2: OTHER FINANCIAL DATA
COMPENSATING BALANCES AND RESTRICTED CASH The Company has established compensating balances at its issuing
banks to offset overdrawn cardholder accounts. Some of these compensating balance accounts are included in the Consolidated Balance Sheets as cash and cash equivalents because there are no legal or
contractual restrictions over deposits in
these accounts. At December 31, 2009 and June 30, 2010, these compensating balances totaled $1.2 million.
Restricted
cash is cash with statutory or contractual restrictions that prevent it from being used in the Company's operations. Restricted cash is classified in other non-current assets
on the Company's Condensed Consolidated Balance Sheets. As of December 31, 2009 and June 30, 2010, the Company had restricted cash of $0.4 million.
CARDHOLDERS' RESERVE The Company is exposed to transaction losses due to cardholder fraud and other losses
resulting from cardholder activity, as well as non-performance of third parties. The Company establishes a cardholders' reserve for estimated losses arising from processing customer transactions,
debit card overdrafts, chargebacks for unauthorized card use, and merchant-related chargebacks due to non-delivery of goods or services. These reserves are established based upon historical loss and
recovery rates, and cardholder activity for which specific losses can be identified. The cardholders' reserve was approximately $1.6 million and $1.9 million
F-48
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 2: OTHER FINANCIAL DATA (Continued)
at
December 31, 2009 and June 30, 2010, respectively. The provision for cardholder losses is included in direct operating costs in the Condensed Consolidated Statements of Operations.
Establishing
the reserve for transaction losses is an inherently uncertain process, and ultimate losses may vary from the current estimate. The Company regularly updates its reserve
estimate as new facts become known and events occur that may impact the settlement or recovery of losses.
FAIR VALUE OF ASSETS AND LIABILITIES The Company's financial instruments include cash, cash equivalents,
accounts receivable, accounts payable, long-term investments and borrowings under the term loan. At December 31, 2009 and June 30, 2010, the fair values of cash, cash equivalents, accounts receivable
and accounts payable approximated carrying values because of the short-term nature of these instruments. At June 30, 2010 the long-term investment was recorded at its fair value based on quoted prices
in an active market.
Borrowings
under the Company's term loan are variable interest rate borrowings that bear annual interest at the greater of 6% or an adjusted market rate (see Note 10). As of December
31, 2009 and June 30, 2010, the fair value of borrowings under the term loan approximated its carrying value based on prevailing market rates for borrowings with similar ratings and maturities. As of
June 30, 2010 there was no required fair value measurement for assets and liabilities measured at fair value on a non-recurring basis.
NOTE 3: INVESTMENTS
In January 2010, the Company purchased 150,000 shares of the common stock of Meta, one of the Company's issuing banks, for the purchase price of $3.2 million. The investment in Meta is
an available-for-sale security and is included in the Condensed Consolidated Balance Sheet as a long-term investment. As of June 30, 2010, the Company's long-term investment is stated at fair value
using its quoted price in an active market. As of June 30, 2010, the fair value of the Company's investment in Meta was $4.5 million.
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued guidance on fair value measurements and disclosures to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value
hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the
additional disclosure requirements related to Level 3 measurements, which are effective for fiscal years beginning after December 15, 2010. The adoption of the additional requirements is not expected
to have a material impact on the consolidated financial statements.
In
February 2010, the FASB issued an amendment to the guidelines on accounting for subsequent events. The amendment clarifies that an SEC filer is required to evaluate subsequent events
through the date that the financial statements are issued, but that SEC filers are not required
F-49
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
to
disclose the date through which subsequent events have been evaluated. The amendment was effective upon issuance and did not have an impact on the consolidated financial statements.
NOTE 5: COMPREHENSIVE INCOME
The Company's comprehensive income is included as a component of stockholders' equity and is composed of net income and unrealized gains and losses on investments designated as
available-for-sale. As of June 30, 2010, the Company had an unrealized gain of $0.8 million, net of tax, related to the difference between the fair value of the long-term investment of $4.5 million on
June 30, 2010 and the $3.2 million purchase price.
The
following table presents the calculation of comprehensive income:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, |
|
|
|
2009 |
|
2010 |
|
|
|
|
(in thousands of dollars) |
|
Net income |
|
$ |
11,078 |
|
$ |
11,064 |
|
Unrealized holding gain on investment, net of tax |
|
|
|
|
|
823 |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,078 |
|
$ |
11,887 |
|
|
|
|
|
|
|
NOTE 6: EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income available to common stockholders by the number of weighted average common shares issued and outstanding for the
period. The Company calculates basic and diluted earnings per share using the treasury stock method, the if-converted method, and the two-class method, as applicable.
The
Company has two classes of common stock. Each share of class B common stock is convertible to one share of class A common stock upon certain events. The rights,
including the liquidation and dividend rights, of the holders of class A and class B common stock are identical, except with respect to voting. As a result, the undistributed earnings
are allocated based on the contractual participation rights of the class A and class B common shares as if the earnings had been distributed. As the liquidation and dividend rights are
identical, the undistributed earnings are allocated on a proportionate basis. The Company assumes the conversion of class B common stock in the computation of diluted earnings per share of
class A common stock.
Certain
employee options and awards contain rights to dividend equivalents. The options with dividend equivalent rights are considered participating securities to the extent that the
options have vested. In calculating basic earnings per share using the two-class method, the dividend equivalents paid on participating securities are excluded from net income available to common
shareholders.
F-50
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 6: EARNINGS PER SHARE (Continued)
Diluted
earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares issued and outstanding for the
period plus amounts representing the dilutive effect of stock options, warrants, and restricted stock. The Company calculates dilutive potential common shares using the treasury stock method, which
assumes that the Company will use proceeds from the exercise of stock options to repurchase shares of common stock to hold in its treasury stock reserves.
In
computing diluted earnings per share, certain options and restricted stock awards were excluded because the number of shares that the Company could potentially repurchase with the
use of proceeds from option exercises and restricted stock vesting, when adjusted for unamortized expense and tax benefits, would be greater than the number of options exercised and awards vested.
During the six months ended June 30, 2009 and 2010, respectively, the potential dilutive effect of 9.8 million and 5.7 million stock options and restricted stock awards were excluded from the
computation of diluted weighted average shares outstanding. These excluded options and awards could potentially dilute earnings per share in the future.
F-51
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 6: EARNINGS PER SHARE (Continued)
The
following is a reconciliation of the numerator (net income) and the denominator (weighted average number of common shares) used in the calculation of basic and diluted earnings
share for the six months ended June 30, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, |
|
|
|
2009 |
|
2010 |
|
|
|
Class A |
|
Class B |
|
Class A |
|
Class B |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,781 |
|
$ |
1,297 |
|
$ |
9,709 |
|
$ |
1,355 |
|
|
Less: Earnings distributed to participating securities |
|
|
(188 |
) |
|
(25 |
) |
|
(155 |
) |
|
(21 |
) |
|
Less: Undistributed earnings allocated to participating securities |
|
|
(35 |
) |
|
(5 |
) |
|
(100 |
) |
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
Undistributed earnings available to common stockholders |
|
|
9,558 |
|
|
1,267 |
|
|
9,454 |
|
|
1,320 |
|
Weighted-average shares outstanding used in basic calculation |
|
|
75,732 |
|
|
10,043 |
|
|
74,449 |
|
|
10,394 |
|
Basic earnings per share |
|
$ |
0.13 |
|
$ |
0.13 |
|
$ |
0.13 |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings available to common stockholders |
|
|
9,558 |
|
|
1,267 |
|
|
9,454 |
|
|
1,320 |
|
|
Add: Earnings distributed to participating securities |
|
|
213 |
|
|
|
|
|
176 |
|
|
|
|
|
Add: Undistributed earnings allocated to participating securities |
|
|
40 |
|
|
|
|
|
114 |
|
|
|
|
|
Add: Reallocation of undistributed earnings as a result of conversion of class B to class A shares |
|
|
1,267 |
|
|
|
|
|
1,320 |
|
|
|
|
|
Add: Reallocation of undistributed earnings to class B shares |
|
|
|
|
|
27 |
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,078 |
|
$ |
1,294 |
|
$ |
11,064 |
|
$ |
1,328 |
|
Weighted-average shares outstanding used in basic calculation |
|
|
75,732 |
|
|
10,043 |
|
|
74,449 |
|
|
10,394 |
|
Weighted-average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of class B to class A common shares outstanding |
|
|
10,043 |
|
|
|
|
|
10,394 |
|
|
|
|
|
Options |
|
|
638 |
|
|
|
|
|
788 |
|
|
|
|
|
Warrants |
|
|
367 |
|
|
|
|
|
435 |
|
|
|
|
|
Restricted stock |
|
|
105 |
|
|
105 |
|
|
37 |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in diluted calculation |
|
|
86,885 |
|
|
10,148 |
|
|
86,103 |
|
|
10,410 |
|
Diluted earnings per share |
|
$ |
0.13 |
|
$ |
0.13 |
|
$ |
0.13 |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
F-52
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2009 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
June 30,
2010 |
|
|
|
|
(in thousands of dollars)
|
|
Computer and office equipment |
|
$ |
14,033 |
|
$ |
13,803 |
|
Computer software |
|
|
16,583 |
|
|
23,696 |
|
Furniture and fixtures |
|
|
1,317 |
|
|
1,329 |
|
Leasehold improvements |
|
|
1,609 |
|
|
1,627 |
|
Construction in progress |
|
|
9,387 |
|
|
4,865 |
|
|
|
|
|
|
|
|
|
|
42,929 |
|
|
45,320 |
|
Less: Accumulated depreciation |
|
|
(18,488 |
) |
|
(21,108 |
) |
|
|
|
|
|
|
|
|
$ |
24,441 |
|
$ |
24,212 |
|
|
|
|
|
|
|
Property
and equipment are assessed for impairment whenever events or circumstances indicate the carrying value of an asset group may not be fully recoverable by comparing the carrying
value to total future undiscounted cash flows. Impairment is recorded for long-lived assets equal to the excess of the carrying amount of the asset group over its estimated fair value. During the six
months ended June 30, 2010, there were no events or circumstances indicating that the Company's long-lived assets were impaired.
Depreciation
expense for the six months ended June 30, 2009 and 2010 was approximately $3.2 million and $4.5 million, respectively.
NOTE 8: INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2009 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
June 30,
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 |
) |
|
(17,066 |
) |
|
|
|
|
|
|
|
|
$ |
28,981 |
|
$ |
27,404 |
|
|
|
|
|
|
|
Amortization
expense for the six months ended June 30, 2009 and 2010 was $1.9 million and $1.6 million, respectively.
F-53
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 9: ACCRUED EXPENSES
Accrued expenses at December 31, 2009 and June 30, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
June 30,
2010 |
|
|
|
|
(in thousands of dollars) |
|
Commissions payable to distributors |
|
$ |
4,972 |
|
$ |
4,652 |
|
Accrued wages and related personnel expenses |
|
|
5,819 |
|
|
5,578 |
|
Other accrued liabilities |
|
|
10,740 |
|
|
14,499 |
|
|
|
|
|
|
|
|
|
$ |
21,531 |
|
$ |
24,729 |
|
|
|
|
|
|
|
NOTE 10: DEBT
As of December 31, 2009 and June 30, 2010, the Company's outstanding principal borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009 |
|
June 30,
2010 |
|
|
|
|
(in thousands of dollars)
|
|
Term loan |
|
$ |
61,875 |
|
$ |
56,250 |
|
Revolving credit facility |
|
|
9,000 |
|
|
|
|
Capital lease |
|
|
2,617 |
|
|
1,995 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
73,492 |
|
|
58,245 |
|
Less: |
|
|
|
|
|
|
|
Current portion of term loan |
|
|
11,250 |
|
|
11,250 |
|
Current portion of credit facility |
|
|
9,000 |
|
|
|
|
Current portion of capital lease |
|
|
1,263 |
|
|
1,301 |
|
|
|
|
|
|
|
|
Long-term debt, current portion |
|
|
21,513 |
|
|
12,551 |
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
51,979 |
|
$ |
45,694 |
|
|
|
|
|
|
|
The
Company's credit agreement ("Amended and Restated Credit Facility") provides financing of $105.0 million, consisting of a $30.0 million revolving credit facility
("revolving credit facility") and a $75.0 million term loan ("term loan"). During the six months ended June 30, 2010, the Company repaid $5.6 million on the outstanding term loan
principal and the $9.0 million outstanding balance of the revolving credit facility. During the six months ended June 30, 2010, the weighted-average interest rate for the term loan was
6.0%. At June 30, 2010, the effective interest rate on the term loan was 6.0%.
As
of June 30, 2010, approximately $56.3 million was outstanding on the term loan and the Company had no loans outstanding under the revolving credit facility.
F-54
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 10: DEBT (Continued)
The
revolving credit facility provides for and includes within its $30.0 million limit a $2.0 million swingline facility and commitments for up to $2.5 million in
letters of credit. As of June 30, 2010, the Company was utilizing approximately $0.2 million of the available letters of credit.
In
addition to the revolving credit facility and term loan, the Company's debt consists of a capital lease entered into in 2009 for the purchase of software. During the six months ended
June 30, 2010, the Company made payments of $0.7 million towards the capital lease, which includes interest payments at an effective interest rate of 6.0%.
The
Amended and Restated Credit Facility contains certain financial and non-financial covenants and requirements. The Company was in compliance with these covenants as of
June 30, 2010.
At
December 31, 2009 and June 30, 2010, the Company's term loan and revolving credit facility represents variable-rate debt that re-prices within one year. Borrowings
under the Company's term loan are variable interest rate borrowings that bear annual interest at the greater of 6% or an adjusted market rate. As of December 31, 2009 and June 30, 2010,
the fair value of borrowings under the term loan approximated its carrying value based on prevailing market rates for borrowings with similar ratings and maturities.
NOTE 11: STOCKHOLDERS' EQUITY
Class A and B Common Stock
The Company's articles of incorporation authorize the Company to issue 150,000,000 shares of $0.001 par value class A
common stock and 15,000,000 of $0.001 par value class B common stock (collectively "common stock"). Each share of class B common stock is convertible, at the holder's discretion, into
one share of class A common stock.
Treasury Stock
Treasury stock is accounted for under the cost method and is included as a component of stockholders' equity. During the six months
ended June 30, 2009, the Company reached agreements with defendants named in the MPower litigation, settling all disputes and claims between the Company and the defendants (see Note 13).
In connection with the settlement, the Company acquired 570,000 shares of its outstanding class A common stock held by the defendants. The settlement transactions resulted in the
Company's non-cash acquisition of
400,000 shares of class A common stock, which is recorded as a litigation settlement gain of $1.2 million on the Company's Condensed Consolidated Statement of Operations, and a
$0.2 million cash purchase of 170,000 shares of class A common stock.
In
March 2010, the Company repurchased 1,500,000 shares of its class A common stock for $5.7 million.
F-55
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 11: STOCKHOLDERS' EQUITY (Continued)
Dividend Equivalents
Certain employee options and awards contain rights to dividend equivalents. The dividend equivalents are paid when the underlying
options vest. During each of the six months ended June 30, 2009 and 2010, the Company paid $0.2 million in dividend equivalents.
Dividends
In 2008, the Company declared a $30.0 million dividend. The Company paid $25.0 million of the $30.0 million
dividend in 2008 and paid the remaining $5.0 million in March 2009. Company did not declare or pay any dividends during the six months ended June 30, 2010.
Warrants
In February 2009, the Company issued 20,000 warrants to purchase shares of class A common stock to one of its
distributors at a weighted average exercise price of $1.50 per share. The Company did not issue any warrants during the six months ended June 30, 2010. No warrants were exercised during the six
months ended June 30, 2009 or 2010. 4,086 warrants were forfeited during the six months ended June 30, 2010.
A
summary of warrant activity for the six months ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Term
(Years) |
|
Warrants outstanding January 1, 2010 |
|
|
726,683 |
|
$ |
1.69 |
|
|
4.3 |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,086 |
) |
$ |
1.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding June 30, 2010 |
|
|
722,597 |
|
$ |
1.69 |
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable and outstanding June 30, 2010 |
|
|
722,597 |
|
$ |
1.69 |
|
|
4.3 |
|
NOTE 12: SHARE BASED PAYMENT
Stock Incentive Plans
As of June 30, 2010, the Company has one stock-based compensation plan, the 2004 Stock Option Plan (the "Plan"). The Plan
provides for the grant of stock options and other 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.
Standard
options issued to employees vest over a four-year period and options granted to members of the board of directors vest over a three year period. The Company expenses the
F-56
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 12: SHARE BASED PAYMENT (Continued)
grant-date
fair value of standard options, net of estimated forfeitures, over the vesting period on a straight-line basis. During the six months ended June 30, 2009 and 2010, the
Company granted 1.1 million and 2.0 million standard stock options to employees, respectively.
Event-based
options 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 the Company during the legal life of the event-based option, the
option will be cancelled. During the six months ended June 30, 2010, the Company granted 0.5 million event-based options to employees. The Company did not issue any event-based options
during the six months ended June 30, 2009. The Company has not recorded stock compensation expense in connection with event-based options because vesting is contingent upon future events.
Performance-based
options to purchase common stock carry service, market and performance conditions different from the Company's other stock option agreements. The terms of the
performance-based options specify that the options vest at the earlier of: 1) the Company's achievement of a performance condition and the option holder's continued employment with the Company
over a four-year period, or 2) the option holders continued employment with the Company over a six year period. During the six months ended June 30, 2009, the Company issued a total of
0.1 million performance-based options. The Company did not issue any performance-based options during the six months ended June 30, 2010.
The
fair value of the stock options granted under the employee stock incentive plan during the six months ended June 30, 2009 and 2010 was $2.6 million and
$5.4 million, respectively.
In
March 2010, the Board modified the terms of certain options held by a former member of the Company's board of directors to allow the former board member's options to continue vesting
subsequent to the termination of the option holder's board membership. The modification was approved by the board of directors in exchange for consulting services. The services were deemed
non-substantive and additional compensation expense of approximately $0.2 million was recognized during the six months ended June 30, 2010.
In
April 2010, the Board also modified the performance condition of all performance-based options. Prior to the modification, the performance condition for employee option holders was
the Company's achievement of a pre-determined equity value hurdle in an initial public offering or change of control. In April 2010, the performance condition for all employee option holders, except
the Company's CEO, was modified to be the earlier of 1) the Company's achievement of a determined equity value hurdle in an initial public offering, or 2) a change in control prior to
December 31, 2011, or 3) the Company's achievement of a pre-determined earnings target. With respect to performance-based options held by the Company's CEO, the performance condition was
modified to include a clause that provided for the immediate vesting of 20% of his options upon the closing of a change in control at a pre-determined equity value hurdle.
As
a result of the modification of the performance-based options, the Company recognized additional performance-based option expense of $0.2 million during the six months ended
June 30,
F-57
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 12: SHARE BASED PAYMENT (Continued)
2010
and the future recognition period related to the unamortized performance-based option expense of $1.2 million was reduced from approximately four years to approximately two years.
The
following table presents a summary of stock option activity for the six months ended June 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 |
|
|
2,272,700 |
|
$ |
3.78 |
|
|
|
|
|
|
|
Exercised |
|
|
(133,617 |
) |
|
1.36 |
|
|
|
|
|
|
|
Expired |
|
|
(76,556 |
) |
|
1.42 |
|
|
|
|
|
|
|
Forfeited |
|
|
(610,780 |
) |
|
3.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2010 |
|
|
11,168,708 |
|
$ |
3.38 |
|
|
7.9 |
|
$ |
41,047,907 |
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
June 30, 2010 |
|
|
9,593,360 |
|
$ |
3.35 |
|
|
7.8 |
|
$ |
35,624,648 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010 |
|
|
3,275,568 |
|
$ |
2.94 |
|
|
6.8 |
|
$ |
13,510,871 |
|
The
aggregate intrinsic value in the table above represents the total pre-tax value, which is calculated as the difference between the Company's stock price on June 30, 2010 and the
exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holders exercised their options on June 30, 2010. This amount
changes based on the fair value of the Company's stock. Total intrinsic value of options exercised during the six months ended June 30, 2009 and 2010 was less than $0.1 million and $0.8 million,
respectively.
Options
with the following characteristics were outstanding as of June 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 |
|
|
868,122 |
|
|
6.2 |
|
$ |
1.24 |
|
|
808,819 |
|
$ |
1.21 |
|
3.45 |
|
|
1,095,610 |
|
|
7.8 |
|
|
3.45 |
|
|
544,748 |
|
|
3.45 |
|
3.47 |
|
|
1,422,566 |
|
|
8.0 |
|
|
3.47 |
|
|
501,643 |
|
|
3.47 |
|
3.53 |
|
|
5,639,710 |
|
|
7.5 |
|
|
3.53 |
|
|
1,420,358 |
|
|
3.53 |
|
3.78 |
|
|
2,142,700 |
|
|
9.8 |
|
|
3.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,168,708 |
|
|
7.9 |
|
$ |
3.38 |
|
|
3,275,568 |
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 12: SHARE BASED PAYMENT (Continued)
Assumptions for Estimating Fair Value of Stock Option Grants
The Company uses the Binomial Lattice model for determining the estimated fair value for stock-based awards. The Binomial Lattice
model requires analysis of actual exercise behavior data and a number of assumptions including expected volatility, risk-free interest rate, expected dividends, option cancellations, and forfeitures.
The
following table summarizes information by quarter for stock options that the Company granted during the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Options
Granted |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Fair Value
per Share of
Common Stock |
|
Intrinsic
Value |
|
January 1, 2010 - March 31, 2010 |
|
|
310,200 |
|
$ |
3.78 |
|
$ |
3.78 |
|
$ |
|
|
April 1, 2010 - June 30, 2010 |
|
|
1,962,500 |
|
$ |
3.78 |
|
$ |
3.78 |
|
$ |
|
|
On
each of the above dates, the Company granted employees stock options at exercise prices equal to the estimated fair value of the underlying common stock, as determined on a
contemporaneous basis by the board of directors.
The
following assumptions were used to value options granted during the six months ended June 30, 2009 and 2010:
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2009 |
|
2010 |
Expected volatility |
|
56.3% 60.5% |
|
58.1% 58.4% |
Expected dividend yield |
|
|
|
|
Expected term |
|
7.7 9.4 years |
|
7.6 8.5 years |
Risk-free rate |
|
2.5% 3.5% |
|
3.6% 3.8% |
The
Company derived its volatility assumptions from the historical volatilities of comparable public companies. The dividend yield assumption is based on the Company's expectation of
future dividend payouts. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding, based on the Company's historical
experience and the contractual terms and vesting schedules of the underlying options. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the
Company's employee stock options.
F-59
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 12: SHARE BASED PAYMENT (Continued)
Restricted Stock
During the six months ended June 30, 2010, the Company issued to its employees 0.3 million restricted stock awards.
Restricted stock awards vest annually over a three to five year period.
Activity
related to the Company's restricted stock awards during the six months ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
Shares of Unvested
Restricted Stock
Outstanding |
|
Weighted Average
Grant Date
Fair Value |
|
Balance at January 1, 2010 |
|
|
262,073 |
|
$ |
3.47 |
|
Granted |
|
|
267,792 |
|
|
3.78 |
|
Vested |
|
|
(204,621 |
) |
|
3.47 |
|
Forfeited |
|
|
(9,733 |
) |
|
3.78 |
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
315,511 |
|
$ |
3.73 |
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense
During the six months ended June 30, 2009 and 2010, the Company recorded total stock-based compensation expense of
$2.3 million and $3.0 million, respectively.
Included
in stock-based compensation expense for the six months ended June 30, 2010 is $0.5 million related to the accelerated vesting of certain restricted stock awards
held by former executives and employees of the Company in accordance with their employment agreements and $0.2 million associated with the modification of the terms of certain options held by a
former member of the Company's board of directors.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has commitments under operating lease agreements, principally a commitment for office space which extends through November
2011. Rent expense for each of the six months ended June 30, 2009 and 2010 was approximately $0.7 million. There have been no significant changes to the Company's future lease
commitments during the six months ended June 30, 2010.
Service Agreements
The Company has agreements with various third-party vendors to provide card issuance services, card processing services, internet data
center services, and other consulting services. The remaining term of the agreements range from one to six years in length and require monthly payments. In January 2010, the Company renegotiated its
program management agreement with Meta. The renegotiated agreement requires the Company to make commercially reasonable efforts to make Meta the Company's preferred issuing bank by July 1,
2010. There were no other
F-60
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
significant
changes to the Company's contractual commitments during the six months ended June 30, 2010.
Guarantees
A significant portion of the Company's business is conducted through retail distributors that provide load and reload services to
cardholders at their retail locations. Members of the Company's distribution and reload network collect cardholders' funds and remit them by electronic transfer directly to the issuing banks for
deposit in the cardholder accounts. The Company does not take possession of cardholders' funds at any time during the settlement process. The Company's issuing banks typically receive cardholders'
funds no earlier than three business days after they are collected by the retailer. If any retailer fails to remit cardholders' funds to the Company's issuing banks, the Company typically reimburses
the issuing banks for such funds. The Company manages the settlement risk associated with this process through a formalized set of credit standards, limiting load volumes for certain retailers,
requiring certain retailers to maintain deposits on account, and by typically maintaining a right of offset of cardholders' funds against commissions payable to retailers. The Company has not
experienced any significant historical losses associated with settlement failures, and has not recorded a settlement guarantee liability as of December 31, 2009 or June 30, 2010. As of
December 31, 2009 and June 30, 2010, the Company's estimated gross settlement exposure was $11.0 million and $10.7 million, respectively.
Cardholders
can incur charges in excess of the funds available in their card accounts, and are liable for the resulting overdrawn account balance. While the Company generally declines
authorization attempts for amounts that exceed the available balance in a cardholder's account, the application of card association and network organization rules and regulations, the timing of the
settlement of transactions and the assessment of subscription, maintenance or other fees, among other things, can result in overdrawn card accounts. The Company also provides, as a courtesy and at its
discretion, certain cardholders with a "cushion" which allows them to overdraw their card accounts. In addition, eligible cardholders may enroll in the issuing banks' overdraft protection programs
pursuant to which the issuing banks fund transactions that exceed the available balance in the cardholders' card accounts. The Company is responsible to the issuing banks for any losses associated
with these overdrawn account balances. As of December 31, 2009 and June 30, 2010, the Company's reserves intended to cover the risk that it may not recover cardholders' overdrawn account
balances were $1.6 million and $1.9 million, respectively. As of December 31, 2009 and June 30, 2010, cardholders' overdrawn account balances totaled $4.1 million
and $6.2 million, respectively.
Recoveries
In 2009, the Company, in conjunction with two of its issuing banks, identified excess funds related to chargebacks and fee-related
recoveries from card associations, much of which the Company had previously written off in its loss reserves. As a result, the Company recorded a $9.0 million settlement gain in its Condensed
Consolidated Statement of Operations during the six
F-61
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
months
ended June 30, 2009, the period in which the chargebacks and fee-related recoveries were settled.
Alexsam Litigation
In October 2007, Alexsam, Inc. ("Alexsam") filed suit against the Company in the District Court of Travis County, Texas, 419th
Judicial District, asserting breach of a license agreement entered into between the Company and Alexsam in 2004. The license agreement was entered into by the parties following Alexsam's assertion and
subsequent dismissal without prejudice of a claim of patent infringement filed by Alexsam against the Company in 2003. Pursuant to the license agreement, NetSpend agreed to pay Alexsam certain royalty
payments if NetSpend changed its business process to allow NetSpend cards to be activated or recharged in a manner allegedly covered by the patents held by Alexsam. The parties mediated the case in
both 2008 and 2009, without reaching a settlement. In April 2009, NetSpend filed a motion for summary judgment, and following a hearing, the Court denied the motion without comment. The Company is
evaluating the possible outcomes related to the litigation and has not recorded a contingent loss because it is currently unable to estimate its loss exposure, if any. The Company plans to vigorously
contest Alexsam's claims.
ACE Arbitration
In June 2010, during the course of negotiations with the Company's largest distributor, ACE Cash Express, Inc., or ACE, regarding
possible modifications to a distribution agreement, ACE initiated arbitration alleging breach of the agreement based on certain activities of the Company's direct-to-consumer and online marketing
programs and seeking, among other things, termination of the agreement. On July 14, 2010, the parties dismissed and released
with prejudice all claims in the proceeding, and the parties also agreed on the terms of certain modifications to the agreement.
Katz Settlement
In 2008, the Company received a letter from Ronald A. Katz Technology Licensing, L.P. ("RAKTL"), which contained an offer for 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 substantive discussions and negotiations it
held with RAKTL in early 2010. In July 2010, the Company and RAKTL reached an agreement. In accordance with the agreement, the Company will pay RAKTL a total of $3.5 million in exchange for the
Company's release from potential infringement liability related to the Company's possible use of RAKTL patents. As part of the agreement, the Company also 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 loss was recorded in settlement gains and other losses on the Condensed
Consolidated Statement of Operations for the six months ended June 30, 2010.
F-62
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
MPower Litigation
In 2008, 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 the suit to add Futeh Kao and Mattrix Group, L.L.C (collectively, "defendants"). In this
lawsuit, the Company alleged breach of fiduciary duties, breach of contractual and common-law duties of confidentiality, breach of contractual non-solicitation, misappropriation of the Company's trade
secrets and confidential and proprietary information belonging to the Company, breach of noncompetition agreements, and engagement in a civil conspiracy. Defendant Mitchell asserted counterclaims
against the Company alleging breach of contract relating to consulting services and payment of certain dividends, as well as for defamation. Mitchell sought actual and consequential damages and
attorneys' fees.
In
March and June 2009, the Company reached agreements with the defendants, settling all disputes and claims between the Company and the defendants. In connection with the settlement,
the Company acquired 570,000 shares of its outstanding class A common stock held by certain of
the defendants. The settlement transactions resulted in the Company's non-cash acquisition of 400,000 shares of class A common stock, which is recorded as a litigation settlement gain of
$1.2 million in the Company's Condensed Consolidated Statement of Operations during the six months ended June 30, 2009, and a $0.6 million cash payment to Richard Child, which
included the repurchase of 170,000 shares of class A common stock for $0.2 million.
Other
During the six months ended June 30, 2010, the Company accrued a $0.8 million contingent loss related to a contractual
dispute with a vendor. The $0.8 million contingent loss is included in settlement gains and other losses on the Condensed Consolidated Statement of Operations.
NOTE 14: EMPLOYEE BENEFIT PLANS
The Company has established a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code ("401(k) Plan"). The Company's 401(k) Plan covers
substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation, not to exceed a federally specified maximum, on a
pre-tax basis. The Company may contribute to the program by matching funds based on a percentage of the employee's contribution. For each of the six months ended June 30, 2009 and 2010, the
Company's match under the 401(k) Plan was approximately $0.4 million.
In
addition, the Company has a deferred compensation plan under which certain employees have the option to defer a portion of their compensation. As of December 31, 2009 and
June 30, 2010, the Company's liability with regard to the deferred compensation plan was less than $0.1 million and approximately $0.3 million, respectively.
F-63
Table of Contents
NetSpend Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
For the Six Months Ended June 30, 2009 and June 30, 2010
(Unaudited)
NOTE 15: RELATED PARTY TRANSACTIONS
JLL Partners Fund IV, LP and JLL Partners Fund V, LP (collectively "the JLL Funds") own approximately 97% of ACE Cash Express, Inc. ("ACE"), one of the Company's largest
distributors. The JLL Funds beneficially own more than five percent of the Company's outstanding class A common stock and class B common stock. In 2008, the Company entered into an
amended and restated independent agency agreement with ACE through March of 2016 related to the sale of the Company's gift and GPR cards. The Company incurred expenses from transactions with ACE of
$11.5 million and $15.6 million for the six months ended June 30, 2009 and 2010, respectively. Although revenues generated from cardholders acquired at ACE represent approximately
one third of the Company's revenues, the portion of those revenues earned from transactions directly with ACE were $1.3 million and $2.3 million for the six months ended June 30,
2009 and 2010, respectively. At December 31, 2009 and June 30, 2010, $2.0 million and $2.3 million, respectively, was payable to ACE.
Oak
Investment 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 beneficial owner of more than five percent of the Company's outstanding class A common stock. The Company incurred expenses from
transactions with Sutherland of $3.3 million and $3.5 million during the six months ended June 30, 2009 and 2010, respectively. At December 31, 2009 and June 30,
2010, $1.2 million and $1.3 million, respectively, was payable to Sutherland.
The
Company leases service hours for an airplane from Birardi Investments, LLC, a company that is partially owned by the Company's current CEO. The airplane is leased for business use
on a per-flight-hour basis with no minimum usage requirement. The Company incurred $0.1 million and
$0.2 million of expenses during the six months ended June 30, 2009 and 2010, respectively, for the use of this airplane.
NOTE 16: SUBSEQUENT EVENTS
The Company has evaluated its subsequent events through August 31, 2010.
In
July 2010, the Company issued 0.4 million options and 0.4 million restricted shares to the Company's president.
In July 2010, the Company reached an agreement with RAKTL related to a potential patent infringement claim whereby the Company agreed to pay RAKTL a total of $3.5 million in
exchange for a release from potential infringement liability claims and a non-exclusive license to certain pending RAKTL patents. The $3.5 million loss is recorded in settlement gains and other
losses on the Condensed Consolidated Statement of Operations for the six months ended June 30, 2010.
F-64
Table of Contents
Report of Independent Certified Public Accountants
Members
Skylight Financial, Inc.
We
have audited the accompanying balance sheet of Skylight Financial, Inc. (the "Company") as of July 14, 2008, and the related statements of operations, stockholders'
equity, comprehensive loss and cash flows for the period from January 1, 2008 through July 14, 2008. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with auditing standards generally accepted in the United Sates of America as established by the American Institute of Certified Public Accountants.
Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Skylight Financial, Inc. as of July 14,
2008, and the results of its operations and its cash flows for the period from January 1, 2008 through July 14, 2008, in conformity with accounting principles generally accepted in the
United States of America.
/s/
Grant Thornton LLP
Dallas,
Texas
December 3, 2008
F-65
Table of Contents
Skylight Financial, Inc.
BALANCE SHEET
July 14, 2008
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,327,707 |
|
|
Restricted cash |
|
|
116,408 |
|
|
Accounts receivable, net |
|
|
1,463,572 |
|
|
Other current assets |
|
|
424,250 |
|
|
|
|
|
|
|
Total current assets |
|
|
13,331,937 |
|
Property and equipment, net |
|
|
1,337,783 |
|
Goodwill |
|
|
79,321,073 |
|
Intangibles, net |
|
|
18,670,332 |
|
Other assets |
|
|
1,101,257 |
|
|
|
|
|
|
|
Total assets |
|
$ |
113,762,382 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable |
|
$ |
923,499 |
|
|
Accrued expenses |
|
|
1,388,806 |
|
|
Allowance for overdraft losses |
|
|
150,000 |
|
|
Current portion of long-term debt |
|
|
400,000 |
|
|
Other current liabilities |
|
|
671,000 |
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,533,305 |
|
Long term debt |
|
|
39,300,000 |
|
|
|
|
|
|
|
Total liabilities |
|
|
42,833,305 |
|
Commitments and contingencies |
|
|
|
|
Stockholders' equity |
|
|
|
|
|
Common stock, $1 par value; issued and outstanding 76,389,286 shares at July 14, 2008 |
|
|
71,858,534 |
|
|
Class A, B, C, D membership shares, 40,000,000 shares authorized; 29,990,000 issued and outstanding at July 14, 2008 |
|
|
276,115 |
|
|
Accumulated deficit |
|
|
(534,572 |
) |
|
Accumulated other comprehensive loss |
|
|
(671,000 |
) |
|
|
|
|
|
|
Total stockholders' equity |
|
|
70,929,077 |
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
113,762,382 |
|
|
|
|
|
The
accompanying notes are an integral part of this financial statement.
F-66
Table of Contents
Skylight Financial, Inc.
STATEMENT OF OPERATIONS
For the period from January 1, 2008 through July 14, 2008
|
|
|
|
|
|
|
Revenue |
|
$ |
13,255,524 |
|
Cost of revenue |
|
|
2,995,402 |
|
|
|
|
|
|
|
Gross profit |
|
|
10,260,122 |
|
Provision for overdraft losses |
|
|
857,691 |
|
|
|
|
|
|
|
Gross profit after provision for overdraft losses |
|
|
9,402,431 |
|
Operating expenses |
|
|
|
|
|
Salaries, commissions, and benefits |
|
|
4,387,649 |
|
|
Advertising and marketing |
|
|
1,135,842 |
|
|
General and administrative |
|
|
1,682,894 |
|
|
Depreciation and amortization |
|
|
761,611 |
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,967,996 |
|
|
|
|
|
|
|
Income from operations |
|
|
1,434,435 |
|
Other income (expenses) |
|
|
|
|
|
Interest income |
|
|
181,594 |
|
|
Interest expense |
|
|
(2,136,301 |
) |
|
|
|
|
|
|
Net loss before income tax expense |
|
|
(520,272 |
) |
Income tax expense |
|
|
4,788 |
|
|
|
|
|
|
|
Net loss |
|
$ |
(525,060 |
) |
|
|
|
|
The
accompanying notes are an integral part of this financial statement.
F-67
Table of Contents
Skylight Financial, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
For the period from January 1, 2008 through July 14, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A, B, C, D
membership shares |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
Accumulated
other
comprehensive
loss |
|
|
|
|
|
Accumulated
deficit |
|
|
|
|
|
Shares |
|
Amount |
|
Amount |
|
Total |
|
Balance at January 1, 2008 |
|
|
76,789,286 |
|
$ |
72,258,534 |
|
$ |
|
|
$ |
(9,512 |
) |
$ |
(325,520 |
) |
$ |
71,923,502 |
|
Common stock issued |
|
|
100,000 |
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
Repurchase of common stock |
|
|
(500,000 |
) |
|
(500,000 |
) |
|
|
|
|
|
|
|
|
|
|
(500,000 |
) |
Change in fair value of interest-rate swap, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345,480 |
) |
|
(345,480 |
) |
Profits interests expense |
|
|
|
|
|
|
|
|
276,115 |
|
|
|
|
|
|
|
|
276,115 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
(525,060 |
) |
|
|
|
|
(525,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 14, 2008 |
|
|
76,389,286 |
|
$ |
71,858,534 |
|
$ |
276,115 |
|
$ |
(534,572 |
) |
$ |
(671,000 |
) |
$ |
70,929,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial statement.
F-68
Table of Contents
Skylight Financial, Inc.
STATEMENT OF COMPREHENSIVE LOSS
For the period from January 1, 2008 through July 14, 2008
|
|
|
|
|
|
Net loss |
|
$ |
(525,060 |
) |
Other comprehensive loss: |
|
|
|
|
|
Change in fair value of interest rate swap, net of tax benefit of $-0- |
|
|
(345,480 |
) |
|
|
|
|
Comprehensive loss |
|
$ |
(870,540 |
) |
|
|
|
|
The
accompanying notes are an integral part of this financial statement.
F-69
Table of Contents
Skylight Financial, Inc.
STATEMENT OF CASH FLOWS
For the period from January 1, 2008 through July 14, 2008
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
Net loss |
|
$ |
(525,060 |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
|
761,611 |
|
|
|
Write-off of software development costs |
|
|
67,970 |
|
|
|
Provision for overdraft losses |
|
|
857,691 |
|
|
|
Stock-based compensation expense |
|
|
276,115 |
|
|
|
Changes in assets and liabilities, net of the effects of the merger |
|
|
|
|
|
|
|
Restricted cash |
|
|
(8,871 |
) |
|
|
|
Accounts receivable |
|
|
59,598 |
|
|
|
|
Other current assets |
|
|
240,736 |
|
|
|
|
Other assets |
|
|
139,257 |
|
|
|
|
Accounts payable |
|
|
(412,714 |
) |
|
|
|
Accrued expenses |
|
|
763,068 |
|
|
|
|
Allowance for overdraft losses |
|
|
(830,430 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,388,971 |
|
Cash flows from investing activities: |
|
|
|
|
|
Purchases of property and equipment |
|
|
(798,844 |
) |
|
Acquisition costs |
|
|
(35,466 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(834,310 |
) |
Cash flows from financing activities: |
|
|
|
|
|
Issuance of common stock |
|
|
100,000 |
|
|
Repayments of term note |
|
|
(200,000 |
) |
|
Repurchase of common stock |
|
|
(500,000 |
) |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(600,000 |
) |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(45,339 |
) |
Cash and cash equivalents at beginning of period |
|
|
11,373,046 |
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,327,707 |
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
1,856,097 |
|
|
|
|
|
|
Cash paid during the period for taxes |
|
$ |
|
|
|
|
|
|
The
accompanying notes are an integral part of this financial statement.
F-70
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS
July 14, 2008
NOTE A BASIS OF PRESENTATION
Skylight Financial, Inc. (the "Company") was incorporated effective September 1, 1998 and conducted business as a
limited liability company prior to that date. The Company is in the financial services industry and offers services primarily to individuals who historically have not developed a traditional banking
relationship. Services include establishing direct deposit accounts for consumers and facilitating the use of automatic teller machines to customers with deposit accounts established through the
Company. The Company has entered into operating agreements with two insured financial institutions to establish deposit accounts and to provide deposit account maintenance and processing services.
On
May 30, 2007, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Skylight Holdings I, LLC, a Delaware limited liability company
formed by JLL Partners Fund IV, L.P. and JLL Partners Fund V, L.P. ("Skylight Holdings"), and Skylight Merger Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of
Skylight Holdings ("Merger Sub"), pursuant to which Merger Sub was merged with and into the Company, which continued as the
surviving corporation (the "Merger"). Skylight continued to operate under the name Skylight Financial, Inc., as a wholly owned subsidiary of Skylight Holdings I, LLC. The Merger was
effective July 13, 2007.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company considers all highly liquid investments with maturities of three months or less at date of purchase to be cash
equivalents.
The Company is required to maintain certain levels of cash with a financial institution to guarantee negative balances on customer
accounts.
Receivables are carried at the gross amount due, with an allowance established for those accounts considered doubtful. On an ongoing
basis, the collectibility of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectibility of specific accounts. Accounts
are written off when it is determined the receivable will not be collected. There was an allowance for doubtful accounts of $10,000 at July 14, 2008. Bad debt expense was $7,500 for the period
ended July 14, 2008.
F-71
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated on a straight-line
method over the estimated useful lives of the assets as follows:
|
|
|
Office and telephone equipment |
|
5 years |
Leasehold improvements |
|
Lesser of 5 years or remaining lease term |
Furniture and fixtures |
|
7 years |
Computer equipment and software |
|
3-5 years |
The Company maintains reserves for potential losses on overdrafts to customers. Under its operating agreements the Company is liable
to pay to financial institutions the amount of any customers account balance that is in overdraft for greater than 90 continuous days. Management performs a review of the number of overdrafts in
delinquency status and establishes a reserve that is sufficient to provide for losses inherent in the portfolio based on historical losses and management judgment. There was an allowance for overdraft
losses of $150,000 at July 14, 2008. Provisions for overdraft losses, net of recoveries, totaled $857,691 for the period ended July 14, 2008. Management believes its estimate for the
allowance for overdraft losses is sufficient to absorb its potential exposure on these customer accounts.
The Company's revenue consists primarily of transaction fees, maintenance fees, and overdraft fees from accountholders. Transaction
and overdraft fees are recorded as revenue at the time transactions are executed and overdrafts occur. Maintenance fees are recorded during the month in which the services are performed.
Cost
of revenue includes fees paid to financial institutions for processing deposit and overdraft transactions and direct costs associated with supporting customer transactions.
The Company expenses advertising costs as incurred. The Company expensed advertising costs of $1,135,842 for the period ended
July 14, 2008.
Goodwill represents the excess of the cost of the acquisition of the Company over the fair value of the net assets at the date of
Merger. Goodwill is subject to periodic tests of impairment of value. Included in intangible assets is the value assigned to the tradenames from the Merger transaction, which have indefinite lives and
are tested for impairment annually or when events or circumstances indicate their carrying values may not be recoverable. There was no impairment loss charged to operations during the period ended
July 14, 2008. Goodwill and tradenames are not
F-72
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
being
amortized. Acquired corporate relationships are amortized over 10 years. Acquired technology is amortized over 7 years.
Deferred financing costs are amortized over the term of the corresponding financing arrangement. Amortization expense related to
deferred financing costs for the period ended July 14, 2008 were $139,257, and is included in interest expense on the statement of operations. As of July 14, 2008, net deferred financing
costs totaled $1,048,215, and related accumulated amortization was $247,208, for the period ended July 14, 2008.
Deferred
financing costs are reflected in other assets in the accompanying balance sheet.
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled.
The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce
deferred tax assets if it is more likely than not some portion of the asset will not be realized.
The Company expenses costs incurred in the preliminary project stages and thereafter capitalizes costs incurred in the developing or
obtaining of internal use software, including external direct costs of materials and services, as well as payroll and payroll-related costs. The Company capitalized $381,332 of software development
costs for the period ended July 14, 2008. Software development costs, which are reported in property and equipment, net on the balance sheet, as of July 14, 2008, are as follows:
|
|
|
|
|
|
Cost |
|
$ |
379,871 |
|
Less: Accumulated depreciation |
|
|
(18,590 |
) |
|
|
|
|
|
Net book value |
|
$ |
361,281 |
|
|
|
|
|
During
the period ended July 14, 2008, the Company expensed $67,970 of software development costs related to projects abandoned by the Company.
During the period ended July 14, 2008, the Company granted Class A, Class B, Class C and Class D
membership shares (collectively, the "Profits Interests"). With respect to the Profits Interests granted, the Company measures the cost of employee services received in exchange for an award
F-73
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
of
equity instruments based on the grant-date fair value of the award and recognizes that cost over the vesting period on a straight-line basis.
The Company follows Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), which requires that every derivative instrument (including certain derivative instruments embedded in other contracts)
be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company estimates fair value based on quotes obtained from the counterparties to the derivative contract. Derivative financial instruments are
designated as a cash flow hedge; therefore, changes in fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in income (loss).
NOTE C PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of July 14, 2008:
|
|
|
|
|
Office and telephone equipment |
|
$ |
199,273 |
|
Furniture and fixtures |
|
|
83,541 |
|
Leasehold improvements |
|
|
36,475 |
|
Computer software |
|
|
888,303 |
|
Computer equipment |
|
|
432,400 |
|
|
|
|
|
|
|
|
1,639,992 |
|
Less: Accumulated depreciation |
|
|
(302,209 |
) |
|
|
|
|
|
|
$ |
1,337,783 |
|
|
|
|
|
Depreciation
expense was $196,704 for the period ended July 14, 2008.
NOTE D INTANGIBLE ASSETS
Acquired corporate relationships totaled $7,383,417, net of accumulated amortization of $816,583 at July 14, 2008. Amortization
expense related to the acquired corporate relationships for the period ended July 14, 2008 was $440,749. The weighted average remaining useful lives of these assets at July 14, 2008 was
9.0 years.
F-74
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE D INTANGIBLE ASSETS (Continued)
Amortization
expense estimated for the five succeeding years is as follows
|
|
|
|
|
Remainder of 2008 |
|
$ |
379,250 |
|
2009 |
|
|
820,000 |
|
2010 |
|
|
820,000 |
|
2011 |
|
|
820,000 |
|
2012 |
|
|
820,000 |
|
2013 |
|
|
820,000 |
|
Thereafter |
|
|
2,904,167 |
|
|
|
|
|
|
|
$ |
7,383,417 |
|
|
|
|
|
Acquired
technology is amortized over 7 years based on its anticipated life. As of July 14, 2008, acquired technology totaled $1,386,915, net of accumulated amortization
of $230,029. Amortization expense related to the acquired technology for the period ended July 14, 2008 was $124,158. The weighted average remaining useful lives of these assets at
July 14, 2008 was 6.0 years.
Amortization
expense estimated for the five succeeding years is as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
106,834 |
|
2009 |
|
|
230,992 |
|
2010 |
|
|
230,992 |
|
2011 |
|
|
230,992 |
|
2012 |
|
|
230,992 |
|
2013 |
|
|
230,992 |
|
Thereafter |
|
|
125,121 |
|
|
|
|
|
|
|
$ |
1,386,915 |
|
|
|
|
|
Changes in the carrying value of goodwill and tradenames for the period ended July 14, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
Tradenames |
|
Balance, December 31, 2007 |
|
$ |
79,959,741 |
|
$ |
9,900,000 |
|
Add: Merger costs |
|
|
35,466 |
|
|
|
|
Less: Realization of pre-merger deferred tax assets and liabilities |
|
|
(674,134 |
) |
|
|
|
|
|
|
|
|
|
Balance as of July 14, 2008 |
|
$ |
79,321,073 |
|
$ |
9,900,000 |
|
|
|
|
|
|
|
There
was no impairment losses for the period ended July 14, 2008.
F-75
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE E LONG-TERM DEBT
On July 13, 2007, the Company entered into a 5-year $45 million credit facility with
General Electric Capital Corporation. The terms of the agreement provide for a $5 million revolving credit facility, including letters of credit, and a $40 million term note. The
revolving credit facility may be repaid and re-borrowed over the term of the facility without penalty. Substantially all of the assets and liabilities of the Company are secured under the
credit facility. The credit facility contains various financial covenants and other restrictions, with which the Company was in compliance at July 14, 2008.
The
entire credit facility bears interest based on a credit spread over either Base Rate, as defined, or the London Interbank Offered Rate ("LIBOR") at the borrower's option. At
July 14, 2008, the interest rate was 8.75%, including the applicable margin of 3.75% and the Base Rate of 5.00%. In addition to interest charges, an additional fee is paid for the unused
portion of the revolving credit facility, as well as a fee for letters of credit issued under the revolving credit facility. At July 14, 2008, the unused portion of the revolving credit
facility was $5 million.
Scheduled
maturities of the term loan are as follows:
|
|
|
|
|
Years ending December 31,
|
|
|
|
Remainder of 2008 |
|
$ |
200,000 |
|
2009 |
|
|
400,000 |
|
2010 |
|
|
400,000 |
|
2011 |
|
|
400,000 |
|
2012 |
|
|
38,300,000 |
|
|
|
|
|
|
|
$ |
39,700,000 |
|
|
|
|
|
Swap Agreement
To reduce the risk of greater interest expense because of interest-rate fluctuations, the Company entered into an
interest-rate swap agreement, which effectively converted a portion of the Company's floating-rate interest obligation to a fixed-rate interest obligation. The swap
agreement, which was entered into with Rabo Capital Services, Inc., has a notional amount of $20 million. The swap agreement is effective from October 11, 2007, through
October 11, 2011. The fixed rate effective for the term of the agreement, prior to adding the applicable margin, is 4.846%.
The
fair value of the interest-rate swap was a liability of $671,000 as of July 14, 2008, and is included in other current liabilities on the accompanying balance
sheet.
|
|
|
|
|
|
Interest expense |
|
$ |
2,010,661 |
|
Swap expense |
|
|
125,640 |
|
|
|
|
|
|
Total interest expense |
|
$ |
2,136,301 |
|
|
|
|
|
Weighted average interest rate (excluding amortization) |
|
|
|
|
|
Excluding swap expense |
|
|
9.40 |
% |
|
Including swap expense |
|
|
9.99 |
% |
F-76
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE F INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, deferred tax assets and
liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse.
The
tax effect of each type of temporary difference that gives rise to a significant portion of deferred taxes at July 14, 2008, are as follows:
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
Net operating loss |
|
$ |
8,099,718 |
|
|
Charitable contributions |
|
|
2,705 |
|
|
Interest rate swap |
|
|
228,140 |
|
|
Accruals and reserves |
|
|
125,462 |
|
|
|
|
|
|
|
|
8,456,025 |
|
|
|
Valuation allowance |
|
|
(1,176,248 |
) |
|
|
|
|
|
|
|
7,279,777 |
|
Liabilities |
|
|
|
|
|
Depreciation and amortization |
|
|
(7,279,777 |
) |
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
|
|
|
Deferred
taxes have not been provided on the portion of goodwill that is not amortizable for tax purposes.
Realization
of the net deferred tax asset that existed at the merger date will result in a reduction of goodwill. During the period ended July 14, 2008, adjustments of $674,134
were recorded against
goodwill due to the realization of the Company's pre-merger deferred tax assets and liabilities.
Income
tax expense for the period ended July 14, 2008 consists of:
|
|
|
|
|
|
Current: |
|
|
|
|
|
Federal |
|
$ |
(10,212 |
) |
|
State |
|
|
15,000 |
|
|
|
|
|
|
|
|
4,788 |
|
Deferred: |
|
|
|
|
|
Federal |
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,788 |
|
|
|
|
|
The
Company has net operating loss carryforwards for Federal income tax purposes of approximately $23,000,000 (net of unavailable loss carryforwards limited due to Section 382 Change
F-77
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE F INCOME TAXES (Continued)
in Control Limitations) at July 14, 2008, which are available to offset future Federal taxable income, if any, through the year 2027.
NOTE G COMMITMENTS AND CONTINGENCIES
The Company leases office space under a long-term operating lease. The lease contains a renewal option and an escalation clause and requires payment of operating costs.
Future minimum lease obligations as of July 14, 2008, are summarized as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
166,594 |
|
2009 |
|
|
368,650 |
|
2010 |
|
|
379,033 |
|
2011 |
|
|
76,629 |
|
|
|
|
|
|
|
$ |
990,906 |
|
|
|
|
|
Rental
expense for the period ended July 14, 2008 was $238,315.
The
Company is party to various legal actions and claims arising in the ordinary course of its business. The Company's management believes it has adequate legal defenses for each of the
actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's financial position or results of operations.
NOTE H STOCKHOLDERS' EQUITY
Under Skylight Holdings' limited liability company agreement, the board of directors is authorized to issue equity interests in Skylight Holdings, designated as "shares." Skylight
Holdings is authorized to issue shares, consisting of common stock, 10,000,000 Class A membership shares, 10,000,000 Class B membership shares, 10,000,000 Class C membership
shares and 10,000,000 Class D
membership shares. Each holder of common stock is entitled to vote on a pro rata basis as a single class.
The
membership share classes (the "Profits Interests") are nonvoting and are subject to forfeiture during the five-year period commencing on the date of grant, in the event
of the termination of the holder's employment with Skylight Holdings or any subsidiaries of Skylight Holdings, according to the following schedule:
|
|
|
|
|
Employment Termination Date Prior To:
|
|
Percentage of Class A, B, C, D
Membership Shares Forfeited: |
|
First anniversary of the date of grant |
|
|
100 |
% |
Second anniversary of the date of grant |
|
|
80 |
% |
Third anniversary of the date of grant |
|
|
60 |
% |
Fourth anniversary of the date of grant |
|
|
40 |
% |
Fifth anniversary of the date of grant |
|
|
20 |
% |
Upon
termination of employment, a holder may convert his or her vested Profits Interests into common stock pursuant to a formula set forth in Skylight Holdings' limited liability
company
F-78
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE H STOCKHOLDERS' EQUITY (Continued)
agreement.
Skylight Holdings will issue new common stock upon conversion of any Profits Interest to common stock. Any Profits Interests not so converted may be repurchased by Skylight Holdings for
$0.00001 per share.
Profits
Interests cannot be transferred except to certain permitted transferees or under certain limited circumstances.
Determining Fair Value
Valuation and Amortization MethodThe Company estimated the fair value of Profits Interests using the Black-Scholes model in an option
pricing
method. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Expected TermThe expected term represents the period the Company's Profits Interests are expected to be outstanding and was determined
based on
historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.
Expected VolatilityThe volatility factor was based on an industry standard three-year annualized equity volatility metric as of
January
2008, adjusted for the capital structure of Skylight Holdings.
Risk-Free Interest RateThe Company based the risk-free interest rate on the implied yield currently available on U.S.
Treasury securities with an equivalent term.
Estimated ForfeituresWhen estimating forfeitures, the Company considers voluntary termination behavior.
Discount for Lack of MarketabilityThe Company calculated the cost of protecting
the value of the shares with a put option that would, in essence, provide portfolio insurance for the current value of the shares.
Fair ValueThe weighted average fair value of each Profits Interest is estimated on the date of grant using the Black-Scholes option
pricing model
with the following weighted-average assumptions for grants during the period ended July 14, 2008:
|
|
|
Expected volatility |
|
31.9% |
Expected life (years) |
|
6 |
Risk-free interest rate |
|
3.25% |
Expected forfeitures |
|
0% |
Expected dividends |
|
None |
Discount for lack of marketability |
|
50% |
F-79
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE H STOCKHOLDERS' EQUITY (Continued)
The
following table summarizes Profits Interests activity for the period ended July 14, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserved |
|
Outstanding |
|
Available
for Grant |
|
Shares at January 1, 2008 |
|
|
40,000,000 |
|
|
|
|
|
40,000,000 |
|
|
Granted |
|
|
|
|
|
29,990,000 |
|
|
(29,990,000 |
) |
|
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at July 14, 2008 |
|
|
40,000,000 |
|
|
29,990,000 |
|
|
10,010,000 |
|
|
|
|
|
|
|
|
|
Shares vested at July 14, 2008 |
|
|
|
|
|
3,826,000 |
|
|
|
|
The
total compensation expense determined under fair value-based methods for all Profits Interests awarded was $276,115 for the period ended July 14, 2008, and is recorded in
salaries, commissions, and benefits in the accompanying statement of operations.
As
of July 14, 2008, there was approximately $2.4 million of total unrecognized Profits Interests compensation cost related to non-vested awards granted under
the plan. That cost is expected to be recognized over a weighted average period of 4.5 years. The weighted average grant date fair value per share is $0.09.
NOTE I EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) savings plan (the "Plan") on behalf of its employees. Employees may contribute up to 50% of their annual compensation to the Plan, subject to statutory
maximums. The Plan provides a matching of 50% of employee contributions, up to the first 6%. Matching contributions for the Plan were $45,608 for the period ended July 14, 2008. Employees
50 years and older were permitted to make an additional "catch-up" contribution of up to $5,000, and these are not subject to Company matching contributions.
NOTE J RELATED PARTY TRANSACTIONS
The Company is party to a management services agreement with JLL Partners ("JLL") pursuant to which JLL provides certain management, consulting, financial advisory and
other services for which the Company will pay normal and customary fees. The Company also reimburses JLL for reasonable out-of-pocket expenses it pays or incurs in connection
with providing such services. In addition, pursuant to the agreement, JLL will provide the Company with financial advisory and investment bank services in connection with any acquisition,
restructuring or initial public offering. For the period ended July 14, 2008, the Company did not incur any expenses associated with the management agreement for services, but did reimburse JLL
for $9,593, for out-of-pocket expenses.
NOTE K SUBSEQUENT EVENT (UNAUDITED)
On July 15, 2008, pursuant to an Agreement and Plan of merger with NetSpend Holdings, Inc., a Delaware limited liability company formed by affiliates of NetSpend
Corporation,
F-80
Table of Contents
Skylight Financial, Inc.
NOTES TO FINANCIAL STATEMENTS (Continued)
July 14, 2008
NOTE K SUBSEQUENT EVENT (UNAUDITED) (Continued)
the
Company was merged into the acquiring entity and will continue to operate as a wholly owned subsidiary thereof.
The
consideration paid consisted of restricted and unrestricted shares in NetSpend Holdings. The aggregate consideration paid to Company stockholders was valued at approximately
$93.7 million based on a third-party valuation of shares issued to the Company's stockholders and Profits Interest Holders.
Concurrent
with the merger with NetSpend Holdings, Inc., all long-term debt was repaid, and the interest-rate swap agreement was settled. Additionally,
all outstanding Class A, B, C and D membership shares became fully vested.
F-81
Table of Contents
Shares
NetSpend Holdings, Inc.
Common Stock
Goldman, Sachs & Co.
BofA Merrill Lynch
William Blair & Company
SunTrust Robinson Humphrey
Wells Fargo Securities
Duncan-Williams, Inc.
Knight/Houlihan Lokey
Through and including , 2010 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
Table of Contents
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses, other than the underwriting discounts and commissions, payable by the registrant in
connection with the sale and distribution of the shares of common stock being registered hereby, including the shares being offered for sale by the selling stockholders. All amounts shown are
estimates, except the Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority filing fee and the Nasdaq Stock Market listing fee.
|
|
|
|
|
|
|
Amount |
|
SEC registration fee |
|
$ |
14,260 |
|
FINRA filing fee |
|
|
20,500 |
|
NASDAQ listing fee |
|
|
* |
|
Legal fees and expenses |
|
|
* |
|
Accounting fees and expenses |
|
|
* |
|
Printing expenses |
|
|
* |
|
Transfer agent fees |
|
|
11,500 |
|
Miscellaneous |
|
|
* |
|
|
|
|
|
Total |
|
$ |
* |
|
|
|
|
|
- *
- To
be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Delaware law permits a corporation to adopt a provision in its certificate of incorporation eliminating or limiting the personal
liability of a director, but not an officer in his or her capacity as such, to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that such
provision shall not eliminate or limit the liability of a director for (1) any breach of the director's duty of loyalty to the corporation or its stockholders, (2) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under section 174 of the General Corporation Law of the State of Delaware (the "DGCL")
for unlawful payment of dividends or stock purchases or redemptions or (4) any transaction from which the director derived an improper personal benefit. Our certificate of incorporation
provides that, to the fullest extent of Delaware law, none of our directors will be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director.
Under
Delaware law, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any type of proceeding, other than an action by or in the right
of the corporation, because he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or
agent of another corporation or other entity, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such
proceeding if: (1) he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and (2) with respect to
any criminal proceeding, he or she had no reasonable cause to believe that his or her conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit brought by or in the right of the corporation because he or she is or was a director, officer, employee or agent of the corporation, or is
or was
II-1
Table of Contents
serving
at the request of the corporation as a director, officer, employee or agent of another corporation or other entity, against expenses, including attorneys' fees, actually and reasonably
incurred in connection with such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except
that no indemnification will be made if the person is found liable to the corporation unless, in such a case, the court determines the person is nonetheless entitled to indemnification for such
expenses. A corporation must also indemnify a present or former director or officer who has been successful on the merits or otherwise in defense of any proceeding, or in defense of any claim, issue
or matter therein, against expenses, including attorneys' fees, actually and reasonably incurred by him or her. Expenses, including attorneys' fees, incurred by a director or officer, or any employees
or agents as deemed appropriate by the board of directors, in defending civil or criminal proceedings may be paid by the corporation in advance of the final disposition of such proceedings upon
receipt of an undertaking by or on behalf of such director, officer, employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the
corporation. The Delaware law regarding indemnification and the advancement of expenses is not exclusive of any other rights a person may be entitled to under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Under
the DGCL, the termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that a person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any
criminal proceeding, had reasonable cause to believe that his or her conduct was unlawful.
Our
certificate of incorporation and bylaws authorize indemnification of any person entitled to indemnity under law to the full extent permitted by law.
Delaware
law also provides that a corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other entity, against any liability asserted against and incurred by such person,
whether or not the corporation would have the power to indemnify such person against such liability. We will maintain, at our expense, an insurance policy that insures our officers and directors,
subject to customary exclusions and deductions, against specified liabilities that may be incurred in those capacities. In addition, we have entered into indemnification agreements with each of our
directors that provide that we will indemnify the indemnitee against, and advance certain expenses relating to, liabilities incurred in the performance of such indemnitee's duties on our behalf to the
fullest extent permitted under Delaware law and our bylaws.
The
underwriting agreement we will enter into with the underwriters (to be filed as Exhibit 1.1 hereto) will provide that the underwriters are obligated, under certain
circumstances, to indemnify our directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
From January 1, 2007 to June 30, 2010, we issued unregistered securities to a limited number of persons, as described
below:
A. Issuances of Class A and Class B Common Stock
- 1.
- In
June 2007, July 2007, September 2007 and October 2007, we issued and sold an aggregate of 2,122,250 shares of Class A Common Stock at $1.70
per share to investors upon the exercise of warrants to purchase Class A Common Stock which
II-2
Table of Contents
B. Issuances of Warrants to Purchase Class A Common Stock
- 1.
- In
each of April 2007, February 2008 and February 2009, we issued a warrant to purchase 20,000 shares of Class A Common Stock at $1.50 per
share to one of our distributors in consideration of the distributor's agreements and covenants, including those related to non-competition and exclusivity, under an independent agency
agreement between NetSpend Corporation and the distributor.
- 2.
- In
November 2008, we issued a warrant to purchase 22,346 shares of Class A Common Stock at $1.70 per share to a former executive officer of
NetSpend Corporation pursuant to a settlement agreement whereby the former executive officer released all claims against us and NetSpend Corporation.
- C.
- Issuances of Restricted Class A Common Stock and Options to Purchase Class A Common
Stock
- 1.
- From
January 1, 2007 to June 30, 2010, we have granted an aggregate of 267,793 shares of restricted Class A Common Stock to
certain of our directors and consultants and to eligible employees and consultants of NetSpend Corporation pursuant to the 2004 Plan.
II-3
Table of Contents
- 2.
- From
January 1, 2007 to June 30, 2010, we have granted options to purchase an aggregate of 14,516,069 shares of Class A Common
Stock to certain of our directors and consultants and to certain employees and consultants of NetSpend Corporation pursuant to the 2004 Plan at exercise prices ranging from $1.29 per share to $3.78
per share.
D. Issuances of Series A Preferred Stock
- 1.
- In
March 2007, May 2007, June 2007 and July 2007, we issued and sold an aggregate of 1,010,000 shares of Series A Preferred Stock upon the
exercise of options to purchase Series A Preferred Stock granted to certain former directors and executive officers of NetSpend Corporation in connection with our acquisition of NetSpend
Corporation and pursuant to the 2004 Plan, each at an exercise price of $0.25 per share.
None
of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and the registrant believes the transactions were exempt from the
registration requirements of the Securities Act of 1933 in reliance on Section 4(2) thereof, and the rules and regulations promulgated thereunder, or Rule 701 promulgated under
Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients of securities pursuant to
Items A.1. through A.8. and Items B.1. and
B.2. above represented that they were accredited or sophisticated and either received adequate information about the registrant or had access, through their relationships with the registrant, to such
information.
Item 16. Exhibits and Financial Statement Schedule.
- (a)
- Exhibits.
|
|
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
|
|
1.1* |
|
Form of Underwriting Agreement |
|
|
|
3.1 |
|
Form of Third Amended and Restated Certificate of Incorporation, to be effective upon completion of this offering |
|
|
|
3.2 |
|
Form of Amended and Restated Bylaws, to be effective upon completion of this offering |
|
|
|
4.1* |
|
Specimen common stock certificate |
|
|
|
4.2 |
|
Form of Registration Rights Agreement, to be effective upon completion of this offering |
|
|
|
5.1* |
|
Opinion of Baker Botts L.L.P. regarding validity of securities being issued |
|
|
|
10.1* |
|
Amended and Restated Credit Agreement, dated as of July 15, 2008, by and among NetSpend Corporation, NetSpend Holdings, Inc., the lenders party thereto and JPMorgan Chase Bank, National Association |
|
|
|
10.2* |
|
Security Agreement, dated as of June 27, 2007, by and among NetSpend Corporation, NetSpend Holdings, Inc. and JPMorgan Chase Bank, National Association |
|
|
|
10.3* |
|
First Amendment to Security Agreement, dated as of July 15, 2008, by and among NetSpend Corporation, NetSpend Holdings, Inc. and JPMorgan Chase Bank, National Association |
|
|
|
10.4 |
|
Amended and Restated Employment Agreement, dated as of September 20, 2010, by and among Daniel Henry, NetSpend Corporation and NetSpend Holdings, Inc. |
II-4
Table of Contents
|
|
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
|
|
10.5** |
|
Employment Agreement, dated as of April 21, 2010, by and between George W. Gresham and NetSpend Corporation |
|
|
|
10.6** |
|
Amended and Restated Employment Agreement, dated as of June 1, 2010, by and between Tom Cregan and NetSpend Corporation |
|
|
|
10.7** |
|
Employment Agreement, dated as of January 4, 2010, by and between James DeVoglaer and NetSpend Corporation |
|
|
|
10.8** |
|
Amendment to Employment Agreement, dated as of April 20, 2010, by and between James DeVoglaer and NetSpend Corporation |
|
|
|
10.9** |
|
Employment Agreement, dated as of April 1, 2010, by and between Anh Vazquez (now known as Anh Hatzopoulos) and NetSpend Corporation |
|
|
|
10.10 |
|
Amended and Restated Employment Agreement, dated as of September 20, 2010, by and among Christopher T. Brown, NetSpend Corporation and NetSpend Holdings, Inc. |
|
|
|
10.11** |
|
Employment Agreement, dated as of June 1, 2010, by and between Charles Harris and NetSpend Corporation |
|
|
|
10.12 |
|
Form of Indemnification Agreement by and between NetSpend Holdings, Inc. and each of its directors |
|
|
|
10.13* |
|
Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock Plan |
|
|
|
10.14** |
|
Office Lease, dated as of August 11, 2003, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.15** |
|
First Amendment to Office Lease, dated as of August 2, 2005, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.16** |
|
Second Amendment to Office Lease, dated as of September 6, 2006, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.17** |
|
Third Amendment to Office Lease, dated as of August 1, 2007, by and between WTCC Austin Investors V, L.P. and NetSpend Corporation |
|
|
|
10.18** |
|
Fourth Amendment to Office Lease, dated as of March 13, 2009, by and between WTCC Austin Investors V, L.P. and NetSpend Corporation |
|
|
|
10.19** |
|
Fourth Amended and Restated Independent Agency Agreement, dated as of June 2, 2008, by and between ACE Cash Express, Inc. and NetSpend Corporation |
|
|
|
10.20** |
|
Second Amended and Restated Card Program Management Agreement, dated as of February 1, 2010, by and between MetaBank, dba Meta Payment Systems, and NetSpend Corporation |
|
|
|
10.21** |
|
Card Program Management Agreement, dated as of February 1, 2010, by and between MetaBank, dba Meta Payment Systems, and Skylight Financial, Inc. |
|
|
|
10.22 |
|
Amended and Restated Stock Option Award Agreement between NetSpend Holdings, Inc. and Daniel Henry, dated March 11, 2008 (Performance-Based Vesting) |
|
|
|
10.23** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Daniel Henry, dated March 11, 2008 (Time-Based Vesting) |
|
|
|
10.24** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010 |
|
|
|
10.25** |
|
Restricted Stock Agreement between NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010 |
|
|
|
10.26** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Christopher T. Brown, dated March 11, 2008 |
|
|
|
10.27** |
|
Form of NetSpend Holdings, Inc. Restricted Stock Agreement |
|
|
|
10.28** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Time-Based Vesting) |
|
|
|
10.29** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Event-Based Vesting) |
|
|
|
10.30** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Director Awards) |
II-5
Table of Contents
|
|
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
|
|
10.31** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Performance-Based Vesting) |
|
|
|
10.32** |
|
Memorandum of Understanding, dated as of September 9, 2010, by and between ACE Cash Express, Inc. and NetSpend Corporation |
|
|
|
21.1** |
|
List of subsidiaries |
|
|
|
23.1 |
|
Consent of KPMG LLP |
|
|
|
23.2 |
|
Consent of Grant Thornton LLP |
|
|
|
23.3* |
|
Consent of Baker Botts L.L.P. (included in Exhibit 5.1) |
|
|
|
24.1** |
|
Powers of Attorney |
- *
- To
be filed by amendment.
- **
- Filed
previously.
-
- Registrant
has omitted portions of the referenced exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment under Rule 406 promulgated under the Securities Act.
- (b)
- Financial
statement schedule.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance |
|
Additional
Charges to
Cost and
Expense |
|
Write-
Offs |
|
Ending
Balance |
|
|
|
(in thousands of dollars)
|
|
Cardholders' reserve for the year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
869 |
|
$ |
2,572 |
|
$ |
(2,331 |
) |
$ |
1,110 |
|
|
2008 |
|
$ |
1,110 |
|
$ |
2,362 |
|
$ |
(2,153 |
) |
$ |
1,319 |
|
|
2009 |
|
$ |
1,319 |
|
$ |
4,930 |
|
$ |
(4,629 |
) |
$ |
1,620 |
|
Other
financial statement schedules are omitted because they are not required or the required information is shown in our consolidated financial statements and the notes thereto.
Item 17. Undertakings.
(a) The
undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification is against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The
undersigned registrant hereby undertakes that, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating
II-6
Table of Contents
to
an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that
was part of the registration statement or made in any such document immediately prior to such date of first use.
(d) For
the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The
undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(e) The
undersigned registrant hereby undertakes that:
(1) For
purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For
the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-7
Table of Contents
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Austin, State of Texas on the 20th day of September 2010.
|
|
|
|
|
|
|
NETSPEND HOLDINGS, INC. |
|
|
By: |
|
/s/ DANIEL R. HENRY
Daniel R. Henry
Chief Executive Officer |
Pursuant to the requirements of the Securities Act, this amendment to the registration statement has been signed by the following persons in the listed capacities on
September 20, 2010:
|
|
|
Name |
|
Title |
|
|
|
/s/ DANIEL R. HENRY
Daniel R. Henry |
|
Chief Executive Officer and Director (Principal Executive Officer) |
/s/ GEORGE W. GRESHAM
George W. Gresham |
|
Chief Financial Officer (Principal Accounting and Financial Officer) |
*
Ann H. Lamont |
|
Director |
*
Daniel M. Schley |
|
Director |
*
Thomas McCullough |
|
Director |
*
Francisco Rodriguez |
|
Director |
*
Alexander R. Castaldi |
|
Director |
II-8
Table of Contents
|
|
|
Name |
|
Title |
|
|
|
*
Andrew Adams |
|
Director |
|
|
|
|
|
*By: |
|
/s/ DANIEL R. HENRY
Daniel R. Henry Attorney-in-fact |
|
|
II-9
Table of Contents
Exhibit Index
|
|
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
|
|
1.1* |
|
Form of Underwriting Agreement |
|
|
|
3.1 |
|
Form of Third Amended and Restated Certificate of Incorporation, to be effective upon completion of this offering |
|
|
|
3.2 |
|
Form of Amended and Restated Bylaws, to be effective upon completion of this offering |
|
|
|
4.1* |
|
Specimen common stock certificate |
|
|
|
4.2 |
|
Form of Registration Rights Agreement, to be effective upon completion of this offering |
|
|
|
5.1* |
|
Opinion of Baker Botts L.L.P. regarding validity of securities being issued |
|
|
|
10.1* |
|
Amended and Restated Credit Agreement, dated as of July 15, 2008, by and among NetSpend Corporation, NetSpend Holdings, Inc., the lenders party thereto and JPMorgan Chase Bank, National Association |
|
|
|
10.2* |
|
Security Agreement, dated as of June 27, 2007, by and among NetSpend Corporation, NetSpend Holdings, Inc. and JPMorgan Chase Bank, National Association |
|
|
|
10.3* |
|
First Amendment to Security Agreement, dated as of July 15, 2008, by and among NetSpend Corporation, NetSpend Holdings, Inc. and JPMorgan Chase Bank, National Association |
|
|
|
10.4 |
|
Amended and Restated Employment Agreement, dated as of September 20, 2010, by and among Daniel Henry, NetSpend Corporation and NetSpend Holdings, Inc. |
|
|
|
10.5** |
|
Employment Agreement, dated as of April 21, 2010, by and between George W. Gresham and NetSpend Corporation |
|
|
|
10.6** |
|
Amended and Restated Employment Agreement, dated as of June 1, 2010, by and between Tom Cregan and NetSpend Corporation |
|
|
|
10.7** |
|
Employment Agreement, dated as of January 4, 2010, by and between James DeVoglaer and NetSpend Corporation |
|
|
|
10.8** |
|
Amendment to Employment Agreement, dated as of April 20, 2010, by and between James DeVoglaer and NetSpend Corporation |
|
|
|
10.9** |
|
Employment Agreement, dated as of April 1, 2010, by and between Anh Vazquez (now known as Anh Hatzopoulos) and NetSpend Corporation |
|
|
|
10.10 |
|
Amended and Restated Employment Agreement, dated as of September 20, 2010, by and among Christopher T. Brown, NetSpend Corporation and NetSpend Holdings, Inc. |
|
|
|
10.11** |
|
Employment Agreement, dated as of June 1, 2010, by and between Charles Harris and NetSpend Corporation |
|
|
|
10.12 |
|
Form of Indemnification Agreement by and between NetSpend Holdings, Inc. and each of its directors |
|
|
|
10.13* |
|
Second Amended and Restated NetSpend Holdings, Inc. 2004 Stock Option and Restricted Stock Plan |
|
|
|
10.14** |
|
Office Lease, dated as of August 11, 2003, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.15** |
|
First Amendment to Office Lease, dated as of August 2, 2005, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.16** |
|
Second Amendment to Office Lease, dated as of September 6, 2006, by and between Crescent Real Estate Funding VIII, L.P. and NetSpend Corporation |
|
|
|
10.17** |
|
Third Amendment to Office Lease, dated as of August 1, 2007, by and between WTCC Austin Investors V, L.P. and NetSpend Corporation |
|
|
|
10.18** |
|
Fourth Amendment to Office Lease, dated as of March 13, 2009, by and between WTCC Austin Investors V, L.P. and NetSpend Corporation |
|
|
|
10.19** |
|
Fourth Amended and Restated Independent Agency Agreement, dated as of June 2, 2008, by and between ACE Cash Express, Inc. and NetSpend Corporation |
|
|
|
10.20** |
|
Second Amended and Restated Card Program Management Agreement, dated as of February 1, 2010, by and between MetaBank, dba Meta Payment Systems, and NetSpend Corporation |
Table of Contents
|
|
|
|
|
|
|
|
Exhibit
Number |
|
Description |
|
|
|
10.21** |
|
Card Program Management Agreement, dated as of February 1, 2010, by and between MetaBank, dba Meta Payment Systems, and Skylight Financial, Inc. |
|
|
|
10.22 |
|
Amended and Restated Stock Option Award Agreement between NetSpend Holdings, Inc. and Daniel Henry, dated March 11, 2008 (Performance-Based Vesting) |
|
|
|
10.23** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Daniel Henry, dated March 11, 2008 (Time-Based Vesting) |
|
|
|
10.24** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010 |
|
|
|
10.25** |
|
Restricted Stock Agreement between NetSpend Holdings, Inc. and Charles Harris, dated July 1, 2010 |
|
|
|
10.26** |
|
Stock Option Award Agreement between NetSpend Holdings, Inc. and Christopher T. Brown, dated March 11, 2008 |
|
|
|
10.27** |
|
Form of NetSpend Holdings, Inc. Restricted Stock Agreement |
|
|
|
10.28** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Time-Based Vesting) |
|
|
|
10.29** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Event-Based Vesting) |
|
|
|
10.30** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Director Awards) |
|
|
|
10.31** |
|
Form of NetSpend Holdings, Inc. Stock Option Award Agreement (Performance-Based Vesting) |
|
|
|
10.32** |
|
Memorandum of Understanding, dated as of September 9, 2010, by and between ACE Cash Express, Inc. and NetSpend Corporation |
|
|
|
21.1** |
|
List of subsidiaries |
|
|
|
23.1 |
|
Consent of KPMG LLP |
|
|
|
23.2 |
|
Consent of Grant Thornton LLP |
|
|
|
23.3* |
|
Consent of Baker Botts L.L.P. (included in Exhibit 5.1) |
|
|
|
24.1** |
|
Powers of Attorney |
- *
- To
be filed by amendment.
- **
- Filed
previously.
-
- Registrant
has omitted portions of the referenced exhibit and filed such exhibit separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment under Rule 406 promulgated under the Securities Act.