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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on October 14, 2010

Registration No. 333-168127

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



AMENDMENT NO. 7
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.


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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 October 14, 2010.

18,527,745 Shares

GRAPHIC

NetSpend Holdings, Inc.

Common Stock



          This is an initial public offering of shares of common stock of NetSpend Holdings, Inc.

          We are offering 2,272,727 shares of our common stock to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 16,255,018 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 $10.00 and $12.00. We have applied to list our common stock on the Nasdaq Stock Market, LLC under the symbol "NTSP".



          See "Risk Factors" beginning on page 13 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 18,527,745 shares of common stock, the underwriters have the option to purchase up to an additional 2,779,162 shares from 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

 
  Page  

Prospectus Summary

    1  

The Offering

    7  

Summary Consolidated Financial Data

    9  

Risk Factors

    13  

Forward-Looking Statements

    34  

Industry Data

    34  

Use of Proceeds

    35  

Dividend Policy

    36  

Capitalization

    37  

Dilution

    39  

Selected Consolidated Financial Data

    41  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    45  

Business

    73  

Management

    91  

Executive Compensation

    98  

Principal and Selling Stockholders

    123  

Certain Relationships and Related Party Transactions

    128  

Description of Capital Stock

    130  

Shares Eligible for Future Sale

    136  

United States Federal Tax Considerations for Non-U.S. Holders

    138  

Underwriting

    142  

Legal Matters

    148  

Experts

    148  

Where You Can Find Additional Information

    148  

Index to Consolidated Financial Statements

    F-1  



          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.

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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 13, 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 cards has increased from approximately 165,000 as of December 31, 2007 to approximately 615,000 as of June 30, 2010. As of June 30, 2010, the average lifetime of a card account was approximately 11 months and the

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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

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      affordable financial services solution and increase the lifetime value of the customer relationship.

    Extensive and Diverse Distribution and Reload Network.  We have built an extensive distribution and reload network throughout the U.S. comprised of diverse categories of retailers, our own direct-to-consumer and online marketing programs and corporate employers, which allows us to reach a large number of underbanked consumers and reduce our dependency on any single channel or distributor.

    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. 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.

    Strong Regulatory Compliance.  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. 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 that is 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. We believe that the strength and experience of our management team has helped us to attract and retain our cardholders and distributors and create a differentiated product offering, which has contributed 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 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;

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      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 13, 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.

Recent Developments

    Third Quarter Results

          Our consolidated financial statements for the quarter ended September 30, 2010 are not yet available. The following expectations regarding our results for this period are solely management estimates based on currently available information. Our independent registered public accounting firm has not audited, reviewed or performed any procedures with respect to these preliminary financial data and, accordingly, does not express an opinion or any other form of assurance with respect to these data.

          We expect that, for the quarter ended September 30, 2010:

    Our operating revenues will be between $65.0 million and $68.0 million; and

    Our net income will be between $5.0 million and $7.0 million.

Our actual results may differ from these expectations.

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          Key operating results for the quarter ended September 30, 2010 are as follows:

    Number of active cards—2.1 million;

    Percentage of active cards with direct deposit—31%; and

    Gross Dollar Volume (GDV)—$2.4 billion.

          We expect our total operating revenues for the quarter ended September 30, 2010 will be between $65.0 million and $68.0 million, an increase of 16% to 21% from total operating revenues of $56.0 million for the quarter ended September 30, 2009. This increase was due primarily to the increase in active cards of approximately 25% offset in part by the decline in gift card related revenue due to our decision to cease marketing gift cards.

          We expect our net income for the quarter ended September 30, 2010 will be between $5.0 million and $7.0 million, a change of 39% to 94% from net income of $3.6 million for the quarter ended September 30, 2009. Our net income for the quarter ended September 30, 2010 is expected to include an aggregate amount of approximately $7.5 million of net interest expense, income tax expense, and depreciation and amortization. Our net income for the quarter ended September 30, 2010 is also expected to include approximately $1.4 million in stock-based compensation expense and approximately $0.7 million of debt extinguishment costs incurred in conjunction with repaying our old term loan facility and with borrowings under our new credit facility that was executed in September 2010. For the quarter ended September 30, 2009, the comparable amount of net interest expense, income tax expense, and depreciation and amortization was $5.9 million, and we incurred approximately $1.1 million in stock-based compensation.

    MetaBank Announcement

          On October 12, 2010, MetaBank publicly disclosed that the Office of Thrift Supervision ("OTS") issued a Supervisory Directive on October 6, 2010, which clarified and supplemented an initial Supervisory Directive issued to MetaBank on August 31, 2010 (collectively, the "OTS Directives"). MetaBank is our preferred issuing bank, and as of June 30, 2010, approximately 71% of our active cards were issued through MetaBank. The OTS Directives require MetaBank to discontinue offering its iAdvance product, based on a determination by OTS that MetaBank engaged in unfair or deceptive acts or practices in connection with its operation of the iAdvance program. In addition, MetaBank announced that the OTS Directives will require MetaBank to obtain prior written approval of OTS to, among other things, enter into any new third party relationship agreements concerning any credit or deposit product (including prepaid access), or materially amend any such existing agreements or publicly announce any new third party relationship agreements or material amendments to existing agreements. MetaBank further indicated that it cannot predict whether OTS will address other compliance and supervisory matters, or the effect on MetaBank's results of operations or financial condition of any such OTS actions, although OTS has informed MetaBank that it will address in the future OTS's expectations with respect to reimbursement of borrowers under the iAdvance program. Future actions by OTS could seek to address other concerns that MetaBank indicated were factors leading to the OTS Directives, including MetaBank's third-party relationship risk, enterprise risk management and rapid growth. We are not in communication with OTS on these matters, and our information is limited to the information that is publicly disclosed and provided to us by MetaBank.

          MetaBank has informed us that it expects to continue to service its existing third party relationship agreements, which would include our card program management agreement, consistent with their terms and the OTS Directives. If, as a result of these or further OTS actions, MetaBank is unable to continue to service our existing needs or support our future growth, we may be forced to move our cards issued through MetaBank to one of our other issuing banks or another

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provider of these bank services. For a discussion of the risks associated with moving these banking services to another provider, see "Risk Factors—Risks Relating to Our Business—The loss of, or change to, our relationships with MetaBank or our other issuing banks could adversely affect our business, results of operations and financial position."

          We do not expect that the discontinuation of the iAdvance product will have a material impact on our financial condition or results of operations.

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.

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The Offering

Common stock we are offering   2,272,727 shares

Common stock offered by the selling stockholders(1)

 

16,255,018 shares

Common stock to be outstanding after this offering (not including Class B common stock)

 

80,838,535 shares

Class B common stock to be outstanding after this offering

 

6,937,367 shares

Option to purchase additional shares

 

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 2,779,162 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, 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. 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".

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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 $21.3 million, assuming an initial offering price of $11.00, 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 new credit facility. In September 2010, we borrowed $58.5 million under our new credit facility and used the funds to repay in full the amounts under our old term loan facility. 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 the 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:

    includes 1,092,135 shares issuable upon the exercise of options and warrants by selling stockholders identified in this prospectus;

    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, other than the options being net exercised by selling stockholders for 573,314 shares of common stock in connection with this offering;

    excludes 315,511 shares of restricted common stock outstanding as of June 30, 2010;

    excludes 1,843,479 additional shares of common stock reserved as of June 30, 2010 for future issuance under our 2004 Plan; and

    excludes 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, other than the warrants being net exercised by selling stockholders for 518,821 shares of common stock in connection with 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 2,779,162 additional shares of common stock from the selling stockholders; and

    an initial public offering price of $11.00 per share, the mid-point of the range of prices set forth on the cover of this prospectus.

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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 45, 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.

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  

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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,   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  

Adjusted 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   $ 2,357,852   $ 3,686,554   $ 5,690,842   $ 7,570,339   $ 3,703,370   $ 4,915,607  

Percentage of active cards with direct deposit(5)

    9.0 %   11.1 %   13.9 %   22.9 %   27.6 %   24.4 %   30.2 %

(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.

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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  
                                 

Settlement (gains) and other losses during the six months ended June 30, 2009 relate 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. Settlement (gains) and other losses during the six months ended June 30, 2010 relate to 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.


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)
In addition to Adjusted EBITDA, we use a second non-GAAP financial metric that we label "Adjusted Net Income" to evaluate our financial performance. We compute Adjusted 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 and we believe it is an important metric that is useful to our board of directors, management and investors for the following reasons:

Assets being depreciated will often have to be replaced in the future and Adjusted EBITDA does not reflect any expenditure for these items;

Adjusted EBITDA does not reflect the significant interest expense, or the payments necessary to service interest payments on our debt;

Adjusted Net Income 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; and

We believe Adjusted Net Income measurements are used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.


By providing this non-GAAP financial measure, together with the below reconciliation, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. The following is a reconciliation of

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    our net income (loss), the most comparable GAAP measure, for the six months ended June 30, 2009 and 2010, and the years ended December 31, 2005, 2006, 2007, 2008 and 2009 to Adjusted 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  
                                 
 

Adjusted net income

  $ 2,496   $ (458 ) $ 16,644   $ 7,800   $ 16,854   $ 7,509   $ 16,370  
                                 

Settlement (gains) and other losses during the six months ended June 30, 2009 relate 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. Settlement (gains) and other losses during the six months ended June 30, 2010 relate to 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.


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 charge consistent with the pre-tax adjustments used to calculate adjusted net income.


Our Adjusted Net Income is not necessarily comparable to what other companies define as Adjusted Net Income. In addition, Adjusted 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 Adjusted 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 cards with direct deposit represents the percentage of our active cards that have had a direct deposit load within the previous 90 days.

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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.

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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 do not have direct control over the sales of our cards and, as a result, our future growth is

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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 "Business—Regulation—Money 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 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

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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 revenue. In addition, various states have statutes that limit the ability of check cashers to charge a fee for cashing government-issued checks.

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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 incurred overdraft charges will not provide their consent to continue participating in the overdraft service.

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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 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

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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. For example, we were recently informed by MetaBank that OTS had issued a supervisory directive directing MetaBank to discontinue offering its iAdvance product based on a determination by OTS that MetaBank engaged in unfair or deceptive acts or practices in connection with its operation of the iAdvance program. See "Prospectus Summary—Recent Developments—MetaBank Announcement."

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 laundering compliance obligations, these obligations arise contractually under the agreements that

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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 as a result of the recent directives issued by OTS against MetaBank, 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. See "Prospectus Summary—Recent Developments—MetaBank Announcement." 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.

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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 sponsorship in the card associations and network organizations, and we are unable to secure

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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.

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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 a transition to a new provider on a timely basis, or at all, we could be forced to temporarily or

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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.

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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

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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,

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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

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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 new 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.

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

          The new credit agreement contains, 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 new 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 new 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 new 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.

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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 87,775,902 shares of common stock outstanding based on the number of shares outstanding as of June 30, 2010. This includes the 18,527,745 shares that we and the selling stockholders are selling

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in this offering, which may be resold in the public market immediately. The remaining 69,248,157 shares, or 79% of our outstanding shares after this offering, will be able to be sold, subject to any applicable volume limitations under federal securities laws, upon the expiration of the 180-day lock-up period.

          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 the expiration of the 180-day lock-up period following this offering, holders of an aggregate of approximately 65,672,306 shares of our common stock 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 58,428,742 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;

    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;

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    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 39% of our outstanding common stock;

    JLL Partners and its affiliated investment funds will own in the aggregate approximately 27% of our outstanding common stock, representing just under 25% of the aggregate voting power; and

    Our executive officers and directors will collectively beneficially own approximately 67% 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.

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 $11.18 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 $11.00 per share, the mid-point of the range of prices set forth on the cover of this prospectus. Purchasers of shares of our common stock offered by us in this offering will have contributed approximately 13.4% of the aggregate price paid by all purchasers of our common stock, but will own only approximately 2.6% 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

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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 new 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;

    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

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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 new 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.

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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

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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 $21.3 million, assuming an initial public offering price of $11.00 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 $11.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $2.1 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 our new credit facility. On September 24, 2010, we borrowed $58.5 million under our new credit facility and used all of the funds to repay in full the amounts owed under our old term loan facility. The new credit facility has a maturity in September 2015. The outstanding borrowings under the new credit facility 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 borrowings 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.

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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, our new credit facility 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.

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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 by us in this offering of 2,272,727 shares of our common stock and the sale by selling stockholders of 1,092,135 shares of our common stock upon exercise of options and warrants at an assumed initial public offering price of $11.00 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 35 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   $ 36,669  
           

Long-term debt, net of current portion:

             
 

Revolving credit facility

  $   $  
 

Term loan

    45,000     45,000  
 

Capital lease

    694     694  
           

Total long-term debt, net of current portion

    45,694     45,694  

Stockholders' equity:

             
 

Class A Common Stock, $0.001 par value; 150,000,000 shares authorized (actual) 225,000,000 shares authorized (pro forma); 77,331,810 shares issued less 3,370,000 shares held in treasury (actual); 84,208,535 shares issued less 3,370,000 shares held in treasury (pro forma)(1)

    77     84  
 

Class B common stock, $0.001 par value; 15,000,000 shares authorized; 10,449,230 shares issued (actual); 6,937,367 shares issued (pro forma)(1)

    11     7  

Treasury stock

    (11,374 )   (11,374 )

Additional paid-in capital

    122,719     144,001  

Accumulated other comprehensive income

    823     823  

Retained earnings

    6,373     6,373  
           
 

Total stockholders' equity

    118,629     139,914  
           
 

Total capitalization

  $ 164,323   $ 185,608  
           

(1)
Assumes the conversion of 3,511,863 shares of our Class B Common Stock into shares of our Class A Common Stock, all of which were outstanding as of June 30, 2010.

          A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional

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paid-in capital, total stockholders' equity and total capitalization by approximately $2.1 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.

          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, other than the options being net exercised by selling stockholders for 573,314 shares of common stock in connection with this offering;

    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, other than the warrants being net exercised by selling stockholders for 518,821 shares of common stock in connection with this offering.

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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 $11.00 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 2,272,727 shares of our common stock offered by us at the assumed initial public offering price of $11.00 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 $(16.1) million, or approximately $(0.18) per share. This amount represents an immediate increase in net tangible book value of approximately $0.26 per share to our existing stockholders and an immediate dilution in net tangible book value of $11.18 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

        $ 11.00  

Net tangible book value per share at June 30, 2010

  $ (0.44 )      

Increase in net tangible book value per share attributable to new investors

    0.26        
             

Adjusted net tangible book value per share after this offering

          (0.18 )
             

Dilution in net tangible book value per share to new investors

        $ 11.18  
             

          A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the adjusted net tangible book value per share after this offering by approximately $0.02 per share, and dilution in net tangible book value per share to new investors by approximately $12.16 per share 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 $11.00 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

    85,503,175     97.4 % $ 161,153,000     86.6 % $ 1.88  

New investors

    2,272,727     2.6     25,000,000     13.4     11.00  
                         

Total

    87,775,902     100.0 % $ 186,153,000     100.0 %      
                         

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          The number of shares of our common stock held by existing stockholders and to be outstanding following this offering is based on 84,411,040 shares of our common stock outstanding as of June 30, 2010 and:

    includes 1,092,135 shares issuable upon the exercise of options and warrants by selling stockholders identified in this prospectus;

    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, other than the options being net exercised by selling stockholders for 573,314 shares of common stock in connection with this offering;

    excludes 315,511 shares of restricted common stock outstanding as of June 30, 2010;

    excludes 1,843,479 additional shares of common stock reserved as of June 30, 2010 for future issuance under our 2004 Plan; and

    excludes 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, other than the warrants being net exercised by selling stockholders for 518,821 shares of common stock in connection with 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 $0.19 and total dilution per share to new investors would be $10.81.

          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 76% 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 21,661,615, or approximately 24% of the total number of shares of our common stock outstanding after this offering.

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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 45, 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  

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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,
  Six Months Ended
June 30,
 
 
  (unaudited)
2005
   
   
   
   
  (unaudited)
 
 
  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  

Adjusted 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   $ 2,357,852   $ 3,686,554   $ 5,690,842   $ 7,570,339   $ 3,703,370   $ 4,915,607  

Percentage of active cards with direct deposit(5)

    9.0 %   11.1 %   13.9 %   22.9 %   27.6 %   24.4 %   30.2 %

(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.

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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)
2005
   
   
   
   
  (unaudited)
 
 
  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  
                               

Settlement (gains) and other losses during the six months ended June 30, 2009 relate 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. Settlement (gains) and other losses during the six months ended June 30, 2010 relate to 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.


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)
In addition to Adjusted EBITDA, we use a second non-GAAP financial metric that we label "Adjusted Net Income" to evaluate our financial performance. We compute Adjusted 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 and we believe it is an important metric that is useful to our board of directors, management and investors for the following reasons:

    Assets being depreciated will often have to be replaced in the future and Adjusted EBITDA does not reflect any expenditure for these items;

    Adjusted EBITDA does not reflect the significant interest expense, or the payments necessary to service interest payments on our debt;

    Adjusted Net Income 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; and

    We believe Adjusted Net Income measurements are used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry.


By providing this non-GAAP financial measure, together with the below reconciliation, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. The following is a reconciliation of our net income (loss), the most

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    comparable GAAP measure, for the six months ended June 30, 2009 and 2010, and the years ended December 31, 2005, 2006, 2007, 2008 and 2009 to Adjusted Net Income.

 
  Year Ended
December 31,
  Six Months Ended
June 30,
 
 
  (unaudited)
2005
   
   
   
   
  (unaudited)
 
 
  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  
                               

Adjusted net income

  $ 2,496   $ (458 ) $ 16,644   $ 7,800   $ 16,854   $ 7,509   $ 16,370  
                               

Settlement (gains) and other losses during the six months ended June 30, 2009 relate 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. Settlement (gains) and other losses during the six months ended June 30, 2010 relate to 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.


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 charge consistent with the pre-tax adjustments used to calculate adjusted net income.


Our Adjusted Net Income is not necessarily comparable to what other companies define as Adjusted Net Income. In addition, Adjusted 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 Adjusted 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 cards with direct deposit represents the percentage of our active cards that have had a direct deposit load within the previous 90 days.

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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

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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 Cards with Direct Deposit — represents the percentage of our active cards that have had a direct deposit load within the previous 90 days. The percentage of our active cards that were direct deposit active cards as of December 31, 2007, December 31, 2008, December 31, 2009, and June 30, 2010, was 13.9%, 22.9%, 27.6% and 30.2%, 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 $3.7 billion and $4.9 billion for the six months ended June 30, 2009 and June 30, 2010, respectively. Approximately 40.4%, 53.5% and 64.4% of the gross dollar volume for the years ended December 31, 2007, December 31, 2008, and December 31, 2009, respectively, was made using active cards with direct deposit. Approximately 62.1% and 69.0% of the gross dollar volume for the six months ended June 30, 2009 and June 30, 2010, respectively, was made using active cards with direct deposit.

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 overdraft protection through our issuing banks, a variety of bill payment options, and card-to-card transfers of funds through our customer service.

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    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 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.

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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  
               

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  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 %
               

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  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  
           

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  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 %
           

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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.

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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

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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

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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  
                       

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          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

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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 revenue 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 an 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.

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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

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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

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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 )
           

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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

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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

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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 outflows 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.

          In September 2010, we entered into a new credit facility with a syndicate of banks with SunTrust Bank as administrative agent. The new credit facility provides a $135.0 million revolving credit facility with the ability to request increases to the revolving credit facility of up to $50.0 million. The initial borrowings under this new credit facility of $58.5 million were used to repay in full the outstanding indebtedness under our old term loan facility. The new credit facility has a maturity date in September 2015, and provides for and includes a $5.0 million swingline facility and $15.0 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 contains 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 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. 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 are imposed by our new credit agreement, we may not 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.

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          In addition to the restrictions and requirements contained in our new credit agreement, the maximum amounts we are 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 timing of the settlement of transactions and the assessment of subscription, maintenance or other

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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, revenue, costs and expenses and related disclosures. We base our estimates on historical

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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 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.

          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

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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.

          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

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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 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.

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          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 14–16% 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.

          Subsequent to the last arms-length transaction involving our common stock in March 2010 at $3.78 per share, we engaged independent third-party valuation professionals to value our common stock in June 2010. 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 services 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. Additionally, prior to June 2010, there were very few examples of comparable public companies with business models similar to ours upon which we could base a valuation of our common stock. Then, on June 16, 2010, we observed that a company in our industry that, although not a direct competitor, had a similar business model, priced its initial public offering 25% below the mid-point of the range published in its preliminary prospectus. This outcome, in our view, signaled that the market was concerned about the prospects of our business model and was significantly influenced by regulatory uncertainty faced by our industry as the result of the Senate's passage in May 2010 of proposed regulations of interchange rates as well as the significant volatility and deterioration in the broader equity markets. We estimated the fair value of our common stock in a merger or strategic sale and an initial public offering scenario using a

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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 using the estimated fair value of our common stock of $7.06 per share.

          In late July 2010, the final version of the federal financial reform legislation was enacted with an express exclusion of GPR programs from the new law's regulation of interchange rates. The passage of this legislation removed significant uncertainty surrounding the implications of potential interchange rate regulation for our company and served to strengthen the prospects for growth in the GPR card market generally. Also in July 2010, a direct competitor of ours priced its initial public offering above the original proposed price range published in its preliminary prospectus. Since consummation of its initial public offering, this competitor has subsequently traded significantly above its initial public offering price, with a price approximately 42% above its initial offering price based on the average closing price during the month of September 2010. Additionally, market concerns regarding sovereign debt stability have subsided and the broader equity markets have performed favorably during the four trading weeks in the period ended September 24, 2010.

          The difference between the fair value of our common stock determined by our board in December 2009 and June 2010 as compared to our anticipated public offering price was influenced significantly by the aforementioned factors, including the very strong performance of our most directly comparable competitor's initial public offering, as well as the improved market conditions that have led to a reduction in overall uncertainty surrounding transaction execution. In addition, the Company has experienced significant growth in its business, increasing the number of active cards from December 31, 2009 to June 30, 2010 more than 9%, increasing total gross dollar value during the six months ended June 30, 2010 more than 32% over the first six months of 2009 and increasing Adjusted EBITDA for the six months ended June 30, 2010 more than 83% over the same period in 2009.

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.

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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 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

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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 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 %

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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 cards has increased from approximately 165,000 as of December 31, 2007 to approximately 615,000 as of June 30, 2010. The gross dollar volume driven by direct deposit active cards has increased from 40.4% of our gross dollar volume for the year ended December 31, 2007 to 69.0% of our gross dollar volume for the six months ended 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

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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 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

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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.

GPR Card Load Volumes 2008-2012 (U.S. $ billions)

GRAPHIC

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.

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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 cards by approximately 272%. 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 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.

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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 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.

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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.

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-

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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, 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 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.

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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 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

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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.


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

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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

GRAPHIC

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

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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.

          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.

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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 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 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. For a discussion of recent developments related to MetaBank, see "Prospectus Summary—Recent Developments—MetaBank Announcement."

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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, 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.

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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 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

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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 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

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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 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

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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 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

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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.

          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.

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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

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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

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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.

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          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;

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    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. We expect to replace Mr. Rodriguez with an independent director as soon as practicable following consummation of this offering. 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.

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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 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.

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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."

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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 himse