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EX-21.1 - LIST OF SUBSIDIARIES - Higher One Holdings, Inc.dex211.htm
EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - Higher One Holdings, Inc.dex231.htm
EX-23.2 - CONSENT OF BURR PILGER MAYER, INC. - Higher One Holdings, Inc.dex232.htm
Table of Contents

As filed with the Securities and Exchange Commission on March 24, 2010

Registration No. 333-            

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

HIGHER ONE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   7389   26-3025501

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

25 Science Park

New Haven, Connecticut 06511

(203) 776-7776

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive office)

 

 

Thomas D. Kavanaugh, Esq.

General Counsel

Higher One Holdings, Inc.

25 Science Park

New Haven, Connecticut 06511

(203) 776-7776

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

David Lopez, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

(212) 225-2000

 

Jay Clayton, Esq.

Sullivan & Cromwell LLP

125 Broad Street

New York, NY 10004-2498

(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, check the following box.  ¨

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.  ¨

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.  ¨

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.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  ¨

   Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of
securities to be registered
            Proposed maximum
aggregate
offering price(1)(2)
  Amount of
registration Fee

Common Stock, par value $.001 per share

      $ 100,000,000   $ 7,130

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Includes (i) shares of common stock to be offered by the registrant and the selling stockholders in this offering and (ii) shares of common stock that may be purchased by the underwriters from the selling stockholders upon the exercise of the underwriters’ option to purchase additional shares.

 

 

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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated March 24, 2010.

                    Shares

LOGO

Higher One Holdings, Inc.

Common Stock

 

 

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

Higher One Holdings, Inc. is offering              of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional              shares. Higher One Holdings, Inc. will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $              and $            . Higher One intends to list the common stock on The NASDAQ Global Select Market under the symbol “        ”.

 

 

See “Risk Factors” on page 11 to read about factors you should consider before buying shares of the 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 discount

   $      $  

Proceeds, before expenses, to
Higher One Holdings, Inc.

   $      $  

Proceeds, before expenses, to the selling stockholders

   $      $  

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares from 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.

 

 

UBS Investment Bank

 

 

 

Piper Jaffray   Raymond James   William Blair & Company

JMP Securities

Prospectus dated                     , 2010.


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page

Prospectus Summary

   1

Risk Factors

   11

Forward-Looking Statements

   32

Use of Proceeds

   33

Dilution

   34

Dividend Policy

   35

Capitalization

   35

Unaudited Pro Forma Condensed Combined Financial Information

   37

Selected Consolidated Financial Data

   40

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

   43

Business

   61

Management

   81

Executive Compensation

   85

Principal and Selling Stockholders

   97

Certain Relationships and Related Party Transactions

   100

Shares Eligible for Future Sale

   103

Description of Capital Stock

   106

Material U.S. Federal Tax Considerations to Non-U.S. Holders

   109

Underwriting

   112

Validity of Common Stock

   116

Experts

   116

Additional Information

   116

Index to Consolidated Financial Statements

   F-1

 

 

We are responsible for the information contained in this prospectus. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date of this prospectus.

 

i


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PROSPECTUS SUMMARY

The following summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully. In particular, you should read the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Unless the context otherwise requires, in the prospectus, references to the “company,” “Higher One,” “we,” “us,” or “our” refer to Higher One Holdings, Inc. and its consolidated subsidiaries.

Our Company

We are a leading provider of technology and payment services to the higher education industry. We provide the most comprehensive suite of disbursement and payment solutions specifically designed for higher education institutions and their students. We also provide campus communities with convenient and student-oriented banking services, which include extensive user-friendly features.

The disbursement of financial aid and other refunds to students is a highly regulated, resource-consuming and recurrent obligation of higher education institutions. The student disbursement process remains mainly paper-based, costly and inefficient at most higher education institutions. These institutions are facing increasing pressure to improve administrative efficiency and the quality of service provided to students, to streamline regulatory compliance in respect of financial aid refunds, and to reduce expenses.

We believe our products provide significant benefits to both higher education institutions as well as their campus communities, including students. For our higher education institution customers, we offer our OneDisburse® Refund Management® disbursement service. Our disbursement service facilitates financial aid and other refunds to students, while simultaneously enhancing the ability of our higher education institutional clients to comply with the federal regulations applicable to financial aid transactions. By using our refund disbursement solutions, our clients save on the cost of handling disbursements, improve related business processes, increase the speed with which students receive their refunds and ensure compliance with applicable regulations.

For students and other campus community members, we offer our OneAccount service that includes a Federal Deposit Insurance Corporation, or FDIC, -insured deposit account provided by our bank partner, a OneCard, which is a debit MasterCard® ATM card, and other retail banking services. OneAccount is cost competitive and tailored to the campus communities that we serve, providing students with convenient and faster access to disbursement funds.

We also offer payment transaction services which are primarily software-as-a service solutions that facilitate electronic payment transactions allowing higher education institutions to receive easy and cost effective electronic payments from students, parents and others for essential education-related financial transactions. Features of our payment services include online bill presentment and online payment capabilities for tuition and other fees.

We have experienced significant growth since our inception in 2000, which we believe demonstrates the benefits and convenience our products provide to our customers, as well as the complementary nature of our higher education institution services and student services. As of December 31, 2009, 367 campuses serving approximately 2.3 million students had purchased the OneDisburse service and 255 campuses serving approximately 1.9 million students had contracted to

 

 

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use one or more of our payment products and services. From 2003 through 2009, our disbursement services and our student banking services have experienced consistent annual growth. Since our initial product launch in 2002 and as of December 31, 2009, we have completed disbursement transactions with a total cash value of approximately $10.8 billion. In addition, as of December 31, 2009, we had approximately 1 million OneAccounts, representing growth in the number of OneAccounts of 81% from December 31, 2008.

In 2009, our total revenue, adjusted EBITDA, adjusted net income and net income were approximately $75.5 million, $30.5 million, $18.1 million and $14.2 million, respectively, which represents three-year compounded annual growth rates over 2006 of approximately 68%, 192%, 74% and 62%, respectively. See “Summary—Summary Consolidated Financial Data” for definitions of adjusted EBITDA and adjusted net income and reconciliations to net income. In 2009, excluding revenue generated by our recent acquisition of CASHNet, we generated over 90% of our revenue from contracts signed in prior years.

Investment Highlights

We believe that an investment in our common stock benefits from the following key factors:

 

  Ÿ  

Most Comprehensive Suite of Products and Services.    We believe that none of our competitors can match our ability to provide solutions to higher education institutions’ financial services needs, including compliance monitoring, while simultaneously meeting the retail banking needs of students. We believe that our unique ability to provide a “one-stop shop” to higher education institutions and their students deepens our relationships with current higher education institutional clients and enhances our attractiveness to other potential clients.

 

  Ÿ  

Diversified Client Base.    Our higher education institutional client base is very diverse, spanning colleges, universities and other higher education institutions in 46 states, with no single campus responsible for more than 4% of our revenue in 2009. We believe our profile among higher education institutional clients enhances our efforts to attract new clients and our experience and stability provides an avenue for references and referrals. These benefits are significant due to the generally long sales cycle and the desire of customers to find a stable and experienced provider.

 

  Ÿ  

Focus on Customer Service and Satisfaction.    We believe our multi-pronged approach to customer service, supported by our approximately 200 after-sales customer service employees, allows us to provide superior customer service and makes us an industry-leader in customer satisfaction. Our after-sales service for higher education institutional clients is focused on person-to-person assistance with our technology and software solutions. Our after-sales service for our student banking customers is designed to provide cost-effective technology-based customer service through a variety of media, including SMS text messaging, Internet and telephone. We believe that our over 97% retention rate since 2003 demonstrates the level of our client and customer satisfaction.

 

  Ÿ  

Predictable Revenue Streams.    We believe we have a recurring and predictable revenue stream and can forecast near-term future revenues with a meaningful degree of reliability due to our stable client base. The majority of our revenue each year is generated through existing relationships with higher education institutions and their campus communities. For example, in 2009, excluding revenue generated by our recent acquisition of CASHNet, we generated over 90% of our revenue from contracts signed in prior years. This, coupled with our over 97% retention rate since 2003, provides a relatively stable and predictable revenue stream. Additionally, we believe the vast majority of our approximately 1 million OneAccount users are

 

 

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students who exhibit common spending habits and demonstrate similar patterns of financial activity. Our focus on higher education enables us to understand this demographic and its spending habits and patterns, which allows us to better forecast near-term future revenues from OneAccounts. This visibility allows us to appropriately manage our expenses and investments.

 

  Ÿ  

Scalable Business Model.    Our scalable technology and infrastructure permits us to significantly expand our business in a cost-effective manner. Our products and services are based on a combination of our proprietary software applications, third-party technology and infrastructure solutions and business processes that can be used for multiple clients without significant cost implications. Moreover, our historical experience is that the relative expense associated with servicing additional higher education clients and student customers has decreased as our business has expanded. Our total revenue for the years ended December 31, 2007, 2008 and 2009 were approximately $28.0 million, $44.0 million and $75.5 million, respectively, while the ratio of our expenses to our total revenue for those years was approximately 84.9%, 77.4% and 70.0%, respectively.

 

  Ÿ  

Experienced Management Team With A Proven Track Record.    Our senior management team, which includes two of our three founders, has been with us for an average of eight years and is primarily responsible for our company’s rapid growth. Their leadership, combined with their deep and specialized understanding of our industry, have been and continue to be essential components of our growth and success in providing our higher education institutional clients with efficient, technology-driven solutions.

Our Strategy

We believe that there is a significant opportunity to continue to achieve significant future growth. We intend to continue to increase revenue and profitability by strengthening our position as a leading provider of technology and payment services to the higher education industry. Key elements of our growth strategy include:

 

  Ÿ  

Expand the Number of Contracted Higher Education Institutions.    Although we have significantly expanded our higher education institutional client base, there remains a large majority of higher education institutions that are potential clients. We believe that we have only accessed 12% and 10% of the potential market for our disbursement products and payment products, respectively, and that a large proportion of the remaining potential clients still rely primarily on inefficient in-house disbursement and payment solutions and would benefit from our industry-leading suite of electronic products and services. We expect our dedicated sales force to leverage our deep experience in providing the higher education industry with cost-saving disbursement and payment services as we continue to add to our client base.

 

  Ÿ  

Increase OneAccount Usage.    We are focused on increasing the number of OneAccount users at our higher education institutional clients, as well as encouraging OneAccount holders to increase their use of their accounts. We believe there is a significant opportunity to achieve revenue growth by increasing our penetration and usage rates from students at our existing OneDisburse clients. While we have achieved an increasing penetration rate, partially through our joint marketing efforts with our higher education institutional clients, we intend to expand and enhance our efforts in order to reach a greater proportion of the campus communities.

 

  Ÿ  

Cross-Sell Our Existing Products and Services.    We intend to cross-sell our products and services though bundled packages and pricing. By building on our successful cross-selling experience, we intend to pursue the cross-selling opportunities presented by our recent acquisition of CASHNet in November 2009. At the time of the acquisition, only 4% of our

 

 

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combined clients were clients of both Higher One and CASHNet, creating an expansive cross-selling opportunity for us.

 

  Ÿ  

Enhance and Extend Our Products and Services.    We intend to continue to anticipate and monitor customer and client needs and to respond by introducing new products and services and upgrading or modifying our existing offerings to take advantage of market opportunities. We also expect to meet the changing demands of our market by developing and offering new products and services, such as our Payroll and Financial Intelligence products launched in recent years.

 

  Ÿ  

Pursue Strategic Partnerships and Opportunistic Acquisitions.    We intend to selectively consider acquisitions of, and investments in, companies or joint ventures that offer complementary products and services that further develop our business or broaden the scope of our products and services into new areas or strengthen the products and services available to existing clients. We believe each acquisition expands our sales opportunities by allowing us to leverage the existing client relationships of the acquired companies.

Our Industry

The higher education industry in the United States consists of colleges, universities and other higher education providers. With nearly seven thousand higher education institutions in the United States accepting new students each year and providing finance and payments functions that serve their campus communities, the higher education payments industry is both large and stable. As an industry innovator focused on the needs of higher education institutional clients, we believe we are well positioned to capitalize on several key industry trends and to increase our market share in this large and underserved industry.

We believe the higher education industry is one of the most stable and least cyclical industries in the United States. Most higher education institutions are potential clients, as these institutions face increasing pressure to reduce expenses, improve the quality of services provided to students and streamline regulatory compliance in their disbursement and payment systems. In addition, we believe that institutions and their students are increasingly attracted to the convenience, security and enhanced services associated with electronic payment systems that meet and comply with applicable regulations.

Risk Factors

We face risks in operating our business, including risks that may prevent us from achieving our business objectives or that may materially and adversely affect our business, financial condition and operating results. You should carefully consider these risks, including the risks discussed in the section entitled “Risk Factors” beginning on page 11, before investing in our company. Risks relating to our business and industry include:

 

  Ÿ  

we may face substantial and increasing competition in the industries in which we do business;

 

  Ÿ  

the fees that we generate are subject to competitive pressures and are subject to change;

 

  Ÿ  

fees for financial services are subject to increasingly intense legislative and regulatory scrutiny;

 

  Ÿ  

the convenience fees that we charge are subject to change;

 

  Ÿ  

we depend on the availability of financial aid and the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions;

 

 

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  Ÿ  

we depend on our relationship with higher education institutions and, in turn, student usage of our products and services for future growth of our business;

 

  Ÿ  

we outsource critical operations, including certain banking services, which exposes us to risks related to our third-party vendors;

 

  Ÿ  

we may face breaches of security measures, unauthorized access to or disclosure of data relating to our clients, fraudulent activity and infrastructure failures;

 

  Ÿ  

our disbursement services to higher education institutions is an emerging and uncertain business; and

 

  Ÿ  

we depend on a strong brand and a failure to maintain and develop our brand in a cost-effective manner may hurt our ability to expand our customer base.

Our Corporate History and Other Information

Higher One, Inc. was founded in 2000 in New Haven, Connecticut by Mark Volchek, Miles Lasater and Sean Glass. In July 2008, Higher One, Inc. formed Higher One Holdings, Inc., which is now the holding company for all of our operations. In November 2009, we acquired Informed Decisions Corporation, which we renamed Higher One Payments, Inc. and which does business as CASHNet. CASHNet is a leader in providing cashiering and payment solutions for higher education.

Our principal executive offices are located at 25 Science Park, New Haven, Connecticut 06511. Our telephone number at that location is (203) 776-7776. We maintain a website at www.higherone.com on which we will post all reports we file with the Securities and Exchange Commission, or the SEC, under Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, after the closing of this offering. We also will post on this site our key corporate governance documents, including our board committee charters, our ethics policy and our principles of corporate governance. Information on our website is not a part of this prospectus and should not be relied upon in determining whether to make an investment decision.

 

 

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The Offering

 

Common stock offered by us

                shares

Common stock offered by the selling stockholders

  

             shares

Common stock to be outstanding after this offering

  

             shares

Use of proceeds

   We estimate that the net proceeds to us from this offering will be approximately $             million.
   We will not receive any proceeds from the sale of shares by the selling stockholders.
   We intend to use $             million of the net proceeds we receive from this offering for the repayment of amounts outstanding under our senior secured revolving credit facility, or Credit Facility, and $              million to satisfy our post-closing obligations under the CASHNet stock purchase agreement dated November 19, 2009. We intend to use the remaining net proceeds to pursue our strategic objectives and for general corporate purposes. See “Use of Proceeds.”

Dividends

   We do not anticipate paying any cash dividends in the foreseeable future.

Proposed NASDAQ Global Select Market symbol

  

Risk Factors

   See “Risk Factors” beginning on page 11 and other information included in this prospectus for a discussion of factors that you should carefully consider before investing in our common stock.

The number of shares of common stock that will be outstanding after this offering in the table above includes              shares of restricted stock issued but not yet vested under our 2000 Stock Option Plan and excludes shares of common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $             per share, of which              were vested as of                     , 2010.

Except as otherwise noted, all information in this prospectus:

 

  Ÿ  

assumes that the underwriters do not exercise their option to purchase up to              additional shares of common stock from the selling stockholders;

 

  Ÿ  

assumes our second amended and restated certificate of incorporation and amended and restated bylaws have become effective; and

 

  Ÿ  

gives effect to the conversion of all outstanding shares of our convertible preferred stock that were outstanding prior to this offering into an aggregate of 12,975,169 shares of our common stock.

 

 

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Summary Consolidated Financial Data

You should read the data set forth below in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this prospectus. We derived the summary financial data as of December 31, 2008 and 2009 and for each of the three years ended December 31, 2007, 2008 and 2009 from our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. We derived the summary financial data as of December 31, 2007 from our audited financial statements and the related notes not included in this prospectus. Our historical results are not necessarily indicative of our results for any future period.

The pro forma income statement data for the year ended December 31, 2009 set forth below gives pro forma effect to our acquisition of CASHNet in November 2009 as if the acquisition occurred on January 1, 2009. The pro forma financial data was derived from our “Unaudited Proforma Financial Information” included elsewhere in this prospectus. The pro forma summary financial data is not necessarily indicative of our results for any future period.

Consolidated Statement of Income Data

 

     Historical     Pro Forma  
     Year Ended December 31,  
     2007     2008     2009     2009  
                       (unaudited)  
     (in thousands, except share and per share amounts)  

Revenue

   $ 27,978      $ 44,006      $ 75,517      $ 92,549   

Cost of revenue

     11,140        16,302        24,440        36,494   
                                

Gross margin

     16,838        27,704        51,077        56,055   

Operating expenses

     12,625        17,753        28,396        35,436   
                                

Income from operations

     4,213        9,951        22,681        20,619   

Other income (expense)

     (569     (26     (537     (1,436
                                

Income before income taxes

     3,644        9,925        22,144        19,183   

Income tax expense

     1,362        3,547        7,925        6,423   
                                

Net income

     2,282        6,378        14,219        12,760   

Less: Net income allocable to participating securities

     1,808        5,102        11,477        10,299   
                                

Net income available to common shareholders

   $ 474      $ 1,276      $ 2,742      $ 2,461   
                                

Net income per common share:

        

Basic

   $ 0.13      $ 0.37      $ 0.88      $ 0.79   

Diluted

   $ 0.12      $ 0.34      $ 0.80      $ 0.72   

Weighted average common shares outstanding:

        

Basic

     3,652,611        3,435,464        3,099,377        3,099,377   

Diluted

     19,033,687        18,652,916        17,802,709        17,802,709   

 

 

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Consolidated Balance Sheet Data

 

     As of December 31,
     2007     2008     2009
Actual
   2009
As Adjusted(1)
     (in thousands)

Cash and cash equivalents

   $ 9,755      $ 1,488      $ 3,339   

Total assets

     18,423        13,662        59,904   

Total debt and capital lease obligations, including current maturities

     1,172        18,934        27,647   

Total liabilities

     22,675        25,402        52,800   

Total stockholders’ equity

     (4,252     (11,740     7,104   

 

(1) Gives effect to (a) the sale by us of common stock in this offering, at an initial public offering price of $             per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (b) the use of $             million of the net proceeds of this offering for the repayment of amounts outstanding under our Credit Facility and (c) the use of $             million of the net proceeds of this offering for certain post-closing costs related to our acquisition of CASHNet. See “Use of Proceeds.”

Consolidated Other Data

 

     Year Ended December 31,
     2007    2008    2009
     (in thousands)

Adjusted EBITDA(1)

   $ 5,473    $ 13,141    $ 30,516

Adjusted net income(2)

   $ 2,434    $ 7,725    $ 18,091

Number of students enrolled at OneDisburse client higher education institutions at end of period

     1,011      1,605      2,331

Number of students enrolled at payment transaction client higher education institutions at end of period

     3      30      1,949

Number of OneAccounts at end of period

     359      554      1,004

 

(1) We define adjusted EBITDA as net income before interest, taxes, depreciation and amortization and warrant fair value adjustment, adjusted to eliminate stock-based customer acquisition expense related to our grant of common stock in connection with our acquisition of EduCard in 2008, stock-based compensation expense and a nonrecurring milestone bonus paid to non-executive employees in 2009 upon our reaching a particular long-term operational target. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with United States generally accepted accounting principles, or GAAP. Our adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate adjusted EBITDA in the same manner as we do. We prepare and present adjusted EBITDA to eliminate the effect of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate our adjustments and the reasons we consider them appropriate.

 

 

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We believe adjusted EBITDA is useful to our board of directors, management and investors in evaluating our operating performance for the following reasons:

 

  Ÿ  

adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items, such as interest expense, income tax expense, depreciation and amortization, warrant fair value adjustment, stock-based expenses and certain nonrecurring items, that can vary substantially from company to company and from period to period depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired;

 

  Ÿ  

securities analysts use adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies;

 

  Ÿ  

because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time, stock-based customer acquisition expense and stock-based compensation expense are not key measures of our core operating performance; and

 

  Ÿ  

because the milestone bonus was a nonrecurring expense that we recorded upon reaching a particular long-term operational target that we do not expect to incur again in the near-term, the milestone bonus does not necessarily reflect how our business is performing at any particular time and is therefore not a key measure of our core operating performance.

The following table presents a reconciliation of adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2007     2008     2009  
     (in thousands)  

Net income

   $ 2,282      $ 6,378      $ 14,219   

Interest income

     (291     (152     (4

Interest expense

     115        357        558   

Other income

            (234     (17

Income tax expense

     1,362        3,547        7,925   

Depreciation and amortization

     1,114        1,452        2,969   

Warrant fair value adjustment

     745        55          
                        

EBITDA

     5,327        11,403        25,650   

Stock-based customer acquisition expense

            1,240        2,385   

Stock-based compensation expense

     146        498        1,387   

Milestone bonus

                   1,094   
                        

Adjusted EBITDA

   $ 5,473      $ 13,141      $ 30,516   
                        

 

(2)

We define adjusted net income as net income, adjusted to eliminate (a) stock-based compensation expense related to incentive stock option grants and (b) after giving effect to tax adjustments, stock-based compensation expense related to non-qualified stock option grants, stock-based customer acquisition expense related to our grant of common stock in connection with our acquisition of EduCard in 2008, a non-recurring milestone bonus paid to non-executive employees in 2009 upon our reaching a particular long-term operational target and amortization expenses related to intangible assets and financing costs. Adjusted net income should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with GAAP. Our adjusted net income may not be comparable to similarly titled measures of other organizations because other organizations

 

 

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may not calculate adjusted net income in the same manner as we do. We prepare adjusted net income to eliminate the effect of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate our adjustments and the reasons we consider them appropriate.

We believe adjusted net income is useful to our board of directors, management and investors in evaluating our operating performance for the following reasons:

 

  Ÿ  

because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time, stock-based customer acquisition expense and stock-based compensation expense are not key measures of our core operating performance;

 

  Ÿ  

because the milestone bonus was a nonrecurring expense that we recorded upon reaching a particular long-term operational target that we do not expect to incur again in the near-term, the milestone bonus does not necessarily reflect how our business is performing at any particular time and is therefore not a key measure of our core operating performance; and

 

  Ÿ  

amortization expenses can vary substantially from company to company and from period to period depending upon their financing and accounting methods, the fair value and average expected life of their acquired intangible assets, their capital structures and the method by which their assets were acquired.

The following table presents a reconciliation of adjusted net income to net income, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2007     2008     2009  
     (in thousands)  

Net income

   $ 2,282      $ 6,378      $ 14,219   

Stock-based customer acquisition expense

            1,240        2,385   

Stock-based compensation expense—ISO

     128        312        610   

Stock-based compensation expense—NQO

     18        186        777   

Milestone bonus expense

                   1,094   

Amortization of intangibles

     21        153        710   

Amortization of finance costs

            31        113   
                        

Total pre-tax adjustments

     167        1,922        5,689   

Tax rate

     37.4     35.7     35.8

Tax adjustment

     15        575        1,817   
                        

Adjusted net income

   $ 2,434      $ 7,725      $ 18,091   
                        

 

 

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RISK FACTORS

An investment in our common stock involves a number of risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our common stock. If any of the following risks actually materializes, our business, financial condition and operating results could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

Our operating results may suffer because of substantial and increasing competition in the industries in which we do business.

The market for our products and services is competitive, continually evolving and, in some cases, subject to rapid technological change. Our disbursement services compete against all forms of payment, including paper-based transactions (principally cash and checks), electronic transactions such as wire transfers and Automated Clearing House, or ACH, payments and other electronic forms of payment, including card-based payment systems. Many competitors, including Sallie Mae, TouchNet Information Systems, Inc. and Nelnet, Inc., provide payment software, products and services that compete with those we offer. In addition, our OneAccount and OneCard products and services, which we provide through our bank partner, also compete with banks active in the higher education market, including U.S. Bancorp and Wells Fargo & Company. Future competitors may begin to focus on higher education institutions in a manner similar to us.

Many of our competitors have substantially greater financial and other resources than we have, may in the future offer a wider range of products and services and may use advertising and marketing strategies that achieve broader brand recognition or acceptance. In addition, our competitors may develop new products, services or technologies that render our products, services or technologies obsolete or less marketable. If we cannot continue to compete effectively against our competitors, our business, financial condition and results of operations will be materially and adversely affected.

The fees that we generate through our relationships with higher education institutions and their campus communities are subject to competitive pressures and are subject to change, which may materially and adversely affect our revenue and profitability.

We generate revenue from, among other sources, the banking services fees charged to our OneAccount holders, interchange fees related to purchases made through our OneCard debit and ATM cards, which our bank partner charges and remits to us, convenience fees from processing tuition payments on behalf of students, fees charged to our higher education institution clients and service fees that we receive from our bank partner based on amounts deposited in OneAccounts and prevailing interest rates.

In an increasingly price-conscious and competitive market, it is possible that to maintain our competitive position with higher education institutions, we may have to decrease the fees we charge institutions for our services. Similarly, in order to maintain our competitive position with our OneAccount holders, we may need to work with our bank partner to reduce banking services fees charged to our OneAccount holders.

MasterCard could reduce the interchange rates, which it unilaterally sets and adjusts from time to time, and upon which our interchange revenue is dependent. In addition, our OneAccount holders may modify their spending habits and increase their use of ACH relative to their use of OneCards, as ACH

 

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payments are generally free, which could reduce the interchange fees remitted to us. Students may also become less willing to pay convenience fees when using our payment transaction services. If our fees are reduced as described above, our business, results of operations and prospects for future growth could be materially and adversely affected.

Fees for financial services are subject to increasingly intense legislative and regulatory scrutiny, which could have a material adverse effect on business, financial conditions, results of operations and prospects for future growth.

In 2009, approximately 88% of our revenue was generated from interchange fees, ATM fees, non-sufficient fund fees, other banking services fees and convenience fees. These fees, as well as the financial services industry in general, could undergo substantial change in the near future. Legislation passed by the U.S. House of Representatives, or House Bill, would further increase regulation and oversight of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. For example, under the House Bill, a Consumer Financial Protection Agency would be established to regulate any person engaged in a “financial activity” in connection with a consumer financial product or service, including those that process financial services products and services. The U.S. Senate is expected to consider its version of this legislation, or Senate Bill shortly. Although it is unclear at this time whether the Senate Bill will provide for a separate Consumer Financial Protection Agency, it is expected that the Senate Bill will include some consumer protection measures.

In addition, in 2009, the U.S. House of Representatives introduced a bill seeking to regulate interchange fees by allowing merchants to collectively seek to lower their interchange costs by exempting such action from the U.S. antitrust laws. Individual state legislatures are also reviewing interchange fees, and legislators in a number of states have proposed bills that purport to limit interchange fees or merchant discount rates or to prohibit their application to portions of a transaction.

The Federal Reserve Board recently amended Regulation E to limit the ability of financial institutions, effective July 1, 2010, to assess an overdraft fee for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to the institution’s payment of overdrafts for these services. In the absence of such a consent, a financial institution may not assess an overdraft fee on a consumer for an ATM or one-time debit card transaction.

Federal and state legislatures and regulatory agencies also frequently propose and adopt changes to their laws and regulations or change the manner in which existing laws and regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, but such measures could affect how we and our bank partner operate and could significantly reduce the interchange fees, ATM fees, non-sufficient fund fees, other banking services fees and convenience fees charged in respect of our services and that drive our financial results. These regulatory and legislative changes could also increase our costs, impede the efficiency of our internal business processes or limit our ability to pursue business opportunities in an efficient manner. The occurrence of any of these risks could materially and adversely affect our business, financial condition and results of operations.

The convenience fees that we charge in connection with payment transactions are subject to change.

Most credit and debit card associations and networks permit us to charge convenience fees to students, parents or other payers who make online payments to our higher education institutional clients through the SmartPay feature of our ePayment product using a credit or debit card. In 2009,

 

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these convenience fees accounted for substantially all of our payment transaction revenue, which is a trend we expect to continue going forward. While the majority of credit and debit card associations and networks routinely permit merchants and other third parties to charge these fees, it is not a ubiquitous practice in the payment industry. If these credit and debit card associations and networks change their policies in permitting merchants and other third-parties to charge these fees or otherwise restrict our ability to do so, our business, financial condition and results of operations could be materially and adversely affected.

In addition, certain states, including California, New York, Florida and Texas, have laws that generally prohibit merchants from charging fees to customers when they use credit cards to make payments. State authorities have generally interpreted and applied these laws in a manner which has allowed us to charge convenience fees for online payments made with our ePayment product in many of these states. If one or more states alter their interpretation or application of these laws in a manner that restricts our ability to charge convenience fees or a change in the interpretation or application of these laws diminishes ability to retain existing or attract new ePayment clients, our business, financial condition and results of operations could be materially and adversely affected.

Our business depends on the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions.

In general, the U.S. federal government distributes financial aid to students through higher education institutions as intermediaries. Following the receipt of financial aid funds and the payment of tuition and other expenses, higher education institutions have typically processed refund disbursements to students by preparing and distributing paper checks. Our OneDisburse service provides our higher education institutional clients an electronic system for improving the administrative efficiency of this refund disbursement process. If the government, through legislation or regulatory action, restructured the existing financial aid regime in such a way that reduced or eliminated the intermediary role played by higher education financial institutions or limited or regulated the role played by service providers such as us, our business, results of operations and prospects for future growth could be materially and adversely affected.

We depend on our relationship with higher education institutions and, in turn, student usage of our products and services for future growth of our business.

Our future growth depends, in part, on our ability to enter into agreements with higher education institutions. While we have experienced significant growth since 2002 in the number of our higher education institutional clients, our contracts with these clients can generally be terminated at will and, therefore, there can be no assurance that we will be able to maintain these clients. We may also be unable to maintain our agreements with these clients on terms and conditions acceptable to us. In addition, we may not be able to continue to establish new relationships with higher education institutional clients at our historical growth rate or at all. The termination of our current client contracts or our inability to continue to attract new clients could have a material adverse effect on our business, financial condition and results of operations.

Not only are establishing new client relationships and maintaining current ones critical to our business, but they are also essential components of our strategy for maximizing student usage of our products and services and attracting new student customers. A reduction in enrollment, a failure to attract and maintain student customers, as well as any future demographic trends that reduce the number of higher education students could materially and adversely affect our capability for both revenue and cash generation and, as a result, could have a material adverse effect on our business, financial condition and results of operations.

 

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A change in the availability of financial aid, as well as budget constraints, could materially and adversely affect our financial performance by reducing demand for our services.

The higher education industry depends heavily upon the ability of students to obtain financial aid. As part of our contracts with our higher education institutional clients that use OneDisburse, students’ financial aid and other refunds are sent to us for disbursement. The fees that we charge most of our OneDisburse clients are based on the number of financial aid disbursements that we make to students. In addition, our relationships with OneDisburse higher education institutional clients provide us with a market for OneAccounts, from which we derive a significant proportion of our revenues. Consequently, a change in the availability of financial aid that restricted client use of our OneDisburse product or otherwise limited our ability to attract new higher education institutional clients could materially and adversely affect our financial performance. Future legislative and executive branch efforts to reduce the U.S. federal budget deficit or worsening economic conditions may require the government to severely curtail its financial aid spending, which could materially and adversely affect our business, financial condition and results of operation.

Global economic and other conditions may adversely affect trends in consumer spending, which could materially and adversely affect our business, financial condition and results of operation.

A decrease in consumer confidence due to the weakening of the global economy may cause decreased spending among our student customers and may decrease the use of our OneAccount and OneCard products and services. Increases in college tuition alongside stagnation or reduction in available financial aid may also restrict spending among college students and the size of disbursements, reducing the use of our OneAccount and OneCard products and services and demand for our disbursement services, which could materially and adversely affect our business, financial condition and results of operation.

We rely on our bank partner for certain banking services, and a change in relationship with our bank partner or its failure to comply with certain banking regulations could materially and adversely affect our business.

As the provider of FDIC-insured depository services for all of our OneAccounts, as well as other banking functions, such as supplying cash for our ATM machines, The Bancorp Bank, our bank partner, provides third-party services that are critical to our student-oriented banking services. If any material adverse event were to affect The Bancorp Bank, including a significant decline in its financial condition, a decline in the quality of its service, loss of deposits, systems failure or its inability to pay us fees, our business, financial condition and results of operations could be materially and adversely affected. If we were required to change banking partners, we could not accurately predict the success of such change or that the terms of our agreement with a new banking partner would be as favorable to us, especially in light of the recent consolidation in the banking industry, which has rendered the market for FDIC-insured retail banking services less competitive.

In addition, while we are not directly subject to banking regulations, some of our products and services are regulated, and we therefore rely on the ability of The Bancorp Bank to comply with applicable banking and financial service requirements. Its failure to do so could cause an interruption in the banking services we provide or require us to seek alternative solutions or relationships, either of which could materially and adversely affect our business. See “Legal and Regulatory Risks—We are subject to substantial federal and state governmental regulation that could change and thus force us to make modifications to our business. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely affect our business, financial condition and results of operations.”

 

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We outsource critical operations, which exposes us to risks related to our third-party vendors.

We have entered into contracts with third-party vendors to provide critical services, technology and software in our operations. These outsourcing partners include: Fiserv, which provides back-end account and transaction data processing for OneAccounts and OneCards; MasterCard, which provides the payment network for our OneCards, as well as for certain other transactions; Comerica Incorporated and Global Payments, which provide transaction processing and banking services for payment processing related to the SmartPay feature of our ePayment service; and Terremark and Neospire, which provide web and application hosting services in secure data centers. See “Business—Key Relationships with Third Parties.”

Accordingly, we depend, in part, on the services, technology and software of these and other third-party service providers. 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 materially disrupt our operations and could divert management’s time and resources. We may also be unable to establish comparable new third-party relationships on as favorable terms or at all, which could materially and adversely affect our business, financial condition and results of operations.

Even if we are able to obtain replacement technology, software or services there may be a disruption or delay in our ability to operate our business or to provide our products and services, and the replacement technology, software or services might be more expensive than those we have currently. The process of transitioning services and data from one provider to another can be complicated, time consuming and may lead to significant disruptions in our business. 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 permanently discontinue certain services, which could disrupt services to our customers and adversely affect our business, financial condition and results of operations. In addition, any failure by third-party service providers to maintain adequate internal controls could negatively affect our internal control over financial reporting, which could impact the preparation and quality of our financial statements.

In particular, we and our bank partner, which issues our OneCards, are subject to MasterCard association rules that could subject us to a variety of fines or penalties that may be levied by MasterCard for acts or omissions by us or businesses that work with us. The termination of the card association registration held by us or our bank partner or any changes in card association or other network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost of doing business or limit our ability to provide our products and services could materially and adversely affect our business, financial condition and results of operation.

Breaches of security measures, unauthorized access to or disclosure of data relating to our clients, fraudulent activity, and infrastructure failures could materially and adversely affect our reputation or harm our business.

Our higher education institution clients and student OneAccount holders disclose to us certain “personally identifiable” information, including student contact information, identification numbers and the amount of credit balances, which they expect we will maintain confidentially. It is possible that hackers, customers or employees acting unlawfully or contrary to our policies, or other individuals, could improperly access our or our vendors’ systems and obtain or disclose data about our customers. Further, because customer data may also be collected, stored, or processed by third party vendors, it is possible that these vendors could intentionally or negligently disclose data about our clients or customers.

 

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We rely to a large extent upon sophisticated information technology systems, databases, and infrastructure, and take reasonable steps to protect them. However, due to their size, complexity, content and integration with or reliance on third party systems they are potentially vulnerable to breakdown, malicious intrusion, natural disaster and random attack, all of which pose a risk that sensitive data may be exposed to unauthorized persons or to the public.

A breach of our information systems could lead to fraudulent activity, including with respect to our OneCards, such as identity theft, losses on the part of our banking customers, additional security costs, negative publicity and damage to our reputation and brand. In addition, our customers could be subject to scams that may result in the release of sufficient information concerning themselves or their accounts to allow others unauthorized access to their accounts or our systems (e.g., “phishing” and “smishing”). Claims for compensatory or other damages may be brought against us as a result of a breach of our systems or fraudulent activity. If we are unsuccessful in defending against any resulting claims against us, we may be forced to pay damages, which could materially and adversely affect our profitability.

In addition, a significant incident of fraud or an increase in fraud levels generally involving our products, such as our OneCards, could result in reputational damage to us, which could reduce the use of our products and services. Such incidents of fraud could also lead to regulatory intervention, which could increase our compliance costs. See “Legal and Regulatory Risks—We are subject to substantial federal and state governmental regulation that could change and thus force us to make modifications to our business. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely affect our business, financial condition and results of operations.” Accordingly, account data breaches and related fraudulent activity could have a material adverse effect on our future growth prospects, business, financial condition and results of operations.

A disruption to our systems or infrastructure could damage our reputation, expose us to legal liability, cause us to lose customers and revenue, result in the unintentional disclosure of confidential information or require us to expend significant efforts and resources or incur significant expense to eliminate these problems and address related data and security concerns. The harm to our business could be even greater if such an event occurs during a period of disproportionately heavy demand for our products or services or traffic on our systems or networks.

Providing disbursement services to higher education institutions is an emerging and uncertain business; if the market for our products does not continue to develop, we will not be able to grow this portion of our business.

Our success will depend, in part, on our ability to generate revenues by providing financial transaction services to higher education institutions and their students. The market for these services has only recently developed and the viability and profitability of this market is unproven. Our business will be materially and adversely affected if we do not develop and market products and services that achieve and maintain market acceptance. Outsourcing disbursement services may not become as widespread in the higher education industry as we anticipate, and our products and services may not achieve continued commercial success. In addition, higher education institutional clients could discontinue using our services and return to in-house disbursement and payment solutions. If outsourcing disbursement services do not become widespread or if institutional clients return to their prior methods of disbursement, our growth prospects, business, financial condition and results of operations could be materially and adversely affected.

 

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Our business depends on a strong brand and a failure to maintain and develop our brand in a cost-effective manner may hurt our ability to expand our customer base.

Maintaining and developing the “Higher One” and “CASHNet” brand is critical to expanding and maintaining our base of higher education institution clients and student OneAccount holders. We believe the importance of brand recognition will increase as competition in our market further intensifies. Maintaining and developing our brand will depend largely on our ability to continue to provide high-quality products and services at cost effective and competitive prices, as well as after-sale customer service. While we intend to continue investing in our brand, we cannot predict the success of these investments. If we fail to maintain and enhance our brand, if we incur excessive expenses in this effort or if our reputation is otherwise tainted, including by association with the wider financial services industry, we may be unable to maintain loyalty among our existing customers or attract new customers, which could materially and adversely affect our business, financial condition and results of operations.

Our business will suffer if we fail to successfully integrate acquired businesses and technologies or to appropriately assess the risks in particular transactions.

We have in the past acquired, and may in the future acquire, businesses, technologies, services, product lines and other assets. For example, in November 2009 we acquired CASHNet, which provides payment services to higher education institutions, and have begun to integrate its operations with our business. The successful integration of CASHNet into our operations, along with any other businesses that we acquire in the future, on a cost-effective basis, may be critical to our future performance. If we do not successfully integrate a strategic acquisition, or if the benefits of the transaction do not meet the expectations of financial or industry analysts, the market price of our common stock may decline. The amount and timing of the expected benefits of any acquisition, including potential synergies between our current business and the acquired business, are subject to significant risks and uncertainties. These risks and uncertainties include, but are not limited to:

 

  Ÿ  

the diversion of management’s time and resources from our core business;

 

  Ÿ  

our ability to retain or replace key personnel of the acquired business, including management and key sales force members;

 

  Ÿ  

our ability to maintain relationships with the customers of the acquired business;

 

  Ÿ  

our ability to integrate common disclosure controls and procedures, internal controls over financial reporting and accounting policies;

 

  Ÿ  

the assumption of disclosed and undisclosed liabilities, including tax liabilities;

 

  Ÿ  

the indemnification agreements with the sellers of the acquired business may be unenforceable or insufficient to cover tax or other liabilities;

 

  Ÿ  

our ability to educate and train a combined sales force and cross-sell the combined products and services to our combined client base;

 

  Ÿ  

our ability to integrate the combined products, services and technology;

 

  Ÿ  

flaws in the acquired business’ technology;

 

  Ÿ  

inaccuracies in the acquired business’ books and records and any weaknesses in its internal controls;

 

  Ÿ  

the existence of intellectual property infringement claims;

 

  Ÿ  

our ability to coordinate organizations that are geographically diverse and that have different business cultures;

 

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  Ÿ  

our ability to integrate common legal, compliance, operational, financial and informational processes and systems; and

 

  Ÿ  

our ability to comply with the regulatory requirements applicable to the acquired business.

As a result of these risks, we may not be able to achieve the expected benefits of any acquisition. If we are unsuccessful in integrating CASHNet or completing an acquisition that we may pursue in the future, we would be required to reevaluate our growth strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the acquisition. Even if we are successful in completing and integrating an acquired business, the acquired businesses may not perform as we expect or enhance the value of our business as a whole.

Failure to manage future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

The continued rapid expansion and development of our business may place a significant strain upon our management and administrative, operational and financial infrastructure. As of December 31, 2009, we had approximately 1 million OneAccounts, representing growth of 81.2% from December 31, 2008. In 2009, our total revenue, adjusted EBITDA, adjusted net income and net income were approximately $75.5 million, $30.5 million, $18.1 million and $14.2 million, respectively, which represents three-year compounded annual growth rates over 2006 of approximately 68%, 192%, 74% and 62%, respectively. See “Summary—Summary Consolidated Financial Data” for definitions of adjusted EBITDA and adjusted net income and reconciliations to net income. Our growth strategy contemplates further increasing the number of our higher education institutional clients and student banking customers at relatively similar growth rates, however, the rate at which we have been able to establish relationships with our customers in the past may not be indicative of the rate at which we will be able to establish additional customer relationships in the future.

Our success will depend in part upon the ability of our executive officers to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise, and manage new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our operational functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations or that we will be able to manage growth effectively or to achieve further growth at all. If our business does not continue to grow or if we fail to manage any future growth effectively our business, financial condition and results of operations could be materially and adversely affected.

The length and unpredictability of the sales cycle for signing potential higher education institutional clients could delay new sales of our products and services, which could materially and adversely affect our business, financial condition and results of operations.

The sales cycle between our initial contact with a potential higher education institutional client and the signing of a contract with that client can be lengthy. As a result of this lengthy sales cycle, our ability to forecast accurately the timing of revenues associated with new sales is limited. Our sales cycle varies widely due to significant uncertainties, over which we have little or no control, including:

 

  Ÿ  

the individual decision-making processes of each higher education institutional client, which typically include extensive and lengthy evaluations and require us to spend substantial time, effort and money educating each client about the value of our products and services;

 

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  Ÿ  

the budgetary constraints and priorities and budget cycle of each higher education institutional client; and

 

  Ÿ  

the reluctance of higher education staff to change or modify existing processes and procedures.

In addition, there is no guarantee that a potential client will sign a contract with us even after we spend substantial time, effort and money on the potential client. A delay in our ability or a failure to enter into new contracts with potential higher education institutional clients could materially and adversely affect our business, financial condition and results of operations.

Our business and future success may suffer if we are unable to cross-sell our products and services.

A significant component of our growth strategy is dependent on our ability to cross-sell products and services to new and existing customers. In particular, we expect our ability to successfully cross-sell our disbursement services to our payment services clients and our payment services to our disbursement services clients, to be a material part of this strategy. We may not be successful in cross-selling our products and services because our customers may find our additional products and services unnecessary or unattractive. Our failure to sell additional products and services to new and existing customers could have a material adverse effect on our prospects, business, financial condition and results of operations.

Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones.

The industry for electronic financial transactions, including disbursement services, is generally subject to rapid and significant technological changes, including continuing developments of technologies in the areas of smart cards, radio frequency and proximity payment devices (such as contactless cards), electronic commerce and mobile commerce, among others. While we cannot predict how these technological changes will affect our business, we believe that disbursement services to the higher education industry will be subject to a similar degree of technological change and that new services and technologies for the industry will emerge in the medium-term. As a result, these new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products and services. In addition, the products and services we develop may not be able to compete with the alternatives available to our customers. Our future success will depend, in part, on our ability to adapt to technological changes and evolving industry standards.

We make substantial investments in improving our products and services, but we have no assurance that our investments will be successful. Our growth prospects, business, financial condition and results of operations will be materially and adversely affected if we do not develop products and services that achieve broad market acceptance with our current and potential customers.

We depend on our founders and other key members of executive management and the loss of their services could have a material adverse effect on our business.

We substantially depend on the efforts, skill and reputations of our founders and senior management team including: Dean Hatton (President and CEO), Mark Volchek (Founder and CFO), Miles Lasater (Founder and COO), Casey McGuane (Chief Service Officer) and Robert Reach (Chief Sales Officer). We do not currently maintain key person life insurance policies with respect to our executive officers. None of our executive officers have entered into employment agreements with us, leaving them free to terminate their involvement with us at any time and/or to pursue other

 

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opportunities. The loss of any of our executive officers or founders could have a material adverse effect on our ability to manage our company, growth prospects, business financial condition and results of operations.

Our success depends in part on our ability to identify, recruit and retain skilled sales, management and technical personnel.

Our future success depends upon our continued ability to identify, attract, hire and retain highly qualified personnel, including skilled technical, management, product and technology and sales and marketing personnel, all of whom are in high demand and are often subject to competing offers. Competition for qualified personnel in the technology industry is intense and there can be no assurance that we will be able to hire or retain a sufficient number of qualified personnel to meet our requirements, or that we will be able to do so at salary, benefit and other compensation costs that are acceptable to us. A loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our business, could have a material adverse effect on our business and growth prospects.

We may be liable to our customers or lose customers if we provide poor service or if our systems or products experience failures.

We must fulfill our contractual obligations with respect to our products and services and maintain high quality service to meet the expectations of our customers. Failure to meet these expectations or fulfill our contractual obligations could cause us to lose customers and bear additional liability.

Because of the large amount of data we collect and manage, hardware failures and errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain significant inaccuracies. For example, errors in our processing systems could delay disbursements or cause disbursements to be made in the wrong amounts or to the wrong person. Our systems may also experience service interruptions as a result of undetected errors or defects in our software, fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism, accident or other similar reason, in which case we may experience delays in returning to full service, especially with regard to our data centers and customer service call centers. If problems such as these occur, our customers may seek compensation, withhold payments, seek full or partial refunds, terminate their agreements with us or initiate litigation or other dispute resolution procedures. In addition, we may be subject to claims made by third parties also affected by any of these problems.

Our ability to limit our liabilities by contract or through insurance may be ineffective or insufficient to cover our future liabilities.

We attempt to limit, by contract, our liability for damages arising from our negligence, errors, mistakes or security breaches. Contractual limitations on liability, however, may not be enforceable or may otherwise not provide sufficient protection to us from liability for damages. We maintain liability insurance coverage, including coverage for errors and omissions. It is possible, however, that claims could exceed the amount of our applicable insurance coverage, if any, or that this coverage may not continue to be available on acceptable terms or in sufficient amounts. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay market acceptance of our products and services, any of which could materially and adversely affect reputation and our business.

 

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If we are unable to protect or enforce our intellectual property rights, we may lose a competitive advantage and incur significant expenses.

Our business depends on certain registered and unregistered intellectual property rights and proprietary information. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and technical measures (such as the password protection and encryption of our data and systems) to protect our technology and intellectual property rights, including our proprietary software. 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. Similarly, there is no guarantee that our pending applications for intellectual property protection will result in registrations or issued patents or sufficiently protect our rights. 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. We cannot be certain that others will not 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.

One or more of our issued patents or pending patent applications may be categorized as so-called “business method” patents. The general validity of software patents and business method patents has been challenged in a number of jurisdictions, including the United States. The United States Supreme Court is currently considering a case that may impact the scope of patent eligible subject matter as relates to software and business methods. Our patents may become less valuable or unenforceable if software or business methods are found to be a non-patentable subject matter or if additional requirements are imposed that our patents do not meet.

From time to time, we seek to enforce our intellectual property rights against third parties, such as through our current litigation against TouchNet. See “Business—Legal Proceedings.” The fact that we have intellectual property rights, including registered intellectual property, may not guarantee success in our attempts to enforce these rights against third parties. Our ability and potential success in enforcing our rights is also subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights. When we seek to enforce our rights, we may be subject to claims that our intellectual property rights are invalid, otherwise unenforceable, or are licensed to the party against whom we are asserting the claim. In addition, our assertions of intellectual property rights may result in the other party seeking to assert various claims against us, including its own alleged intellectual property rights, claims of unfair competition, or other claims. Furthermore, enforcing our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive or less profitable to do business and consequently harm our operating results.

We may incorporate open source software into our products. While the terms of many open source software licenses have not been interpreted by U.S. or foreign courts, such licenses could be construed in a manner that imposes conditions or restrictions on our ability to offer our products and services. In such event, we could be required to make the source code for certain of our proprietary software available to third parties, which may include competitors, to seek licenses from third parties, to re-engineer, or to discontinue the offering of our products or services, or we could become subject to other consequences, any of which could adversely affect our business, revenues and operating expenses.

 

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Intellectual property infringement claims against us could be costly and time-consuming to defend and if we are unsuccessful in our defense could have a material adverse effect on our business, financial condition and results of operations.

Third parties may assert, including by means of counter-claims against us as a result of the assertion of our intellectual property rights, that our products, services or technology, or the operation of our business, violate their intellectual property rights. As the number of competitors in our industry increases and the functionality of technology offerings further overlap, such claims and counter-claims could become more common. We cannot be certain that we do not or will not infringe third parties’ intellectual property rights.

Any intellectual property claim against us, regardless of its merit, could result in significant liabilities to our business. Depending on the nature of such claim, our business may be disrupted, our management’s attention and other company resources may be diverted and we may be required to redesign our products and services or to enter into royalty or licensing agreements in order to obtain the rights to use necessary technologies, which may not be available on terms acceptable to us, if at all. If we cannot redesign our products and services or license necessary technologies, we may be subject to the risk of injunctive relief and/or significant damage awards, which are complex, subjective and hard to predict, and subsequently we may not be able to offer or sell a particular product or service, or a family of products or services.

Any intellectual property claim against us could be expensive and time consuming to defend. Insurance may not cover or be insufficient for such claim, or may not be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results. Even if we have an indemnification arrangement with a third party to indemnify us against an intellectual property claim, such indemnifying party may be unable or fail to uphold its contractual obligations to us. If any infringement or other intellectual property claim that is brought against us is successful, our business, operating results and financial condition could be materially and adversely affected.

General economic conditions may adversely affect our ability to raise capital in the future.

We may need or seek additional financing in the future to refinance our existing indebtedness, fund our operations, fund acquisitions, develop additional products and services or implement other projects. As of December 31, 2009, Higher One, Inc. had $18.0 million outstanding under its Credit Facility. Given the state of the current credit environment resulting from, among other things, the general weakening of the global economy, it may be difficult to refinance our existing indebtedness or obtain any additional financing on acceptable terms, which could have an adverse effect on our business, financial condition and results of operations. In addition, if, as a result of the current conditions in the credit markets, the lender under our current credit agreement or any other lender under any future credit agreement is unable to fund borrowings under that agreement, our liquidity could be adversely affected.

The terms of our credit agreement may restrict our current and future operations, which would adversely affect our ability to respond to changes in our business and to manage our operations.

Our credit agreement contains, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

 

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create liens;

 

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make investments and acquisitions;

 

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  Ÿ  

incur additional debt;

 

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transfer all or substantially all of our assets or enter into merger or consolidation transactions;

 

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dispose of assets;

 

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pay dividends or make any other distributions with respect to our stock;

 

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issue stock, warrants, options or other rights to purchase stock or securities convertible into or exchangeable for shares of stock;

 

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engage in any material line of business substantially different from the lines of business we currently conduct or any business substantially related or incidental thereto; and

 

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enter into transactions with affiliates.

Our ability to comply with these covenants may be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants or alternative sources of funding. We cannot assure you that that such waivers, amendments or alternative sources of funding could be obtained, or if obtained, would be on terms acceptable to us.

Our credit agreement also requires us to maintain certain liquidity levels and financial ratios, including a maximum total leverage ratio and a minimum interest coverage ratio. A failure by us to comply with the covenants or financial ratios contained in our credit agreement could result in an event of default which could adversely affect our ability to respond to changes in our business and manage our operations. An event of default would also occur under our credit agreement if we undergo a change of control or if we experience a material adverse change in our operations, condition or prospects. In the event of any default under our credit agreement, the lender could elect to declare all amounts outstanding to be due and payable and require us to apply all of our available cash to repay these amounts. The acceleration of indebtedness under our credit agreement could have a material adverse effect on our business, financial condition and results of operations.

As a holding company, our main source of cash is distributions from our operating subsidiaries.

We, Higher One Holdings, Inc., conduct all of our operations through our subsidiaries. Accordingly, our main cash source is dividends and other distributions from these subsidiaries. The ability of each subsidiary to make distributions depends on the funds that a subsidiary has from its operations in excess of the funds necessary for its operations, obligations or other business plans. Since our subsidiaries are wholly owned by us, our claims will generally rank junior to all other obligations of the subsidiaries. If our operating subsidiaries are unable to make distributions, our growth may slow after the proceeds of this offering are exhausted, unless we are able to obtain additional debt or equity financing. In the event of a subsidiary’s liquidation, there may not be assets sufficient for us to recoup our investment in the subsidiary.

 

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Legal and Regulatory Risks

We are subject to substantial federal and state governmental regulation that could change and thus force us to make modifications to our business. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely affect our business, financial condition and results of operations.

As a payments processor to higher education institutions that takes payment instructions from institutions and their constituents, including students and employees, and gives them to our bank partner, we are directly or indirectly subject to a variety of federal and state laws and regulations. Our contracts with most of our higher education institutional clients and our bank partner require us to comply with applicable laws and regulations, including, where applicable:

 

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regulations promulgated by the United States Department of Education regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV of the Higher Education Act, or Title IV;

 

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the Family Educational Rights and Privacy Act, or FERPA;

 

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the Electronic Fund Transfer Act and Regulation E promulgated thereunder;

 

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the USA PATRIOT Act and related anti-money laundering requirements; and

 

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certain federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or GLBA.

Higher Education Regulations

Because of the services we provide to some institutions with regard to the handling of Title IV funds, the Department of Education may deem us to be a “third-party servicer” under the Title IV regulations. Those regulations require a third-party servicer annually to submit a compliance audit conducted by outside independent auditors that covers the servicer’s Title IV activities. Accordingly, each year we submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the Department of Education, which includes a report by an independent audit firm. We also provide this audit report to clients upon request to help them fulfill their compliance audit obligations as Title IV participating institutions.

If we were deemed to be a third-party servicer, certain other Title IV regulations would apply to our business. These include, for example, regulations making a third-party servicer jointly and severally liable with its client institution for any liability to the Department of Education arising out of the servicer’s violation of Title IV or its implementing regulations, which could subject us to material fines related to acts or omissions of entities beyond our control. The Department of Education is also empowered to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil penalties on the violating servicer. In the event the Department of Education concluded that we were a third-party servicer, had violated Title IV or its implementing regulations and should be subject to one or more of these sanctions, our business and results of operations could be material and adversely affected. There is limited enforcement and interpretive history of Title IV regulations.

Our higher education institutional clients are subject to FERPA, which prohibits educational institutions that receive any federal funding from disclosing certain personally identifiable information of any student to third parties without the student’s consent, subject to certain exceptions. Our higher education institutional clients disclose to us certain information concerning their students, including

 

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contact information, student identification numbers and the amount of students’ credit balances. We believe that our higher education institutional clients may disclose this information to us pursuant to one or more exceptions to FERPA disclosure prohibition. However, if we do not fall into one of these exceptions or if future changes to legislation or regulations required student consent before our higher education institutional clients could disclose this information to us, a sizeable number of students may cease using our products and services, which could materially and adversely affect our business, financial condition and results of operations.

Additionally, as we are indirectly subject to FERPA, we may not permit the transfer of any personally identifiable information to another party other than in a manner in which an educational institution may disclose it. In the event that we re-disclose student information in violation of this requirement, FERPA requires our clients to suspend our access to any such information for a period of five years. Any such suspension could have a material adverse effect on our business, financial condition or results of operations. We may also be subject to similar state laws and regulations that restrict higher education institutions from disclosing certain personally identifiable information of students. For example, an Illinois law passed in 2009 prohibits certain public higher education institutions in Illinois from providing personally identifiable information of students to businesses that issue credit or debit cards.

Banking Regulations

The Bancorp Bank, our bank partner, is an insured depository institution and funds held at our bank partner are insured by the FDIC up to applicable limits. As an insured depository institution, our bank partner is subject to comprehensive government regulation and, in the course of making its services available to our customers, we are required to assist the bank in complying with certain of its regulatory obligations. In particular, the anti-money laundering provisions of the USA PATRIOT Act require that customer identifying information be obtained and verified whenever a bank account is established. For example, because we facilitate the opening of deposit accounts at The Bancorp Bank on behalf of our customers, we assist the bank in collecting the basic customer identification information that is necessary to open an account. In addition, both we and the bank are subject to the laws and regulations enforced by the Office of Foreign Assets Control, which prohibit U.S. persons from engaging in transactions with certain prohibited persons. As a service provider to an insured depository institution, we are required under federal law to agree to submit to examination by our bank partner’s primary federal regulator, which is currently the FDIC. We also are subject to audit by our bank partner to ensure that we comply with our obligations to it appropriately. Failure to comply with our responsibilities properly could negatively affect our operations. Our bank partner is required under its agreement with us to, and we rely on our bank partner’s ability to, comply with state and federal banking regulations. Our failure to comply with any of the laws or regulations applicable to our business and the services we provide or the failure of our bank partner to maintain regulatory compliance could result in significant disruptions to our business and have a material adverse effect on our business, financial condition and results of operations.

The Bancorp Bank provides demand deposit services for OneAccounts through a private label relationship. We provide processing services for these OneAccounts for The Bancorp Bank. These services are subject to, among other things, the requirements of the Electronic Fund Transfer Act and the Federal Reserve Board’s Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs, debit cards and other electronic banking services. We may assist our bank partner with fulfilling its compliance obligations pursuant to these requirements. See “Business—Government Regulation.” Failure to comply with applicable regulations could materially and adversely affect our business, financial condition and results of operations.

 

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Because our technology services are provided in connection with the financial products of our bank partner, our activities are occasionally reviewed by regulatory agencies to ensure that we do not impermissibly engage in activities that require licensing at the state or federal level. In the ordinary course of business, we receive letters and inquiries concerning the nature of our business as it applies to state “money transmitter” licensing and regulations from different state regulatory agencies. If a state agency were to conclude that we are required to be licensed as a “money transmitter,” we may need to undergo a costly licensing process in that state, and failure to comply could be a violation of state and potentially federal law.

Privacy and Data Regulation

We are subject to laws and regulations relating to the collection, use, retention, security and transfer of personally identifiable information and data regarding our customers and their financial information. In addition, we are bound by our own privacy policies and practices concerning the collection, use and disclosure of user data, which are posted on certain of our websites.

In conjunction with the disbursement, payroll and tuition payment services we make available through our bank partner, it is necessary to collect certain information from our customers (such as bank account and routing numbers) to transmit to the bank. The bank uses this information to execute the funds transfers requested by our customers, which are effected primarily by means of ACH networks and other wire transfer systems, such as FedWire. To the extent the data required by these electronic funds networks change, the information that we will be required to request from our clients may also change.

We are subject, either directly or by virtue of our contractual relationship with our bank partner, to the privacy and security standards of the GLBA privacy regulations, as well as certain state data protection laws and regulations. The GLBA privacy regulations require that we develop, implement and maintain a written comprehensive information security program prescribing safeguards that are appropriate to our size and complexity, the nature and scope of our activities and the sensitivity of any personally identifiable information we access for processing purposes or otherwise maintain. As a service provider of The Bancorp Bank, we also are limited in our use and disclosure of the personal information we receive from the bank, which we may use and disclose only for the purposes for which it was provided to us and consistent with the bank’s own data privacy and security obligations. We also are subject to the standards set forth in guidance on data security issued by the Federal Financial Institution Examination Council, as well as the data security standards imposed by the card associations, including Visa, Inc., and MasterCard International. In addition, we are subject to similar data security breach laws enacted by a number of states. Several other states are considering similar legislation.

Any failure or perceived failure by us to comply with any legal or regulatory requirements or orders or other federal or state privacy or consumer protection-related laws and regulations, or with our own privacy policies, could result in fines, sanctions, litigation, negative publicity, limitation of our ability to conduct our business and injury to our reputation, any of which could materially and adversely affect our business, financial condition and results of operations.

New legislation and regulations in this area have been proposed, both at the federal and state level. Such measures, including pending Federal legislation, would potentially impose additional obligations on us, including requiring that we provide notifications to consumers and government authorities in the event of a data breach or unauthorized access or disclosure, beyond what state law already requires. The interpretation of pending legislation and regulations, as well as some of the existing laws and regulations, is evolving and, therefore, these laws and regulations may be applied inconsistently. Under some interpretations, it is possible that our current data protection policies and

 

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practices may be deemed inconsistent with legal requirements, and breaches in the security of our technology systems and infrastructure could result in a violation of these laws and regulations. These laws and regulations could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.

Compliance

We monitor our compliance through a robust internal audit program. Our full-time internal auditor works with a third-party internal audit firm to conduct annual reviews to ensure compliance with the regulatory requirements described above. The costs of these audits and the costs of complying with the applicable regulatory requirements are significant. Increased regulatory requirements on our products and services, such as in connection with the matters described above, could materially increase our costs or reduce revenue.

It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. The imposition of any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business. In addition, many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions. If we were deemed to be in violation of any laws or regulations that are currently in place or that may be promulgated in the future, including but not limited to those described above, we could be exposed to financial liability and adverse publicity or forced to change our business practices or stop offering some of our products and services. We also could face significant legal fees, delays in extending our product and services offerings, and damage to our reputation that could harm our business and reduce demand for our products and services. Even if we are not required to change our business practices, we could be required to obtain licenses or regulatory approvals that could cause us to incur substantial costs and delays.

Current and future litigation against us could be costly and time-consuming to defend.

We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business. Litigation may result in substantial costs and may divert management’s attention and resources, which may materially and adversely affect our business, financial condition and results of operations. In addition, legal claims that have not yet been asserted against us may be asserted in the future. Insurance may not cover such claims, be sufficient for one or more such claims, or continue to be available on terms acceptable to us.

In particular, a third party may assert that our technology violates its intellectual property rights. As the number of products in our industry increases and the functionality of these products further overlap, infringement claims could become more common. Any claims, regardless of their merit, could be expensive and time consuming to defend, require us to redesign our products, divert management’s attention and other company resources and require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance resulting in a reduction in the trading price of our stock. See “Business—Legal Proceedings.”

 

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Risks Related to our Common Stock

There is no prior public market for our common stock and an active trading market may not develop, leading to a decline in our stock price.

Prior to this offering, there has been no public trading market for shares of our common stock. Although we intend to apply to list our common stock on The NASDAQ Global Select Market, it is possible that, after this offering, an active trading market will not develop or continue. As a result, shareholders may have difficulty selling their shares or selling their shares at a certain price. In addition, the initial public offering price or future price of our common stock may not reflect our actual financial performance.

The initial public offering price per share of our common stock will be determined by agreement among us and the representative of the underwriters and may not be indicative of the price at which the shares of our common stock will trade in the public market after this offering.

Our common stock price may experience significant volatility.

The stock market in general, and the market for technology-related stocks in particular, have been highly volatile in the recent past. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described in this Risk Factors section of this prospectus and others such as:

 

  Ÿ  

changes in our revenues or earnings estimates or recommendations by securities analysts;

 

  Ÿ  

publication of research reports about us or our industry by securities analysts;

 

  Ÿ  

speculation in the press or investment community;

 

  Ÿ  

sales of common stock by institutional shareholders;

 

  Ÿ  

changes in accounting principles; and

 

  Ÿ  

general market or economic conditions, including factors unrelated to our performance.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.

We anticipate that our founders, senior executive officers, directors and principal stockholders will together beneficially own approximately      percent of our common stock outstanding after this offering. As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

 

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A substantial number of shares of our common stock will be eligible for sale in the near future, which could cause our common stock price to decline significantly.

The market price of our common stock could decline as a result of sales of a large number of shares in the market after the offering or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us or you to sell our equity or equity-related securities in the future. If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the             -day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of             , upon completion of this offering, we will have outstanding             shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended, or the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Goldman, Sachs & Co. may, in its sole discretion, permit our officers, directors, employees and current stockholders who are subject to the             -day contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

After the lock-up agreements pertaining to this offering expire          days from the date of this prospectus or earlier waiver by Goldman, Sachs & Co., up to an additional              shares will be eligible for sale in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions and other securities laws. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

If you invest in this offering, you will experience immediate and substantial dilution.

We expect that the initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our outstanding common stock. As a result, assuming an initial public offering price of $             per share, which is the midpoint of the price range on the front cover of this prospectus, investors purchasing common stock in this offering will incur immediate and substantial dilution of $             per share in the net tangible book value of the common stock. This means that the investors who purchase shares:

 

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will pay a price per share that substantially exceeds the per share value of our assets after subtracting our liabilities; and

 

  Ÿ  

will have contributed approximately     % of the total amount of our equity funding since inception but will only own     % of the shares outstanding.

In addition, options and warrants issued in the past have per-share exercise prices substantially below the initial public offering price per share. As of                 , 2010, there were              shares of common stock issuable upon exercise of outstanding options, other than those that will be exercised prior to the completion of the offering. To the extent these outstanding options or warrants are ultimately exercised, there will be further dilution to investors in this offering. See “Dilution.”

 

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We do not intend to pay dividends on our common stock in the foreseeable future, and, because of restrictive covenants in our credit agreement and because we are a holding company, we may be unable to pay dividends.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, our current credit agreement prohibits us from paying dividends. Furthermore, because we are a holding company, any future dividend payments would depend on the cash flow of our subsidiaries. See “––As a holding company, our main source of cash is distributions from our operating subsidiaries.” Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem it appropriate.

We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. For the foregoing reasons, you will not be able to rely on dividends on our common stock to receive a return on your investment.

Anti-takeover provisions in our charter documents, our credit agreement and Delaware law could delay or prevent entirely a takeover attempt or a change in control.

Provisions contained in our second amended and restated certificate of incorporation and bylaws, our credit agreement and Delaware law could delay or prevent entirely a merger or acquisition that our stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm our stock price.

In addition, an event of default would occur under our credit agreement if we undergo a change of control without the consent of our lender.

Further, we will be governed by Section 203 of the General Corporation Law of the State of Delaware, which prohibits a corporation from engaging in any business combination with any interested stockholder for a period of three years following the time that the stockholder became an interested stockholder, except under certain circumstances including upon receipt of prior board approval.

See “Description of Capital Stock—Certain Certificate of Incorporation and Bylaw Provisions.”

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant levels of legal, accounting and other expenses that we did not incur as a privately owned corporation. The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and related rules of the SEC and The NASDAQ Global Select Market corporate governance practices for public companies impose significant requirements relating to disclosure controls and procedures and internal control over financial reporting. We expect that compliance with these public company requirements will increase our costs, place additional demands on our finance and accounting staff and on our financial, accounting and information systems and may require additional resources. We expect that we will be required to expend considerable time and resources complying with public company regulations.

 

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Failure to establish and maintain effective internal controls over financial reporting may lead investors to lose confidence in our financial data.

Maintaining effective internal controls over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. We are in the process of evaluating how to document and test our internal control procedures to satisfy the requirements of Section 404 of Sarbanes-Oxley and the related rules of the SEC, which require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting and our independent registered public accounting firm to issue a report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2011. During the course of this documentation and testing, we may identify deficiencies that we may be unable to remedy before the requisite deadline for those reports.

Our auditors have not conducted an audit of our internal control over financial reporting. Any failure to remediate material weaknesses noted by us or our independent registered public accounting firm or to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information and the trading price of our common stock could decrease significantly.

 

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FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this prospectus reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:

 

  Ÿ  

substantial and increasing competition in the industries in which we do business and the growth of our industry

 

  Ÿ  

competitive pressures related to the fees that we charge;

 

  Ÿ  

increasingly intense legislative and regulatory scrutiny of fees charged for financial services;

 

  Ÿ  

changes in the convenience fees that we charge in connection with payment transactions are subject to change;

 

  Ÿ  

availability of financial aid and dependence on the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions;

 

  Ÿ  

our ability to maintain and develop our brand in a cost-effective manner;

 

  Ÿ  

the outsourcing of critical operations, including reliance on our bank partner for certain banking services;

 

  Ÿ  

our ability to maintain adequate security measures for our data systems;

 

  Ÿ  

the length and unpredictability of the sales cycle for signing potential higher education institutional clients;

 

  Ÿ  

liability to our customers or loss of customers if we provide poor service or if our systems or products experience failures and our ability to limit our liabilities by contract or through insurance;

 

  Ÿ  

our ability to cross-sell products and services and integrate acquired businesses and technologies;

 

  Ÿ  

our ability to update and improve our existing products and services, develop new ones and manage future growth effectively;

 

  Ÿ  

our reliance on our founders and other key members of executive management and our ability to identify, recruit and retain skilled personnel;

 

  Ÿ  

our ability to protect and enforce our intellectual property rights; and

 

  Ÿ  

the impact of governmental laws and regulations and the outcomes of legal proceedings.

The forward-looking statements contained in this prospectus reflect our views and assumptions only as of the date of this prospectus. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of              shares of common stock in this offering, after deducting underwriting discounts, commissions and other estimated offering expenses payable by us, will be approximately $             million (based on the midpoint of the range shown on the cover page of this prospectus). We will not receive any proceeds from the sale of shares by the selling stockholders. In addition, we will not participate in the sale of additional shares relating to the underwriters’ option to purchase additional shares from the selling stockholders.

We intend to use $             million of the net proceeds we receive from this offering for the repayment of amounts outstanding under our Credit Facility dated as of August 26, 2008, and amended as of July 15, 2009 and November 19, 2009. Loans drawn under our senior secured revolving credit facility are payable in a single maturity on December 31, 2010 and bear interest at the Eurodollar rate plus an applicable margin that ranges between 1.75% and 3.75% per annum depending on Higher One, Inc.’s funded debt to EBITDA ratio.

We also intend to use $             million of the net proceeds we receive from this offering for certain post-closing costs related to our acquisition of CASHNet. We intend to use the remaining net proceeds to pursue our strategic objectives and for general corporate purposes.

A $1.00 change, up or down, in the midpoint of the range shown on the cover page of this prospectus would change our estimated net proceeds by $             million. Similarly, a change in the number of shares of common stock we sell would increase or decrease our net proceeds. We believe that our intended use of proceeds would not be affected by changes in either our initial public offering price or the number of shares of common stock we sell.

 

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DILUTION

If you invest in our common stock, your interest will be diluted by the amount by which the initial offering price per share paid by the purchasers of common stock in this offering exceeds the net tangible book value per share of our common stock following this offering. As of December 31, 2009, our net tangible book value was approximately $             million, or $             per share of common stock. Net tangible book value per share equals total consolidated tangible assets minus total consolidated liabilities and preferred stock divided by the number of shares of our common stock outstanding.

Our net tangible book value as of December 31, 2009 would have been approximately $             million, or $             per share of common stock, after giving effect to:

 

  Ÿ  

the sale by us of common stock in this offering, at an assumed initial public offering price of $             per share (the midpoint of the range on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; and

 

  Ÿ  

the conversion of all outstanding shares of our convertible preferred stock that were outstanding prior to this offering into an aggregate of 12,975,169 shares of our common stock.

This represents an immediate increase in the net tangible book value of $             per share to existing stockholders and an immediate dilution in the net tangible book value of $             per share to the investors who purchase our common stock in this offering. Sales of shares by our selling stockholders in this offering do not affect our net tangible book value.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     

Net tangible book value per share as of December 31, 2009

     

Increase in net tangible book value per share attributable to this offering

     
       

Net tangible book value per share after this offering

     
       

Dilution per share to new investors

     
       

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, as of December 31, 2009, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us for these shares and the average price per share paid by our existing stockholders and to be paid by the new investors in this offering. The calculation below reflecting the effect of shares purchased by new investors is based on an assumed initial public offering price of $             per share (the midpoint of the range on the cover page of this prospectus), before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased    Total Consideration    Average Price
Per Share
     Number    Percent    Amount    Percent   

Existing stockholders

              

New investors

              
                      

Total

              
                      

The share information in the table above includes              shares of restricted stock issued but not yet vested under our 2000 Stock Option Plan and excludes shares of common stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $             per share, of which                      were vested as of                     , 2010.

 

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DIVIDEND POLICY

We currently anticipate that we will retain any future earnings for use in our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operation, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. Furthermore, because we are a holding company, any dividend payments would depend on cash flow from our subsidiaries. Our credit agreement, however, generally prohibits us from paying dividends. Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem them appropriate.

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2009:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

on an as adjusted basis to reflect:

 

   

the sale by us of common stock in this offering, at an initial public offering price of $             per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us;

 

   

the use of $             million of the net proceeds of this offering for the repayment of amounts outstanding under our Credit Facility;

 

   

the use of $             million of the net proceeds of this offering for certain post-closing costs related to our acquisition of CASHNet; and

 

   

the conversion of all outstanding shares of our convertible preferred stock that were outstanding prior to this offering into an aggregate of 12,975,169 shares of our common stock.

 

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You should read this table in conjunction with the sections of this prospectus captioned “Use of Proceeds,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2009

In thousands, except share and per share amounts

   Actual     As Adjusted

Cash and cash equivalents

   $ 3,339     

Total debt and capital lease obligations, including current maturities

     27,647     

Convertible preferred stock:

    

Series A Convertible Preferred Stock, $0.001 par value; 1,012,314 shares authorized, 417,049 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     313     

Series B Convertible Preferred Stock, $0.001 par value; 1,622,078 shares authorized, 1,086,784 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     882     

Series C Convertible Preferred Stock, $0.001 par value; 4,315,216 shares authorized, 2,522,554 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     3,478     

Series C-1 Convertible Preferred Stock, $0.001 par value; 3,250,000 shares authorized, 2,180,633 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     2,085     

Series D Convertible Preferred Stock, $0.001 par value; 3,999,999 shares authorized, 1,313,604 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     2,254     

Series E Convertible Participating Preferred Stock, $0.001 par value; 5,454,545 shares authorized, 5,454,545 issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted

     71,942     
            

Total convertible preferred stock

     80,954     

Stockholders’ equity:

    

Common stock, $.001 par value, 30,000,000 shares authorized, 4,092,255 issued and outstanding; shares authorized, issued and outstanding, pro forma

     4     

Additional paid-in capital

     4,625     

(Accumulated deficit) retained earnings

     (78,479  
            

Total stockholders’ equity

     7,104     
            

Total capitalization

   $ 38,090     
            

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 are based on our historical consolidated financial statements and give effect to our acquisition of Informed Decision Corporation, which we renamed Higher One Payments, Inc. and which does business as CASHNet, on November 19, 2009 and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2009 give effect to the acquisition as if they occurred on January 1, 2009.

The pro forma adjustments and allocation of purchase price of the acquisition are preliminary and are based on management’s estimates of the fair value of the assets acquired and liabilities assumed. The final purchase price allocation will be completed after asset and liability valuations are finalized. This final valuation will be based on the actual net tangible and intangible assets that exist as of the date of the completion of the transactions. Any final adjustments may change the allocations of the purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma condensed combined financial information.

This unaudited pro forma condensed combined financial information is presented for informational purpose only and has been derived from, and should be read in conjunction with, our historical consolidated financial statements, including the notes thereto. The pro forma adjustments, as described in the accompanying notes, are based on current available information and certain adjustments that we believe are reasonable. They are not necessarily indicative of our consolidated financial position or results of operations that would have occurred had the acquisition taken place on the date indicated, nor are they necessarily indicative of our future consolidated results of operations.

 

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Higher One Holdings, Inc. and CASHNet

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2009

(in thousands)

 

          + (   Plus:     -   Less:     +   Plus:   +   Plus:     ) =   Sub-total              
    Higher One
Historical
Year Ended
December 31,
2009
(audited)
        CASHNet
Historical
Year Ended
March 31,
2009
(audited)(A)
        CASHNet
Nine Months
Ended
December 31,
2008
(unaudited)
        CASHNet
Six Months
Ended
September 30,
2009
(unaudited)
      CASHNet
October 1,
2009 to
November 19,
2009
(unaudited)
        CASHNet
January 1,
2009
November 19,
2009
(unaudited)
    Pro Forma
Adjustments
(unaudited)
    Pro Forma
Year Ended
December 31,
2009
(unaudited)
 

Revenue:

                         

Account revenue

  $ 66,440        $        $        $     $        $      $      $ 66,440   

Payment transaction revenue

    1,688          10,220          7,136          6,979       1,407          11,470               13,158   

Higher education institution revenue

    5,135          4,168          2,948          2,858       902          4,980               10,115   

Other revenue

    2,254          528          404          318       140          582               2,836   
                                                                       

Total revenue

    75,517          14,916          10,488          10,155       2,449          17,032               92,549   

Cost of revenue

    24,440          11,307          7,953          6,978       1,991          12,323        (269 )(B)(C)      36,494   
                                                                       

Gross margin

    51,077          3,609          2,535          3,177       458          4,709        269        56,055   

Operating expenses:

                         

General and administrative

    18,143          1,775          1,259          1,074       391          1,981        1,427 (D)(F)     21,551   

Product development

    2,287                                                  1,126 (B)      3,413   

Sales and marketing

    7,966          2,831          2,214          1,537       352          2,506               10,472   
                                                                       

Total operating expenses

    28,396          4,606          3,473          2,611       743          4,487        2,553        35,436   
                                                                       

Income from operations

    22,681          (997       (938       566       (285       222        (2,284 )      20,619   

Interest income

    (4       (30                      (38       (68            (72

Interest expenses

    558          6          4          2       1          5        860 (E)      1,423   

Other

    (17       40          3          50       15          102               85   
                                                                       

Net income before income taxes

    22,144          (1,013       (945       514       (263       183        (3,144 )      19,183   

Income tax expense (benefit)

    7,925          (195       (112             (272       (355     (1,147 )(G)      6,423   
                                                                       

Net income

    14,219          (818       (833       514       9          538        (1,997     12,760   
                                                           

Less: Net income allocable to participating securities

    11,477                              10,299   
                                     

Net income available to common shareholders

  $ 2,742                            $ 2,461   
                                     

Net income per common share

                         

Basic

  $ 0.88                            $ 0.79   

Diluted

  $ 0.80                            $ 0.72   

Weighted average common shares outstanding

                         

Basic

    3,099,377                              3,099,377   

Diluted

    17,802,709                              17,802,709   

 

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Notes to Unaudited Pro Forma Condensed Combined Statement of Operations

 

(A) Reflects the historical results of operations of CASHNet for its year ended March 31, 2009. On November 19, 2009, we purchased all of the shares of outstanding capital stock of CASHNet for a purchase price of $27,489. The purchase price was allocated to net tangible and intangible assets based on their estimated fair values on the date of acquisition. The fair value of the intangible assets, consisting of customer relationships, developed software, trademarks and non-competes, was estimated at $20,880, based on an independent appraisal and was determined through either an income approach or a relief from royalty approach. The intangible assets are amortized on a straight line basis over lives ranging from 5 to 10 years, the estimated lives of the assets. The remainder of the purchase price was allocated to goodwill.

 

     Of the total purchase price, $17,889 was paid upon closing (excluding cash acquired), and pursuant to the purchase agreement, we are required to pay initial post-closing payments of $10,000. The initial post closing payments call for four quarterly payments of $1,750 each on or before March 31, June 30, September 30 and December 31, 2010. A final post closing payment of $3,000 is to be paid on or before December 31, 2010, but is subject to an escrow deposit reduction in regard to any applicable indemnification adjustments. This acquisition payable was discounted and recorded at its estimated fair value of $9,600, based on an estimated discount rate of 5.0%. The payable is being accreted to its principle amount through maturity on an effective interest rate method.
(B) Reflects adjustment to reclassify CASHNet’s product development costs from cost of revenue to product development costs to conform to our classification of such costs.
(C) Reflects adjustments for increased intangible asset amortization associated with acquired identified intangible assets in connection with the acquisition.
(D) Reflects adjustments for increased intangible asset amortization associated with acquired identified intangible assets in connection with the acquisition.
(E) Reflects interest expense adjustments for (i) increased interest expense attributable to the incremental $17,250 borrowing we made under our Credit Facility to pay for the acquisition at an assumed interest rate equal the adjusted Eurodollar rate plus a margin of between 1.75% and 3.75% per annum (depending on Higher One, Inc.’s funded debt to EBITDA ratio), and (ii) increased interest expense attributable to accretion on the acquisition payable at an assumed fixed discount rate of 5.0%. The interest rate on our Credit Facility is variable and the effect on interest expense of a change in interest rates of 0.125% would have been $45 for the year ended December 31, 2009.
(F) Reflects an adjustment to reduce expenses for the $125 of one-time transaction costs we incurred directly as a result of the acquisition.
(G) Reflects an adjustment to income tax equal to our statutory income tax rate of 36.5% applied to the pro forma adjustments.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

You should read the data set forth below in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this prospectus. We derived the selected financial data as of December 31, 2008 and 2009 and for each of the three years ended December 31, 2007, 2008 and 2009 from our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. We derived the selected financial data as of and for the years ended December 31, 2005 and 2006 and as of December 31, 2007 from our audited financial statements and the related notes not included in this prospectus. Our historical results are not necessarily indicative of our results for any future period.

The pro forma income statement data for the year ended December 31, 2009 set forth below gives pro forma effect to our acquisition of CASHNet in November 2009 as if the acquisition occurred on January 1, 2009. The pro forma financial data was derived from our “Unaudited Proforma Financial Information” included elsewhere in this prospectus. The pro forma summary financial data is not necessarily indicative of our results for any future period.

Consolidated Statement of Income Data

 

    Historical     Pro Forma  
    Year Ended December 31,  
    2005     2006     2007     2008     2009     2009  
    (in thousands, except share and per share amounts)  
                                  (unaudited)  

Revenue

  $ 8,973      $ 16,006      $ 27,978      $ 44,006      $ 75,517      $ 92,549   

Cost of revenue

    3,920        6,569        11,140        16,302        24,440        36,494   
                                               

Gross margin

    5,053        9,437        16,838        27,704        51,077        56,055   

Operating expenses

    5,973        9,268        12,625        17,753        28,396        35,436   
                                               

Income from operations

    (920     169        4,213        9,951        22,681        20,619   

Other (expense) income

    (1     (503     (569     (26     (537     (1,436
                                               

Income before income taxes

    (921     (334     3,644        9,925        22,144        19,183   

Income tax (benefit) expense

    (47     (3,689     1,362        3,547        7,925        6,423   
                                               

Net income

    (874     3,355        2,282        6,378        14,219        12,760   

Less: Net income allocable to participating securities

           2,657        1,808        5,102        11,477        10,299   
                                               

Net income available to common shareholders

  $ (874   $ 698      $ 474      $ 1,276      $ 2,742      $ 2,461   
                                               

Net income per common share:

           

Basic

  $ (0.25   $ 0.19      $ 0.13      $ 0.37      $ 0.88      $ 0.79   

Diluted

  $ (0.25   $ 0.18      $ 0.12      $ 0.34      $ 0.80      $ 0.72   

Weighted average common shares outstanding:

           

Basic

    3,556,438        3,642,363        3,652,611        3,435,464        3,099,377        3,099,377   

Diluted

    3,556,438        18,600,615        19,033,687        18,652,916        17,802,709        17,802,709   

 

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Consolidated Balance Sheet Data

 

     As of December 31,
     2005     2006     2007     2008     2009
     (in thousands)

Cash and cash equivalents

   $ 4,786      $ 5,770      $ 9,755      $ 1,488      $ 3,339

Total assets

     8,203        13,974        18,423        13,662        59,904

Total debt and capital lease obligations, including current maturities

     879        950        1,172        18,934        27,647

Total liabilities

     18,377        20,740        22,675        25,402        52,800

Total stockholders’ (deficit) equity

     (10,174     (6,766     (4,252     (11,740     7,104

Consolidated Other Data

 

     Year Ended December 31,
     2005     2006    2007    2008    2009
     (in thousands)

Adjusted EBITDA(1)

   $ (106   $ 1,223    $ 5,473    $ 13,141    $ 30,516

Adjusted net income(2)

   $ (780   $ 3,429    $ 2,434    $ 7,725    $ 18,091

Number of students enrolled at OneDisburse client higher education institutions at end of period

     380        675      1,011      1,605      2,331

Number of students enrolled at payment transaction client higher education institutions at end of period

                 3      30      1,949

Number of OneAccounts at end of period

     126        207      359      554      1,004

 

(1) The following table presents a reconciliation of adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,  
   2005     2006     2007     2008     2009  
   (in thousands)  

Net income

   $ (874   $ 3,355      $ 2,282      $ 6,378      $ 14,219   

Interest income

     (139     (223     (291     (152     (4

Interest expense

     140        93        115        357        558   

Other income

                          (234     (17

Income tax expense

     (47     (3,689     1,362        3,547        7,925   

Depreciation and amortization

     814        1,002        1,114        1,452        2,969   

Warrant fair value adjustment

            633        745        55          
                                        

EBITDA

     (106     1,171        5,327        11,403        25,650   

Stock-based customer acquisition expense

                          1,240        2,385   

Stock-based compensation expense

            52        146        498        1,387   

Milestone bonus

                                 1,094   
                                        

Adjusted EBITDA

   $ (106   $ 1,223      $ 5,473      $ 13,141      $ 30,516   
                                        

See “Summary—Summary Consolidated Financial Data” for definition of adjusted EBITDA.

 

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(2) The following table presents a reconciliation of adjusted net income to net income, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,  
   2005     2006     2007     2008     2009  
   (in thousands)  

Net income

   $ (874   $ 3,355      $ 2,282      $ 6,378      $ 14,219   

Stock-based customer acquisition expense

                          1,240        2,385   

Stock-based compensation expense—ISO

            52        128        312        610   

Stock-based compensation expense—NQO

                   18        186        777   

Milestone bonus expense

                                 1,094   

Amortization of intangibles

     99        35        21        153        710   

Amortization of finance costs

                          31        113   
                                        

Total pre-tax adjustments

     99        87        167        1,922        5,689   

Tax rate

     5.1     37.4     37.4     35.7     35.8

Tax adjustment

     5        13        15        575        1,817   
                                        

Adjusted net income

   $ (780   $ 3,429      $ 2,434      $ 7,725      $ 18,091   
                                        

See “Summary—Summary Consolidated Financial Data” for definition of adjusted net income.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this prospectus under the captions “Risk Factors,” “Selected Consolidated Financial Data” and “Business.” The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. Factors that might cause these differences include those described under “Risk Factors,” “Forward-Looking Statements,” and elsewhere in this prospectus.

Overview

We are a leading provider of technology and payment services to the higher education industry. We provide the most comprehensive suite of disbursement and payment solutions specifically designed for higher education institutions and their students. We also provide campus communities with convenient, cost-competitive and student-oriented banking services, which include extensive user-friendly features.

Our products and services for our higher education institutional clients include our OneDisburse® Refund Management® disbursement service and our suite of payment transaction products and services. Through our bank partner, we offer our OneAccount service to the students of our higher education institutional clients, which includes an FDIC-insured deposit account, a OneCard, which is a debit MasterCard® ATM card, and other retail banking services.

As of December 31, 2009, 367 campuses serving approximately 2.3 million students had purchased the OneDisburse service and 255 campuses serving approximately 1.9 million students had contracted to use one or more of our payment products and services. We also had approximately 1 million OneAccounts.

For the year ended December 31, 2009:

 

  Ÿ  

total revenue was approximately $75.5 million, representing three-year compounded annual growth of approximately 68%;

 

  Ÿ  

adjusted EBITDA was approximately $30.5 million, representing three-year compounded annual growth of approximately 192%;

 

  Ÿ  

adjusted net income was approximately $18.1 million, representing three-year compounded annual growth of approximately 74%; and

 

  Ÿ  

net income was approximately $14.2 million, representing three-year compounded annual growth of approximately 62%.

See “Summary—Summary Consolidated Financial Data” for definitions of adjusted EBITDA and adjusted net income and reconciliations to net income.

In addition, as of December 31, 2009, the number of OneAccounts had increased by a compounded annual growth rate of 69% compared to December 31, 2006.

We expect our growth to continue in the future and that our strategy will continue to offer significant opportunity for expansion. Our growth strategy includes the following elements:

 

  Ÿ  

Expand the number of contracted higher education institutions;

 

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  Ÿ  

Increase OneAccount adoption and usage rates;

 

  Ÿ  

Cross-sell our products to existing clients to increase the number of institutions using each product;

 

  Ÿ  

Enhance our products and services to create new sources of revenue; and

 

  Ÿ  

Pursue strategic partnerships and opportunistic acquisitions.

See “Business—Our Strategy.”

Assessing the Performance of our Business

In evaluating our results, we consider a variety of operating and financial measures. The key metrics that we use to determine how our business is performing include: (i) total number of students enrolled at our higher education institutional clients; (ii) number of active OneAccounts; (iii) total revenue; (iv) adjusted EBITDA; (v) adjusted net income; and (vi) net income. See “Summary—Summary Consolidated Financial Data” for definitions of adjusted EBITDA and adjusted net income and reconciliations to net income.

Our primary source of revenue is fees generated from use of OneAccounts. Our historical experience is that fees earned per OneAccount are relatively consistent across the majority of our student and other banking customers. Consequently, the primary factor affecting our revenue is the number of active OneAccounts, which, in turn, is significantly affected by the total number of students enrolled at a higher education institutional client. See “—Revenue.”

In each of the last three years, increases in total revenue combined with decreases in expenses as a percentage of total revenue have caused our adjusted EBITDA, adjusted net income and net income to increase.

Revenue

We derive revenue primarily from fees charged for the transactions that we facilitate for our higher education institutional clients and our banking customers. Most of these fees are charged on a per transaction basis and, accordingly, transaction volumes significantly affect our revenue growth. Transaction volumes are generally a function of the number of students enrolled at each of our higher education institutional clients, as larger student populations lead to greater numbers of active OneAccounts and related banking transactions, as well as other transactions such as OneDisburse-based disbursements and payment transactions.

We believe our revenue stream is relatively stable, recurring and predictable, as the majority of our revenue each year is generated through existing relationships with higher education institutions and their campus communities. For example, in 2009, excluding revenue generated by our recent acquisition of CASHNet, we generated over 90% of our revenue from contracts signed in prior years. In addition, our experience is that OneAccount, disbursement and payment transaction volumes and patterns are generally similar from one period to another, resulting in a large degree of predictability. Our over 97% retention rate since 2003 also helps to ensure a relatively stable, recurring and predictable revenue stream.

We divide our revenue into four categories: account revenue, payment transaction revenue, higher education institution revenue and other revenue.

 

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Account Revenue

We generate revenue from active OneAccounts, which are opened and funded by students and other members of the campus community. The OneAccount offered to our customers has no monthly fee or minimum balance requirement. We earn fees for services based on a fee schedule, including (i) interchange fees; (ii) ATM fees; (iii) non-sufficient fund, or NSF, fees; and (iv) other fees. These fees are either charged by our bank partner and remitted to us or we charge them to our clients directly.

Our bank partner charges merchants interchange fees for point-of-sale, or POS, purchases made with OneCards and remits these fees to us. The amount of the fee generally depends on the size of the transaction, the merchant where the purchase is made and the network through which the transaction is processed.

We earn ATM fees from transactions effected through our ATMs with cards other than OneCards. We also earn fees from ATM transactions effected by OneAccount holders using their OneCards at ATMs outside of our ATM network. We expect the per transaction ATM fee that we charge to increase significantly in the second quarter of 2010.

Our bank partner charges NSF fees and remits them to us when OneAccount holders attempt to withdraw or transfer money from their OneAccounts in excess of their deposited funds. These NSF fees are primarily assessed on electronic transfers from, and checks drawn on, accounts in excess of available funds. Historically, our bank partner also assessed these fees on overdrafts on debit card transactions. However, the Federal Reserve Board recently amended Regulation E to limit the ability of financial institutions, effective July 1, 2010, to assess an overdraft fee for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to the institution’s payment of overdrafts for these services. In the absence of debit card-related NSF fees, we expect the amount of total NSF fees per OneAccount that our bank partner remits to us to decrease substantially.

We earn other fees for banking services provided to OneAccount holders, including fees for effecting wire transfers, replacing lost OneCards, processing international transactions, processing stop payment requests, over-the-counter cash withdrawals using OneCards, issuing official checks and electronic bill pay features.

Our historical experience has been that revenue per OneAccount has been generally stable and predictable. The primary influence on account revenue growth has been, and is expected to continue to be, the number of active OneAccounts. Growth in the number of accounts is tied to growth in the number of students enrolled at our OneDisburse higher education institutional clients, which expands as new clients contract to use this product. For example, of the students at higher education institutions that became OneDisburse clients in 2007, the average percentage of students that maintain OneAccounts increased from 37% in 2007 to 76% in 2009.

The number of OneAccounts has risen in each of the last three years, which has led to a compounded annual growth rate of 74% in account revenue over this period. While we expect the number of OneAccounts to continue to grow in the near-term, there is a possibility that further legislative and regulatory changes will be enacted in the near-term that may reduce account revenue. See “Risk Factors—Risks Related to Our Business—Fees for financial services are subject to increasingly intense legislative and regulatory scrutiny, which could have a material adverse effect on business, financial conditions, results of operations and prospects for future growth.”

 

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Payment Transaction Revenue

We generate payment transaction revenue through convenience fees charged to students, parents or other payers who make online payments to our higher education institutional clients through the SmartPay feature of our ePayment product using a credit or debit card. As this fee is assessed on a per transaction basis, growth in payment transaction revenue is primarily influenced by transaction volumes. We acquired ePayment when we purchased CASHNet in November 2009 and believe that due to the convenience it offers payers and the relatively low implementation cost to higher education institutions, it will become increasingly popular among our existing clients, as well as new clients going forward.

Higher Education Institution Revenue

Our higher education institutional clients pay fees for the products and services they purchase from us. We charge our clients: (i) an annual subscription fee based on the size of their student population; (ii) a per-transaction fee; or (iii) a combination of both. For certain payment transaction products, we also charge an implementation fee, which is recognized over the initial contract period. Historically, revenue from higher education institutions has been primarily comprised of card and transaction fees related to our OneDisburse product. However, with our acquisition of CASHNet in November 2009, we expect that beginning in 2010 the composition of our higher education institution revenue will be approximately 40% card and transaction revenue related to our OneDisburse product and 60% payment products-related revenue. The number of students enrolled at client institutions and the number of campuses under contract are significant drivers of our higher education institution revenue. As we have expanded the number of our institutional clients over the last three years, our higher education institution revenue has grown by a compounded annual rate of 61%. We expect that assuming our institutional client base grows, our higher education institution revenue will also increase.

Other Revenue

Other revenue consists of two main components: a marketing incentive fee paid by MasterCard International Incorporated based on transaction volumes and new OneCard issuances and processing fees paid by our bank partner based on prevailing interest rates and the total amount of deposits held in our OneAccounts. Since 2008, fees paid by our bank partner have been relatively small due to low interest rates. As a result, fees may increase or decrease for future periods as prevailing interest rates vary.

Cost and Expenses

Employee compensation and related expenses represent our largest single expense. We allocate compensation and other related expenses, including stock-based compensation, to product development, sales and marketing and general and administrative expenses. While we expect the number of our employees to increase over time, we believe the economies of scale in our business model will allow us to grow our compensation and related expenses at a lower rate than revenue. We expect that since our products and services are technology enabled, as our business grows, the number of new employees needed to service an expanded clientele will decrease relative to the corresponding increase in revenue due to economies of scale.

Other costs and expenses include outsourced managed hosting, data processing, ATM-related expenses, professional services, office lease payments, travel and amortization and depreciation for hardware and software purchases.

 

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The following summarizes our cost of revenue and certain significant operating expenses:

Cost of Revenue

Cost of revenue consists primarily of data processing expenses, interchange expenses related to SmartPay and ATM transactions, uncollectible fees and write-offs and customer service expenses. These expenses are shared across the different revenue categories and we are not able to meaningfully allocate such costs between separate categories of revenue. Consequently, all costs and expenses applicable to our revenue are included in the cost of revenue category in our statements of operations. These expenses generally move in line with the number of active OneAccounts and transaction volumes for our banking and payment transactions services.

General and Administrative

General and administrative expenses include finance, legal, compliance, facility and administration costs, as well as components of operational costs such as ATM cash services and maintenance, data center costs and costs associated with our information technology. These costs include employee compensation and related expenses, as well as fees for professional services. Following this offering, we expect we will incur additional general and administrative expenses as a result of our obligations to comply with the ongoing obligations of a public company, including the SEC’s ongoing reporting obligations, director and officer liability insurance and other expenses. We also expect other factors affecting general and administrative expenses to increase going forward due to the expected enlargement of our work force and the general growth of our business.

Product Development

Product development expenses include costs associated with defining and specifying new features and ongoing enhancements for our proprietary technology platform and other aspects of our service offerings. Product development costs primarily relate to employee compensation.

Sales and Marketing

Sales and marketing expenses include costs of acquiring new institutional clients and educating their students about our services in order to improve the adoption and usage rates of our OneAccount and our other student-oriented products and services. The majority of our sales and marketing expenses are comprised of employee compensation. Each of our sales representatives earns: (i) a base salary; (ii) sales commissions, which are earned upon the signing of a contract with a higher education institutional client; and (iii) generally, certain trailing commissions, which are based on account performance. Having nearly doubled the number of our sales and marketing personnel with our acquisition of CASHNet, we expect that beginning in 2010, our sales and marketing expense will increase significantly as a result of increases in employee compensation allocated to this segment.

CASHNet Acquisition

In November of 2009, we acquired Informed Decision Corporation for $27.5 million, which we renamed Higher One Payments, Inc. and which does business as CASHNet. CASHNet is a leader in providing cashiering and payment solutions in higher education. This transaction nearly doubled the number of campuses with which we have relationships. It also broadened the scope of our services and deepened our relationships with our clients, as we now provide higher education institutions a comprehensive disbursement and payment solution. We funded this acquisition with available cash, an assumption of debt and borrowings from our existing credit line.

 

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In acquiring CASHNet, we purchased its payment transaction suite of products and services, such as ePayment, eBill, MyPaymentPlan, eMarket and Cashiering, which we did not previously offer. For the year ended December 31, 2009, we generated revenue and incurred expenses related to these products and services for 42 days from the date of the acquisition to year end. On a pro forma basis, however, these products and services accounted for substantially all of our payment transaction revenue and approximately half of higher education institution revenue in 2009.

In 2010, we expect that our payment transaction revenue, higher education institution revenue, cost of revenue and other costs and expenses will all increase to reflect a full year of revenue, costs and expenses related to CASHNet. We further expect that going forward, the majority of our payment transaction revenue and higher education institution revenue will be derived from our acquired payment transaction products and services. See “Unaudited Pro Forma Condensed Combined Financial Information.”

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of total revenue:

 

     Year Ended December 31,  
   2007     2008     2009  
   (in thousands)  

Account revenue

   $ 22,458      $ 37,570      $ 66,440   

Payment transaction revenue

            29        1,688   

Higher education institution revenue

     1,907        3,220        5,135   

Other revenue

     3,613        3,187        2,254   
                        

Total revenue

     27,978        44,006        75,517   

Cost of revenue

     11,140        16,302        24,440   
                        

Gross margin

     16,838        27,704        51,077   

General and administrative expense

     8,507        11,725        18,143   

Product development expense

     1,148        1,629        2,287   

Sales and marketing expense

     2,970        4,399        7,966   
                        

Income from operations

     4,213        9,951        22,681   

Interest and other expense, net

     860        412        558   

Interest and other income, net

     (291     (386     (21
                        

Income before income taxes

     3,644        9,925        22,144   

Income tax expense

     1,362        3,547        7,925   
                        

Net income

   $ 2,282      $ 6,378      $ 14,219   
                        

 

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     Year Ended December 31,  
       2007         2008         2009    
     (% of total revenue)  

Account revenue

   80.3   85.4   88.0

Payment transaction revenue

   0.0   0.1   2.2

Higher education institution revenue

   6.8   7.3   6.8

Other revenue

   12.9   7.2   3.0
                  

Total revenue

   100.0   100.0   100.0

Cost of revenue

   39.8   37.0   32.4
                  

Gross margin

   60.2   63.0   67.6

General and administrative expense

   30.4   26.6   24.0

Product development expense

   4.1   3.7   3.0

Sales and marketing expense

   10.6   10.0   10.5
                  

Income from operations

   15.1   22.7   30.1

Interest and other expense, net

   3.1   0.9   0.7

Interest and other income, net

   (1.0 )%    (0.9 )%    (0.0 )% 
                  

Income before income taxes

   13.0   22.7   29.4

Income tax expense

   4.9   8.1   10.5
                  

Net income

   8.1   14.6   18.9
                  

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Total Revenue

Total revenue increased 72%, or $31.5 million, to $75.5 million for the year ended December 31, 2009 from $44.0 million for the year ended December 31, 2008. The increase in total revenue was comprised of an increase of 76.8% in account revenue and an increase of 59.5% in higher education institution revenue, which were partially offset by a decrease of 29.3% in other revenue. Payment transaction revenue was $1.7 million for the year ended December 31, 2009, which was primarily generated by the inclusion of 42 days’ of CASHNet revenue.

Account revenue

Account revenue increased 76.8%, or $28.9 million, to $66.4 million for the year ended December 31, 2009 from $37.6 million for the year ended December 31, 2008. The increase in account revenue was primarily due to an increase of 81.2% in the number of OneAccounts compared to the previous year, which resulted in an increase in interchange fees that our bank partner remitted to us and relating to POS purchases made with our OneCards, an increase in ATM fees and an increase in NSF fees that our bank partner remitted to us.

Payment Transaction Revenue

Payment transaction revenue was $1.7 million for the year ended December 31, 2009, which was primarily generated by the inclusion of 42 days’ of revenue generated by our CASHNet payment transaction products from the consummation of the acquisition in November 2009 to year end. See “—CASHNet Acquisition.”

Higher Education Institution Revenue

Higher education institution revenue increased 59.5%, or $1.9 million, to $5.1 million for the year ended December 31, 2009 from $3.2 million for the year ended December 31, 2008. The increase in

 

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higher education institution revenue was primarily due to an increase in card and transaction fees related to our OneDisburse product due mainly to an increase in the number of higher education institutional clients using this product compared to the previous year. To a lesser extent, the increase in higher education institution revenue resulted from the inclusion of 42 days’ of revenue generated by the payment transaction products and services that we acquired when we purchased CASHNet in November 2009.

Other Revenue

Other revenue decreased 29.3%, or $0.9 million, to $2.3 million for the year ended December 31, 2009 from $3.2 million for the year ended December 31, 2008. The decrease in other revenue was primarily due to a decrease in the processing fees that our bank partner pays to us caused by a decline in prevailing interest rates during the year ended December 31, 2009. This decrease was partially offset by an increase in the marketing incentive fees that MasterCard paid to us.

Cost of Revenue

Cost of revenue increased 49.9%, or $8.1 million, to $24.4 million for the year ended December 31, 2009 from $16.3 million for the year ended December 31, 2008. This increase was comprised of an increase in data processing expenses, interchange expenses, uncollectible fees, write-offs and customer service expenses and card issuance expenses. The growth in these expenses was primarily due to an increase of 81.2% in the number of active OneAccounts, a related increase in transaction volume for our banking services and, to a lesser extent, the inclusion of 42 days’ of costs related to our recently acquired payment transaction products and services.

General and Administrative Expense

General and administrative expense increased 54.7%, or $6.4 million, to $18.1 million for the year ended December 31, 2009 from $11.7 million for the year ended December 31, 2008. The increase in general and administrative expense was primarily due to an increase of 28.8% in employee compensation and an increase of 210.7% in fees for professional services during the year ended December 31, 2009, which increased in part as a result of the inclusion of 42 days’ of expenses related to our recently acquired payment transaction products and services, as well as an increase of 178.5% in stock-based compensation.

Product Development Expense

Product development expense increased 40.4%, or $0.7 million, to $2.3 million for the year ended December 31, 2009 from $1.6 million for the year ended December 31, 2008. The increase in product development expense was primarily due to an increase of 40.4% in costs related to employee compensation allocated to product development expense during the year ended December 31, 2009.

Sales and Marketing Expense

Sales and marketing expense increased 81.1%, or $3.6 million, to $8.0 million for the year ended December 31, 2009 from $4.4 million for the year ended December 31, 2008. The increase in sales and marketing expense was primarily due to an increase of 40.7% in costs related to employee compensation allocated to sales and marketing expense and an increase of 92.4% in the non-cash expense related to the vesting of certain shares held by Kevin Jones during the year ended December 31, 2009.

 

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Net Income

Net income increased 123.0%, or $7.8 million, to $14.2 million for the year ended December 31, 2009 from $6.4 million for the year ended December 31, 2008. The increase in net income was primarily due to an increase of 76.8% in account revenue and an increase of 59.5% in higher education institution revenue during the year ended December 31, 2009. In addition, the increase in net income for the year was partially the result of the $1.7 million payment transaction revenue generated by our recently acquired payment transaction products and services. These increases were partially offset by an increase of 49.9% in costs of revenue, an increase of 54.7% in general and administrative expense, an increase of 40.4% in product development expense and an increase of 81.1% in sales and marketing expense and during the year ended December 31, 2009. The increase in net income was also partially offset by an increase in income tax expense of $4.4 million resulting from an increase in taxable income in 2009, an increase in interest and other expense, net of $0.1 million resulting from increased borrowings under our Credit Facility and a decrease in interest and other income of $0.4 resulting from a gain on capital lease buyouts from 2008 that did not recur in 2009.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Total Revenue

Total revenue increased 57.3%, or $16.0 million, to $44.0 million for the year ended December 31, 2008 from $28.0 million for the year ended December 31, 2007. The increase in total revenue was comprised of an increase of 67.3% in account revenue and an increase of 68.9% in higher education institution revenue, which were partially offset by a decrease of 11.8% in other revenue.

Account revenue

Account revenue increased 67.3%, or $15.1 million, to $37.6 million for the year ended December 31, 2008 from $22.5 million for the year ended December 31, 2007. The increase in account revenue was primarily due to an increase of 54.3% in the number of OneAccounts compared to the previous year, which resulted in an increase in interchange fees that our bank partner remitted to us, an increase in ATM fees and an increase in NSF fees that our bank partner remitted to us.

Payment Transaction Revenue

In the year ended December 31, 2008, we recorded a de minimus amount of payment transaction revenue related to fees generated by a pilot payment transaction product. We discontinued marketing this product in 2009, when we replaced it with CASHNet’s products and services. See “—CASHNet Acquisition.”

Higher Education Institution Revenue

Higher education institution revenue increased 68.9%, or $1.3 million, to $3.2 million for the year ended December 31, 2008 from $1.9 million for the year ended December 31, 2007. The increase in higher education institution revenue was primarily due to an increase in card and transaction fees related to our OneDisburse product due mainly to an increase in the number of higher education institutional clients using this product compared to the previous year.

Other Revenue

Other revenue decreased 11.8%, or $0.4 million, to $3.2 million for the year ended December 31, 2008 from $3.6 million for the year ended December 31, 2007. The decrease in other revenue was

 

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primarily due to a decrease in the processing fees that our bank partner paid to us caused by a decline in prevailing interest rates during the year ended December 31, 2009. This decrease was partially offset by an increase in the marketing incentive fees that MasterCard paid to us.

Cost of Revenue

Cost of revenue increased 46.3%, or $5.2 million, to $16.3 million for the year ended December 31, 2008 from $11.1 million for the year ended December 31, 2007. This increase was comprised of an increase in data processing expenses, interchange expenses, uncollectible fees and write-offs, customer service expenses and card fulfillment expenses. The growth in these expenses was primarily due to an increase of 54.3% in the number of OneAccounts and a related increase in transaction volume for our banking services during the year ended December 31, 2008.

General and Administrative Expense

General and administrative expense increased 37.8%, or $3.2 million, to $11.7 million for the year ended December 31, 2008 from $8.5 million for the year ended December 31, 2007. The increase in general and administrative expense was primarily due to an increase of 24.5% in employee compensation, an increase of 240.8% in stock-based compensation, offset by a decrease of 22.9% in fees for professional services during the year ended December 31, 2008.

Product Development Expense

Product development expense increased 41.9%, or $0.5 million, to $1.6 million for the year ended December 31, 2008 from $1.1 million for the year ended December 31, 2007. The increase in product development expense was primarily due to an increase of 41.9% in costs related to employee compensation allocated to product development expense during the year ended December 31, 2008.

Sales and Marketing Expense

Sales and marketing expense increased 48.1%, or $1.4 million, to $4.4 million for the year ended December 31, 2008 from $3.0 million for the year ended December 31, 2007. The increase in sales and marketing expense was primarily due to an increase of 6.0% in costs related to employee compensation allocated to sales and marketing expense. The increase was also due to $1.1 million in non-cash expense related to the vesting of certain shares held by Kevin Jones during the year ended December 31, 2008.

Net Income

Net income increased 179.5%, or $4.1 million, to $6.4 million for the year ended December 31, 2008 from $2.3 million for the year ended December 31, 2007. The increase in net income was primarily due to an increase of 67.3% in account revenue and an increase of 68.9% in higher education institution revenue during the year ended December 31, 2008, which were partially offset by an increase of 46.3% in costs of revenue, an increase of 41.9% in product development expense, an increase of 48.1% in sales and marketing expense and an increase of 37.8% in general and administrative expense during the year ended December 31, 2008. The increase in net income for the year ended December 31, 2008 was also partially due to a decrease in interest and other expense, net of $0.4 million from the buyout of capital leases and an increase in interest and other income, net of $0.1 million resulting from bank interest on operating cash reserves, partially offset by an increase in income tax expense of $2.2 million resulting from an increase in taxable income in 2008.

 

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Quarterly Results of Operations and Seasonality

Our revenue fluctuates as a result of seasonal factors related to the academic year. A large proportion of our revenue is either directly or indirectly dependent on academic financial aid received by students. Higher education institutional clients typically disburse financial aid refunds to students at the start of each academic semester. Distribution of financial aid disbursements through our OneDisburse service indirectly generates revenue through deposits of financial aid into OneAccounts, which generates account revenue, and directly generates revenue through our higher education institution clients’ use of the OneDisburse service, which generates higher education institution revenue.

While revenue fluctuates over the course of the year, our fixed expenses remain relatively constant, resulting in wide disparities in our adjusted net income and net income from quarter to quarter. Accordingly, in 2009, the second quarter accounted for the smallest proportion of our revenue but an equal proportion of our expenses, which resulted in only minor second quarter income. This is primarily because the majority of financial aid is disbursed at other times of the year and higher education institutions tend to enroll fewer new students in the second fiscal quarter. We expect that this trend will continue going forward.

The following tables set forth our unaudited quarterly results of operations for 2009. The information for each of these periods has been prepared on the same basis as the audited financial statements included elsewhere in this prospectus. This information includes all adjustments, which consist only of normal and recurring adjustments, management considers necessary for the fair presentation of such data. This data should be read in conjunction with the audited financial statements included elsewhere in this prospectus. The results of operations for historical periods are not necessarily indicative of results for any future period.

 

     2009 Quarter Ended (unaudited)
     Mar. 31,    June 30,    Sept. 30,    Dec. 31,    Total
     (in thousands)

Total revenue

   $ 17,235    $ 12,464    $ 20,503    $ 25,315    $ 75,517

Net income

     4,046      413      4,793      4,967      14,219

Adjusted EBITDA(1)

     8,106      2,997      9,076      10,337      30,516

Adjusted net income(2)

     4,831      1,551      5,529      6,180      18,091

 

     2009 Quarter Ended (unaudited)  
     Mar. 31,     June 30,     Sept. 30,     Dec. 31,  
     (% of annual amount)  

Total revenue

   22.8   16.5   27.2   33.5

Net income

   28.5   2.9   33.7   34.9

Adjusted EBITDA(1)

   26.6   9.8   29.7   33.9

Adjusted net income(2)

   26.7   8.6   30.6   34.2

 

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(1) The following table presents a reconciliation of adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated:

 

    2009 Quarter Ended (unaudited)  
    Mar. 31,   June 30,     Sept. 30,     Dec. 31,     Total  
    (in thousands)  

Net income

  $ 4,046   $ 413      $ 4,793      $ 4,967      $ 14,219   

Interest income

        (1     (1     (2     (4

Interest expense

    161     120        113        164        558   

Other income

                      (17     (17

Income tax expense

    2,267     252        2,595        2,811        7,925   

Depreciation and amortization

    570     684        633        1,082        2,969   
                                     

EBITDA

    7,044     1,468        8,133        9,005        25,650   

Stock-based customer acquisition expense

    619     1,050        227        489        2,385   

Stock-based compensation expense

    293     329        341        424        1,387   

Milestone bonus

    150     150        375        419        1,094   
                                     

Adjusted EBITDA

  $ 8,106   $ 2,997      $ 9,076      $ 10,337      $ 30,516   
                                     

See “Summary—Summary Consolidated Financial Data” for definition of adjusted EBITDA.

 

(2) The following table presents a reconciliation of adjusted net income to net income, the most comparable GAAP measure, for each of the periods indicated:

 

    2009 Quarter Ended (unaudited)  
    Mar. 31,     June 30,     Sept. 30,     Dec. 31,     Total  
    (in thousands)  

Net income

  $ 4,046      $ 413      $ 4,793      $ 4,967      $ 14,219   

Stock-based customer acquisition expense

    619        1,050        227        489        2,385   

Stock-based compensation expense—ISO

    112        140        152        206        610   

Stock-based compensation expense—NQO

    181        189        189        218        777   

Milestone bonus expense

    150        150        375        419        1,094   

Amortization of intangibles

    76        143        86        405        710   

Amortization of finance costs

    22        22        32        37        113   
                                       

Total pre-tax adjustments

    1,160        1,694        1,061        1,774        5,689   

Tax rate

    35.8     35.8     35.8     35.8     35.8

Tax adjustment

    375        556        325        561        1,817   
                                       

Adjusted net income

  $ 4,831      $ 1,551      $ 5,529      $ 6,180      $ 18,091   
                                       

See “Summary—Summary Consolidated Financial Data” for definition of adjusted net income.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity are cash flows from operations and borrowings under our Credit Facility. As of December 31, 2009, we had $3.3 million in cash and cash equivalents and $7.0 million available under our Credit Facility. Our primary liquidity requirements are for working capital, capital expenditures, product development expenses and general corporate needs. As of December 31, 2009, we had negative working capital of $37.6 million, which resulted primarily from the $18.0 million outstanding under our Credit Facility and the $10.0 million acquisition payable related to our post-closing obligations under the CASHNet stock purchase agreement dated November 19, 2009.

 

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We intend to use $              of the net proceeds we receive from this offering for the repayment of amounts outstanding under our Credit Facility, and $              million to satisfy our post-closing obligations under the CASHNet stock purchase agreement. We intend to use the remaining net proceeds we receive from this offering to further our strategic objectives and for general corporate purposes. See “Use of Proceeds.”

Senior Secured Revolving Credit Facility

Higher One, Inc. entered into a senior secured revolving credit facility dated as of August 26, 2008 that was subsequently amended as of July 15, 2009 and November 19, 2009. We refer to the credit facility, as amended, as the Credit Facility. Higher One, Inc. is the borrower under the Credit Facility and each of Higher One Holdings, Inc. and Higher One Machines, Inc. guaranteed Higher One, Inc.’s obligations thereunder. We refer to these guarantors, together with Higher One, Inc., as the Loan Obligors.

Higher One, Inc. has the option to increase the current $25 million amount available under the Credit Facility to up to $50 million. The Credit Facility is also secured by a perfected first priority security interest in all of the capital stock of Higher One, Inc. and Higher One Machines, Inc. and substantially all of each Loan Obligor’s tangible and intangible assets, other than intellectual property. Each of the Loan Obligors has also granted to the administrative agent under the Credit Facility a negative pledge of the intellectual property of Higher One, Inc. and Higher One Machine, Inc., including patents and trademarks that are pending and are acquired in the future.

As of December 31, 2009, Higher One, Inc. had $18.0 million outstanding under the Credit Facility. The loans drawn under the Credit Facility are payable in a single maturity on December 31, 2010.

Amounts outstanding under the Credit Facility accrue interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 1.75% and 3.75% per annum (depending on Higher One, Inc.’s funded debt to EBITDA ratio). Interest is payable on the last day of each interest period selected by Higher One, Inc. under the Credit Facility and, in any event, at least quarterly. The average effective interest rates on the loans drawn under the Credit Facility for the year ended December 31, 2009 was 2.4%.

In addition, Higher One, Inc. pays a commitment fee equal to 0.25% on the daily average undrawn portion of revolving commitments under the Credit Facility, which accrues and is payable quarterly in arrears. If the loans that are drawn and outstanding are equal to or less than the total revolving commitments, then the applicable commitment fee rate increases to 0.375%. Higher One, Inc. also pays certain agent fees.

The Credit Facility contains certain affirmative covenants including, among other things, covenants to furnish the lenders with financial statements and other financial information and to provide the lenders notice of material events and information regarding collateral. The Credit Facility also contains certain negative covenants that, among other things, restrict Higher One, Inc.’s ability, subject to certain exceptions, to incur additional indebtedness, grant liens on its assets, undergo fundamental changes, make investments, sell assets, make restricted payments, change the nature of its business and engage in transactions with its affiliates.

In addition, the Credit Facility contains certain financial covenants that require Higher One, Inc. to maintain certain liquidity levels, a funded debt to EBITDA ratio not to exceed 2.00 to 1.00, an interest coverage ratio of at least 3.50 to 1.00 and a debt service coverage ratio of at least 1.25 to 1.00.

 

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As of February 28, 2010, Higher One, Inc. was in compliance with all covenants under the amended Credit Facility.

Cash Flows

The following table presents information regarding our cash flows, cash and cash equivalents for the years ended December 31, 2007, 2008 and 2009:

 

     Year Ended December 31,  
     2007     2008     2009  
     (in thousands)  

Net cash provided by (used for)

      

Operating activities

   $ 4,368      $ 9,962      $ 20,656   

Investing activities

     (179     (3,340     (18,731

Financings activities

     (204     (14,889     (74

Increase (decrease) in cash and cash equivalents

     3,985        (8,267     1,851   

Cash and cash equivalents, end of period

   $ 9,755      $ 1,488      $ 3,339   

Operating Activities

Net cash provided by operating activities was $20.7 million for the year ended December 31, 2009 compared to $10.0 million for the year ended December 31, 2008. The $10.7 million increase from 2008 to 2009 was primarily comprised of an increase of $7.8 million in net income, an increase of $1.5 million in depreciation and amortization, a decrease of $1.6 million in income receivable, an increase of $1.1 million in stock-based customer acquisition expense and an increase of $0.9 in stock-based compensation, which were partially offset by a deferred income tax benefit of $0.8 million in 2009 compared to a deferred income tax expense of $1.8 million in 2008. The increase in depreciation and amortization was primarily attributable to increased tangible and intangible asset purchases and increased deferred implementation costs, the decrease in income receivable was attributable to an increase in our receipt of cash owed to us, the increase in stock-based customer acquisition expense was primarily attributable to increased vesting of certain shares acquired by Kevin Jones in connection with our acquisition of EduCard in 2008, and the increase in stock-based compensation was primarily attributable to an increase in the strike price of options and additional grants of options. The income tax benefit in 2009 was primarily the result of the increased vesting of certain shares acquired by Kevin Jones described above.

Net cash provided by operating activities was $10.0 million for the year ended December 31, 2008 compared to $4.4 million for the year ended December 31, 2007. The $5.6 million increase from 2007 to 2008 was primarily comprised of an increase of $4.1 million in net income, an increase of $1.6 million in accrued expenses and a stock-based customer acquisition expense of $1.1 million in 2008 compared to none in 2007, which were partially offset by an increase of $0.8 million in income receivable and an increase of $0.8 in deferred costs. The increase in accrued expenses was primarily attributable to increased data processing costs as a result of increased revenues and increased compensation costs. The stock-based customer acquisition expense in 2008 was related to the grant and vesting of certain shares acquired by Kevin Jones described above. The increase in income receivable was primarily attributable to an increase in the marketing incentive fees that MasterCard paid to us and the increase in deferred costs was primarily attributable to an increase in the number of higher education institutional clients compared to the previous year.

Investing Activities

Net cash used for investing activities was $18.7 million for the year ended December 31, 2009, $3.3 million for the year ended December 31, 2008 and $0.2 million for the year ended December 31, 2007. Net cash used for investing activities for 2009 primarily related to our acquisition of CASHNet in

 

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November 2009, as well as our purchase of fixed assets, including computers, software and ATM equipment. Net cash used for investing activities for 2008 primarily related to our acquisition of EduCard in June 2008, as well as our purchase of fixed assets, including computers, software and ATM equipment. We did not have any significant investing activities in 2007.

We expect that our capital expenditures for 2010 will be approximately $6.7 million, related primarily to computer and phone equipment, as well as ATM equipment. We believe that our cash flow from operations, together with our existing liquidity sources and the net proceeds from this offering, will be sufficient to fund our operations and anticipated capital expenditures over at least the next 24 months.

Financing Activities

Net cash used in financing activities was less than $0.1 million for the year ended December 31, 2009, $14.9 million for the year ended December 31, 2008 and $0.2 million for the year ended December 31, 2007. Net cash used in financing activities for 2009 primarily related to repayments under our Credit Facility, partially offset by proceeds from the issuance of debt and from notes payable relating to borrowings under this Credit Facility. Net cash used in financing activities for 2008 primarily related to the completion of our tender offer to purchase certain outstanding capital stock in August 2008, which was partially offset by the proceeds from our sale of preferred stock in August 2008 and borrowings under our Credit Facility. We did not have any significant financing activities in 2007.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

     Payments Due by Period
     Total    Less Than
1 Year
   1 to 3
Years
   3 to 5
Years
   5+
Years
     (in thousands)

Long-term debt obligations(1)(2)

   $ 18,000    $ 18,000    $ 0    $ 0    $ 0

Operating lease obligations(3)

     1,633      1,094      537      2      0
                                  

Total contractual obligations(4)

   $ 19,633    $ 19,094    $ 537    $ 2    $ 0
                                  

 

(1) As of December 31, 2009, we had $18.0 million outstanding under our Credit Facility. The loans drawn under the Credit Facility are payable in a single maturity on December 31, 2010. We intend to use $             million of the net proceeds of this offering for the repayment of the amounts outstanding under our Credit Facility.
(2) Excludes estimated interest payments on amounts outstanding under the Credit Facility, which accrue interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 1.75% and 3.75% per annum (depending on Higher One, Inc.’s funded debt to EBITDA ratio). The average effective interest rate on the loans drawn under the Credit Facility for the year ended December 31, 2009 was 2.4%.
(3) We lease certain property in New Haven, Connecticut and Alameda, California under non-cancelable operating leases. The lease in New Haven is currently due to expire on July 31, 2011 and the lease in Alameda is due to expire on April 30, 2010. The leases generally contain renewal provisions for varying periods of time.
(4) Excludes the use of $             million of the net proceeds of this offering that we intend to use to satisfy our post-closing obligations under the CASHNet stock purchase agreement dated November 19, 2009.

 

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Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. Our Credit Facility accrues interest at a rate equal to an adjusted Eurodollar rate plus a margin of between 1.75% and 3.75% per annum (depending on Higher One, Inc.’s funded debt to EBITDA ratio). The average effective interest rate on the loans drawn under the Credit Facility for the year ended December 31, 2009 was 2.4%. Based upon a sensitivity analysis at January 1, 2010, assuming average outstanding borrowings during the year ended December 31, 2010 of $10.0 million, a hypothetical 50 basis point increase in interest rates would result in an increase in interest expense of $0.05 million.

In addition, we receive processing fees paid from our bank partner, based on prevailing interest rates and the total deposits held in our OneAccounts. Since 2008, fees paid by our bank partner have been relatively small because of depressed interest rates. A change in interest rates would affect the amount of processing fees that we earn and therefore would have an effect on our revenue, cash flows and results of operations.

Critical Accounting Policies

Provision for Operational Losses

We have entered into an agreement with The Bancorp Bank to hold all deposit accounts opened by OneAccount holders. Although those deposit funds are held by The Bancorp Bank, we are liable to the bank for any uncollectible accountholder overdrafts and any other losses due to fraud or theft. We provide reserves for our estimated overdraft liability and our estimated uncollectible fees to The Bancorp Bank. The provision for these reserves is included within the costs of revenue on the consolidated financial statements included in this prospectus. Such reserve is based upon an analysis of outstanding overdrafts and historical repayment rates.

Goodwill and Intangible Assets

Goodwill represents costs in excess of the fair value of consideration transferred over the fair values assigned to the underlying net identifiable assets of acquired businesses. Annual impairment testing of goodwill is assessed in accordance with ASC 350, “Intangibles—Goodwill and Other,” or ASC 350, which compares carrying values of the reporting units to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. Accordingly, we test goodwill for impairment annually on October 31, or whenever events or changes in circumstances indicate that an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If it is determined that an impairment has occurred, we record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. During 2008 and 2009, we were not required to record any impairment on goodwill or indefinite-lived intangibles.

 

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Stock Based Compensation

We account for stock-based compensation expense in accordance with FASB ASC 718, “Compensation—Stock Compensation,” or ASC 718, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for stock options granted during the years ended December 31, 2007, 2008 and 2009:

 

     2007    2008    2009

Expected term(1)

   6.0 – 6.5 years    6.3 – 6.5 years    5.8 – 6.3 years

Expected volatility(2)

   28.6%    40.2%    50.7%

Risk-free rate(3)

   4.4% - 5.0%    2.4% - 3.4%    2.2% - 3.2%

Expected dividends(4)

   None    None    None
              

 

(1) Expected term is the period of time that the equity grants are expected to remain outstanding. We calculate the expected life of the options as prescribed under the provisions of ASC 718. We generally use the midpoint between the end of the vesting period and the contractual life of the grant to estimate option exercise timing.
(2) Expected volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We based our estimated volatility on the historical volatility of a peer group of publicly traded companies, which includes companies that are in the same industry or are competitors.
(3) Risk-free rate is the average U.S. Treasury rate at the time of grant having a term that most closely approximates the expected term of the option.
(4) We have never declared or paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

Restricted stock is a stock award that entitles the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock award is estimated using the intrinsic value method that is based on the fair market value price on the date of grant. Compensation expense for restricted stock awards is recognized ratably over the vesting period on a straight-line basis.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carry-forwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Income tax provision or benefit includes U.S. federal, and state and local income taxes and is based on pre-tax income or loss. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local taxes and our ability to use tax credits and net operating loss carry-forwards.

We follow the provisions of FASB ASC 740, “Income Taxes,” or ASC 740. ASC 740 clarifies the accounting for uncertainty in income taxes. It prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions

 

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that meet the more-likely-than-not recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters in income tax expense. All tax years are subject to examination. All of our unrecognized tax benefit liability would affect our effective tax rate if recognized. We do not expect our unrecognized tax benefit liability to change significantly over the next 12 months.

Business Combinations

We follow the provisions of FASB ASC 805, “Business Combinations,” or ASC 805, (Prior authoritative literature: SFAS No. 141R, Business Combinations), which requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, affect the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. ASC 805 is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update, or ASU, No. 2009-13 “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables and its performance within arrangements. The amendments also required providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating this new ASU.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating this new ASU.

 

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BUSINESS

Overview

We are a leading provider of technology and payment services to the higher education industry. We provide the most comprehensive suite of disbursement and payment solutions specifically designed for higher education institutions and their students. We also provide campus communities with convenient and student-oriented banking services, which include extensive user-friendly features.

The disbursement of financial aid and other refunds to students is a highly regulated, resource-consuming and recurrent obligation of higher education institutions. The student disbursement process remains mainly paper-based, costly and inefficient at most higher education institutions. These institutions are facing increasing pressure to improve administrative efficiency and the quality of service provided to students, to streamline regulatory compliance in respect of financial aid refunds, and to reduce expenses.

We believe our products provide significant benefits to both higher education institutions as well as their campus communities, including students. For our higher education institution customers, we offer our OneDisburse® Refund Management® disbursement service. Our disbursement service facilitates financial aid and other refunds to students, while simultaneously enhancing the ability of our higher education institutional clients to comply with the federal regulations applicable to financial aid transactions. By using our refund disbursement solutions, our clients save on the cost of handling disbursements, improve related business processes, increase the speed with which students receive their refunds and ensure compliance with applicable regulations.

For students and other campus community members, we offer our OneAccount service that includes an FDIC-insured deposit account provided by our bank partner, a OneCard, which is a debit MasterCard® ATM card, and other retail banking services. OneAccount is cost competitive and tailored to the campus communities that we serve, providing students with convenient and faster access to disbursement funds.

We also offer payment transaction services which are primarily software-as-a service solutions that facilitate electronic payment transactions allowing higher education institutions to receive easy and cost effective electronic payments from students, parents and others for essential education-related financial transactions. Features of our payment services include online bill presentment and online payment capabilities for tuition and other fees.

 

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We have experienced significant growth since our inception in 2000, which we believe demonstrates the benefits and convenience our products provide to our customers as well as the complementary nature of our higher education institution services and student services. As of December 31, 2009, 367 campuses serving approximately 2.3 million students had purchased the OneDisburse service and 255 campuses serving approximately 1.9 million students had contracted to use one or more of our payment products and services. As set forth in the charts below, from 2003 through 2009, our disbursement services and our student banking services have experienced consistent annual growth. Since our initial product launch in 2002 and as of December 31, 2009, we have completed disbursement transactions with a total cash value of approximately $10.8 billion. In addition, as of December 31, 2009, we had approximately 1 million OneAccounts, representing growth in the number of OneAccounts of 81% from December 31, 2008.

 

LOGO   

LOGO

Source: Higher One Holdings, Inc.

The majority of our revenue each year is generated through existing relationships with higher education institutions and their campus communities, which is primarily derived from:

 

  Ÿ  

Fees that we receive for providing banking and other services to OneAccount holders, including interchange fees that our bank partner charges and remits to us, ATM fees for out of network withdrawals, NSF fees that our bank partner charges and remits to us and other banking service fees charged to process transactions outside basic OneAccount usage;

 

  Ÿ  

convenience fees from processing tuition payments on behalf of students;

 

  Ÿ  

fees charged to our higher education institutional clients; and

 

  Ÿ  

service fees that we receive from our bank partner based on amounts deposited in OneAccounts and prevailing interest rates.

For the year ended December 31, 2009, our:

 

  Ÿ  

total revenue was approximately $75.5 million, representing three-year compounded annual growth of approximately 68%;

 

  Ÿ  

adjusted EBITDA was approximately $30.5 million, representing three-year compounded annual growth of approximately 192%;

 

  Ÿ  

adjusted net income was approximately $18.1 million, representing three-year compounded annual growth of approximately 74%; and

 

  Ÿ  

net income was approximately $14.2 million, representing three-year compounded annual growth of approximately 62%.

 

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See “Summary—Summary Consolidated Financial Data” for definitions of adjusted EBITDA and adjusted net income and reconciliations to net income.

In 2009, excluding revenue generated by our recent acquisition of CASHNet, we generated over 90% of our revenue from contracts signed in prior years

Our Industry

The higher education industry in the United States consists of colleges, universities and other higher education providers. With nearly seven thousand higher education institutions in the United States accepting new students each year and providing finance and payments functions that serve their campus communities, the higher education payments industry is both large and stable. As an industry innovator focused on the needs of higher education institutional clients, we believe we are well positioned to capitalize on several key industry trends and to increase our market share in this large and underserved industry.

Stable Enrollment at Higher Education Institutions

According to estimates by the United States Department of Education—National Center for Education Statistics, or the NCES, in the 2008-2009 school year, the U.S. higher education industry consisted of more than 6,500 institutions serving more than 18.6 million students. We believe the higher education industry is one of the most stable and least cyclical industries in the United States. According to the NCES, over 2.5 million new students enter U.S. higher education institutions each year and, as reflected in the chart set forth below, the total enrollment in U.S. higher education institutions is expected to increase to almost 19.7 million students by 2013.

LOGO

Source for total US student enrollment: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System, “Fall Enrollment Survey” (IPEDS-EF:93–99), and Spring 2001 through Spring 2008; Enrollment in Degree-Granting Institutions Model, 1973–2007; and First-Time Freshmen Model, 1975-2007. (Total US student enrollment figures prepared as of January 2009. 2006-2007 figures are actual and 2008-2013 figures are estimated projections.)

Source for enrollment at OneDisburse and payment suite clients: Higher One Holdings, Inc. (All enrollment at OneDisburse and payment suite client figures are actual.)

 

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Increasing Pressure on Institutions to Become More Efficient

We believe that most higher education institutions continue to use inefficient and more costly disbursement and payment systems. For example, we estimate that OneDisburse serves only 12% of students at higher education institutions, while our payment products serve only 10% of these students. As a result, we believe that a large portion of the remaining 88% and 90% of institutions, respectively, are potential clients, as these institutions face increasing pressure to reduce expenses, improve the quality of services provided to students and streamline regulatory compliance in their disbursement and payment systems.

Trend Toward Electronic Payments

We believe that higher education institutions will follow the general commercial and governmental trend away from traditional paper-based payment systems towards electronic-based disbursement and payment systems. Institutions and their students are increasingly attracted to the convenience, security and enhanced services associated with electronic payment systems that meet and comply with complex new regulations. We believe that students are also drawn to electronic and online payments for enhanced security and ease of use.

Investment Highlights

We believe that an investment in our common stock benefits from the following key factors:

Most Comprehensive Suite of Products and Services

We believe that none of our competitors can match our ability to provide solutions to higher education institutions’ financial services needs, including compliance monitoring, while simultaneously meeting the retail banking needs of students. We believe that our unique ability to provide a “one-stop shop” that provides higher education institutions with disbursement and payment solutions and their students with convenient and cost competitive banking solutions deepens our relationships with our current higher education institutional clients and enhances our attractiveness to other potential clients.

Diversified Client Base

Our higher education institutional client base is very diverse, spanning colleges, universities and other higher education institutions in 46 states, with no single campus responsible for more than 4% of our revenue in 2009. We believe our profile among higher education institutional clients enhances our efforts to attract new clients and our experience and stability provides an avenue for references and referrals. These benefits are significant due to the generally long sales cycle and the desire of higher education institutional clients to find a stable and experienced provider. We encourage both the public disclosure of our affiliation with a higher education institutional client, as well as discussion with potential clients, as we strongly believe in our products, services and the satisfaction of our institutional clients and their campus communities.

Focus on Customer Service and Satisfaction

We believe our multi-pronged approach to customer service, supported by our approximately 200 after-sales customer service employees, allows us to provide superior customer service and makes us an industry-leader in customer satisfaction. Our after-sales service for higher education institutional clients is focused on person-to-person assistance with our technology and software solutions. Our after-sales service for our student banking customers is designed to provide cost-effective technology-

 

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based customer service through a variety of media, including SMS text messaging, Internet and telephone. For example, our website provides a searchable database of frequently asked questions that we regularly update as more questions are answered by our trained customer service team. We believe that our over 97% retention rate since 2003 demonstrates the level of our client and customer satisfaction.

Predictable Revenue Streams

We believe we have a recurring and predictable revenue stream and can forecast near-term future revenues with a meaningful degree of reliability due to our stable client base. As depicted in the chart below, the majority of our revenue each year is generated through existing relationships with higher education institutions and their campus communities. For example, in 2009, excluding revenue generated by our recent acquisition of CASHNet, we generated over 90% of our revenue from contracts signed in prior years. This, coupled with our over 97% retention rate since 2003, provides a relatively stable and predictable revenue stream. This visibility allows us to appropriately manage our expenses and investments.

We believe the vast majority of our approximately 1 million OneAccount users are students who exhibit common spending habits and demonstrate similar patterns of financial activity. Our focus on higher education enables us to understand this demographic and its spending habits and patterns, which allows us to better forecast near-term future revenues from OneAccounts.

The following chart sets forth the proportion of our account and higher education institution yearly revenue streams generated from the contracts signed in each of the school years from 2005 to 2009.

LOGO

Source: Higher One Holdings, Inc.

 

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Scalable Business Model

Our scalable technology and infrastructure permits us to significantly expand our business in a cost-effective manner. Our products and services are based on a combination of our proprietary software applications, third-party technology and infrastructure solutions and business processes that can be used for multiple clients without significant cost implications. Moreover, our historical experience is that the relative expense associated with servicing additional higher education clients and student customers has decreased as our business has expanded. Our total revenue for the years ended December 31, 2007, 2008 and 2009 were approximately $28.0 million, $44.0 million and $75.5 million, respectively, while the ratio of our expenses to our total revenue for those years was approximately 84.9%, 77.4% and 70.0%, respectively.

Experienced Management Team With A Proven Track Record

Our senior management team, which includes two of our three founders, has been with us for an average of eight years and is primarily responsible for our company’s rapid growth. Their leadership, combined with their deep and specialized understanding of our industry, has been and continues to be essential components of our growth and success in providing our higher education institutional clients with efficient, technology-driven solutions. Dean Hatton, our Chief Executive Officer, joined us in 2002 and has over 25 years of experience primarily in financial services, both in large and small companies. Miles Lasater, our Chief Operations Officer, and Mark Volchek, our Chief Financial Officer, founded the company in 2000 after having worked together to establish the Yale Entrepreneurial Society. Casey McGuane, our Chief Service Officer, joined in 2000 and has extensive experience serving and strengthening our client relationships. Robert Reach, our Chief Sales Officer, joined in 2004 and has contributed greatly to our continued sales growth.

Our Strategy

We believe that there is a significant opportunity to continue to achieve significant future growth. We intend to continue to increase revenue and profitability by strengthening our position as a leading provider of technology and payment services to the higher education industry. Key elements of our growth strategy include:

Expand the Number of Contracted Higher Education Institutions

Since 2003, we have expanded the number of campuses we serve by 5,364% to over 600 and the number of students enrolled on client campuses served by one or more of our products by 2,128% to approximately 4.1 million. Although we have significantly expanded our higher education institutional client base, there remains a large majority of higher education institutions that are potential clients. We believe that we have only accessed 12% and 10% of the potential market for our disbursement products and payment products, respectively, and that a large proportion of the remaining potential clients still rely primarily on inefficient in-house disbursement and payment solutions and would benefit from our industry-leading suite of electronic products and services. We expect our dedicated sales force to leverage our deep experience in providing the higher education industry with cost-saving disbursement and payment services as we continue to add to our client base.

Increase OneAccount Usage

We are focused on increasing the number of OneAccount users at our higher education institutional clients, as well as encouraging OneAccount holders to increase their use of their accounts. Each time we contract with a new higher education institution or add a new campus of an existing client for OneDisburse, we add an additional group of students who are potential customers for our

 

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OneAccount and related services. We work closely with our higher education institutional clients for OneDisburse to introduce and reinforce the benefits of our OneAccount products and services to the institution’s students through an integrated marketing program. Our joint marketing programs generally highlight the more salient features of our OneAccounts, including faster refunds, no monthly fees, no minimum balances, access to “no fee” ATM machines on campus and other competitive features. As we build our relationship with existing clients that use OneDisburse and our presence on campuses matures, our OneAccount penetration rate among the client’s student population typically increases. For example, of the students at higher education institutions that became our OneDisburse clients in 2007, the average percentage of students that maintain OneAccounts increased from 37% in 2007 to 76% in 2009. We believe there is a significant opportunity to achieve revenue growth by increasing our penetration and usage rates from students at our existing OneDisburse clients. While we have achieved an increasing penetration rate, partially through our joint marketing efforts with our higher education institutional clients, we intend to expand and enhance our efforts in order to reach a greater proportion of the campus communities.

Cross-Sell Our Existing Products and Services

We intend to cross-sell our products and services though bundled packages and pricing. By building on our successful cross-selling experience, we intend to pursue the cross-selling opportunities presented by our recent acquisition of CASHNet in November 2009.

In acquiring CASHNet we nearly doubled our existing client base and obtained complementary products and services that we believe significantly helps our cross-selling efforts. At the time of the acquisition, only 4% of our combined clients were clients of both Higher One and CASHNet, creating an expansive cross-selling opportunity for us.

Enhance and Extend Our Products and Services

We intend to continue to anticipate and monitor customer and client needs and to respond by introducing new products and services and upgrading or modifying our existing offerings to take advantage of market opportunities. For example, we provide our higher education institutional clients with regular technology releases to update and enhance our proprietary software. For our student customers, we continue to increase the breadth of financial tools and individualized information available to them. We also expect to meet the changing demands of our market by developing and offering new products and services, such as our Payroll and Financial Intelligence products launched in recent years.

 

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The following table sets forth information relating to the new products that we introduced since 2002:

 

Product

   Year Initiated   

Product Description

CASHNet

Product Suite

   2009    Software-as-a-service solution which offers campuses the following products: ePayment, eBill, eMarket, MyPaymentPlan and Cashiering

Financial

Intelligence

   2009    Financial literacy education software for students

OnePay

   2007    Web-based solution for inbound payments

Payroll

   2006    Facilitates the registration for and distribution of direct deposit payments

EasyRefund

   2005    Non-ID, single-brand refund management service

Higher One

Support.com

   2004    Broad range of self-service features for university administrators

Send-Money

   2003    Allows individuals to send money to students as simply as sending an email

Campus Auto-

Load

   2002    Automatic replenishment of campus account

Pursue Strategic Partnerships and Opportunistic Acquisitions

We intend to selectively consider acquisitions of, and investments in, companies or joint ventures that offer complementary products and services that further develop our business or broaden the scope of our products and services into new areas or strengthen the products and services available to existing clients. We believe each acquisition expands our sales opportunities by allowing us to leverage the existing client relationships of the acquired company.

For example, our acquisition of EduCard in June 2008 and the associated Evisions partnership, had, as of December 31, 2009, resulted in new higher education institutional clients with total enrollments of over 200,000 students. Our November 2009 acquisition of CASHNet, has provided us with our suite of payment transaction products and services and nearly doubled our client base and sales force. By expanding our client base and our product offerings into an area complementary to our historical focus, we strengthened our competitive position and created expansive cross-selling opportunities.

Products and Services

We provide products and services to two distinct, but related target markets: higher education institutions and their students.

Products and Services for Higher Education Institutions

We provide our higher education institutional clients with an integrated suite of products and services. These include our OneDisburse service, our payment suite and other financial services.

OneDisburse

Our OneDisburse® Refund Management® product is a turnkey solution that provides higher education institutional clients with a comprehensive technology service for streamlining the student

 

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refund disbursement process. Following the payment of their tuition and other school-related expenses, many students receive residual financial aid disbursements to cover non-academic school expenses, such as living expenses and books. Students also receive disbursements, such as a refund following withdrawal from a course or other miscellaneous fees. Higher education institutions have typically processed these refund disbursements by preparing and distributing paper checks, which is both time consuming and costly for institutions and slow and inconvenient for students. After a higher education institution purchases the OneDisburse service, the institution sends the full amount of each student’s disbursement to us and we then forward the funds to the student in accordance with the student’s instructions. For students with OneAccounts, disbursements are generally made by electronic transfers to their OneAccounts. By partnering with us to provide refund disbursements and related processes, including the student/customer service function, our clients reduce their time and cost spent on handling disbursements, improve the related business processes and increase convenience for students. In addition to saving time and costs for our clients, OneDisburse is designed to ensure that the refund disbursement process is fully compliant with all applicable federal regulations, thereby providing our clients compliance monitoring services, which eases their administrative and regulatory burden. OneDisburse also has a number of features that benefit students receiving refunds, including convenient and fast processing of refunds and notifications via email or text message of incoming refund disbursements. As of December 31, 2009, 367 campuses serving approximately 2.3 million students had contracted to use the OneDisburse service.

Payment Suite

Our payment suite includes the following software-as-a-service products and services, which our higher education institutional clients may purchase separately or together as a bundle. As of December 31, 2009, 255 campuses serving approximately 1.9 million students had contracted to use one or more products and services in our payment suite.

ePayment™.    Our ePayment product enables higher education institutions to securely accept online payments for tuition, charges and fees from students via credit card, pinless debit or without charge via ACH. Our ePayment product also allows students to set up and maintain recurring payments and authorize other users such as parents to pay student related charges on their behalf. SmartPay, a feature of ePayment, enables higher education institutions to reduce the cost of accepting credit and debit cards by passing the convenience fee to the payers.

eBill™.    Our eBill product enables higher education institutions to automate payer billing and processing functions performed on campus and to extend payment services. This product allows the student or authorized payer to view the bill online and enables them to make payments online. By automating the billing process and facilitating electronic payments, higher education institutions can reduce administrative and labor costs, deliver bills quickly and securely and increase student and authorized payer convenience. eBill also expedites the processing, authorization and receipt of student payments.

MyPaymentPlan™.    Our MyPaymentPlan product enables higher education institutions to personalize students’ payment plans, in order to better meet the individual needs of each student. In particular, MyPaymentPlan offers campus administrators the ability to tailor payment plan rules and fees; access the status and history of each student’s account; and calculate the due date and payment schedule for each student.

eMarket™.    Our eMarket product enables higher education institutions to provide their academic, athletic and other departments with Internet ecommerce storefronts that can be used for, among other things, taking alumni donations, selling items such as event tickets, t-shirts and other

 

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merchandise, and accepting payments of event and conference registration fees. Higher education institutions can also use eMarket as an administrative portal to maintain centralized control of policy setting and reporting while allowing individual departments and entities autonomy to manage their operations. This centralized approach enables the institution to update policies related to campus commerce immediately and uniformly throughout all departmental campus storefronts.

Cashiering™.    Our Cashiering enables higher education institutions to operate and manage their cashiering functions, back office payments and campus-wide departmental deposits. In particular, Cashiering allows: institutions to process walk-in and mail payments at any cashier’s office on campus; departments to allocate deposits to specific general ledger accounts in a paperless environment; and multiple locations to receive any information that is downloaded into the CASHNet database.

Other Products and Services

 

  Ÿ  

OneDisburse ID.    We offer our higher education institutional clients the option to combine our debit card with the institution’s ID cards. If an institution elects this option, we provide its students with our OneCard, which is a debit MasterCard ATM card and also serves as their official campus identification.

 

  Ÿ  

OneDisburse Payroll.    Our OneDisburse Payroll product can quickly and efficiently distribute payroll and other employee-related payments through the OneDisburse platform.

 

  Ÿ  

Financial Intelligence.    In 2009, we launched a beta service to deliver financial literacy to the students at higher education institutions that can be purchased by the institution and offered directly to students through their existing Higher One co-branded website. This product offers students an online class that uses game based learning to help teach financial literacy.

Products and Services for Students – The OneAccount

Through our bank partner, our OneAccount product provides students, as well as faculty, staff and alumni, with an FDIC-insured online checking account with no monthly fee and no minimum balance. We also provide OneAccount holders with a OneCard, which is a debit MasterCard ATM card. Students can use their OneCard instead of cash or writing checks to make purchases wherever MasterCard is accepted at millions of locations worldwide or online. Many students also use their OneCard to pay bills automatically, send money instantly to other OneAccount holders and access over 400 Higher One ATMs located on or near campuses, with no fee to OneCard holders.

The OneAccount includes features designed to provide students with powerful, convenient, user-friendly tools to manage their finances, such as free text to balance, mobile low balance alerts and an enhanced statement page. Other customized features of the OneAccount include: “Campus Auto-Load,” which allows students to set up automatic funds transfers to campus flexible spending accounts, and the “Request Money” and “Send Money” features, which allow students to request money from parents and provides parents with a mechanism to make person-to-person payments into students’ OneAccounts, respectively. As of December 31, 2009, there were approximately 1 million OneAccounts.

 

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Sales and Marketing

Our sales and marketing efforts separately target our two key markets: higher education institutions and their students.

Higher Education Institutions

Our dedicated and experienced sales team actively markets our products and services to higher education institutions in the United States. This team identifies potential new clients through a variety of channels, including higher education regional and national tradeshows, existing client showcase events and through word-of-mouth referrals. The sales process typically includes an extended solicitation period, which can be lengthy, and that usually includes phone conversations, in-person presentations and formal proposals to various levels of administrators. Historically, our primary points of contact have been an institution’s chief financial officer and bursar, however, following our acquisitions of EduCard and CASHNet, our marketing team has also started contacting chief technology officers.

An important part of our sales effort is educating our potential clients about the benefits of our products and services for both the higher education institution and its students. Institutions generally are attracted to the idea of partnering with us to provide their payment functions because of the resulting operating efficiencies, compliance monitoring and the potential benefits to students, such as receiving financial aid disbursements and paying bills more quickly and conveniently.

Students

Once we enter into a contract with a higher education institution, we begin focusing our marketing effort on the institution’s students. Our consumer-marketing department conducts student-directed marketing efforts with a primary goal of increasing awareness and usage of our services, including both our payment products and our OneAccount.

We work closely with our higher education institutional clients to communicate the benefits of our products and services through school-branded communications and literature in an effort to increase both the number of new OneAccounts and usage of existing OneAccounts. Typically, we will send information to parents and incoming students soon after their admission applications are accepted by the school and during student orientation. We generally contact returning students before the beginning of a new semester and place signs in strategic campus locations such as bookstores, student centers, dining halls, athletic facilities and cash dispensers to increase awareness of our products and services. Before we introduce our OneDisburse service to a new higher education institutional client, we frequently implement a word of mouth program through which selected students volunteer to use our service and provide word of mouth marketing and education to other students on campus. In an effort to strengthen our relationships with students, we often sponsor and support on-campus events and create a co-branded website with the higher education institutions. Our higher education institutional clients provide us with student email addresses that we commonly use to communicate with students about our products and services. Many times, we also use these email addresses, as well as on campus orientation events, to distribute our “Money 101” lessons, which provide tips and other information to improve students’ financial literacy, such as explaining how a checking account works, how to protect against security breaches and how to avoid excessive fees.

 

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Customer and Client Service

We are dedicated to addressing the needs of both our higher education institutional clients and student customers. We believe that our multi-pronged approach to providing cost-effective customer service helps make us an industry-leader in customer satisfaction.

Higher Education Institutions

We believe we enhance our sales and marketing efforts by providing reliable after-sale service. Our dedicated client-service employees are focused on servicing our higher education institutional clients.

We provide higher education institutional clients with a variety of service touch points, such as a dedicated relationship manager, OneSupport, our client support for managers and administrative staff at our higher education institutions, and the Higher One User Group, or HUG, our regularly held client conference. Our dedicated relationship managers are responsible for ensuring we maintain a strong relationship with each of our institutional clients and for assisting, supporting and providing updates on the quality and use of our services. OneSupport is designed to address a range of client issues from client specific technical questions to client service matters that require management’s attention. During our HUG conferences, clients can meet in person with our management and staff to learn about new features and products, updates to current offerings and build long lasting personal relationships.

Students

As of February 28, 2010, we had approximately 200 after-sales customer service representatives to assist students and others in the campus community that use our products and services. Our website provides a searchable database of frequently asked questions that we regularly update as more questions are answered by our customer service team. This database helps us assist our self-service oriented customers. We also provide students with the ability to contact us via telephone, email and text message.

We systematically evaluate our performance through our analysis based on our internal service levels established for customer service inquiries and response and issue resolution times. We also record and analyze refund delivery cycles and seasonal variances to help identify and adapt to particularly high volume periods by, among other things, increasing ATM cash holdings for peak refund periods and increasing customer service staff during seasonally busy periods, which is typically the beginning of each semester.

Key Relationships with Third Parties

We maintain relationships with a number of third parties that provide key services for us. By partnering with third-party providers, we are able to streamline our own operations and infrastructure and provide a high level of specialized services. Our primary third-party provider relationships are with the following entities:

The Bancorp Bank

The Bancorp Bank provides FDIC-insured depository services for all of our OneAccounts, as well as other banking functions such as supplying cash for our ATM machines. Under the terms of our agreement with The Bancorp Bank, we maintain responsibility for the technology-related aspects of the OneAccounts.

 

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The Bancorp Bank is a publicly traded, Delaware-chartered, FDIC-insured depository institution. We began our relationship with The Bancorp Bank in May 2008 and our current agreement is scheduled to expire in May 2013. It will thereafter automatically renew on an annual basis unless either party cancels. We have a right, subject to a notice period, to terminate this agreement. Upon termination of the agreement, The Bancorp Bank is obligated to transfer the OneAccount deposits to another institution that we designate. We do not pay The Bancorp Bank a fee for its services; rather its sole compensation is to retain the investment returns earned on OneAccount deposits. The Bancorp Bank pays us a monthly processing fee based on amounts deposited in OneAccounts and prevailing interest rates.

The market for FDIC-insured retail banking services is very competitive and we continue to evaluate other bank partnership options. While we are satisfied with our current bank partnership, we believe other options would exist if we changed partners. The Bancorp Bank is our third banking partner since our inception and, in the past, when we have changed banking partners, we have done so in a limited amount of time and with no material disruption or inconvenience to any of our customers. While we have evaluated the relative costs and benefits of establishing or acquiring an institution capable of offering FDIC-insured retail banking services, we have decided to operate our banking activity through a bank partnership at this time for strategic and operational purposes.

Fiserv Solutions, Inc.

Fiserv provides back-end account and transaction data processing for OneAccounts and OneCards, including: core processing, ACH processing, issuance authorization and settlement, ATM driving and related services. We began our relationship with Fiserv in November 2001 and our current agreement is scheduled to expire in June 2014. Thereafter, unless either party cancels, our agreement will automatically renew on an annual basis. We pay Fiserv a monthly fee for services rendered and related software licenses.

MasterCard International Incorporated

MasterCard provides the payment network for our OneCard MasterCard debit and ATM card and certain other transactions, including for SmartPay. We have an exclusive relationship with MasterCard through 2013 for the issuance and marketing of debit cards. As a registered member service provider with MasterCard, we arrange for the marketing of both embossed and unadorned MasterCard debit cards. Fiserv Solutions, Inc. is a principal debit licensee of MasterCard and provides certain processing, implementing and support services to facilitate our OneCard program. We receive various incentives, both directly from MasterCard and indirectly through Fiserv, for achieving growth targets in the issuance and promotion of our cards.

Comerica Incorporated and Global Payments Inc.

Comerica and Global Payments provide transaction processing and banking services for payment processing related to the SmartPay feature of our ePayment service. The primary function of Global Payments is to route credit card authorization requests and to settle credit card transactions. Comerica processes the funds for SmartPay before they are transferred to our higher education institutional clients.

Terremark North America, Inc. and Neospire, Inc.

Terremark (formerly NAP of the Americas, Inc.) and Neospire provide web and application hosting services in secure data centers. These vendors provide various managed services including security, network, cooling, power, hardware and other services to host our proprietary applications.

 

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Both vendors have been certified as compliant with Payment Card Industry’s, or PCI, standards and have business continuity plans. Under our standing agreement, we occasionally purchase computer hardware and software from Terremark and Neospire. We also compensate Terremark and Neospire on a monthly basis for services rendered.

Technology

We have invested in establishing a secure technology platform to provide us with a flexible and scalable infrastructure. Our technology strategy is to focus our internal resources on proprietary applications while leveraging third party partnerships or purchases for more routine applications. For example, the OneDisburse and OneAccount platforms include major components of internally developed software, while we partner with third parties to provide banking core processing, transaction processing and web hosting.

The key modules of our technology platform include:

HigherOneAccount.com

Our software engineering team has developed and maintains this web application, which allows students and parents to manage their OneAccount. It offers robust, self-service online banking for our OneAccount accountholders including: viewing statements, paying bills, making electronic deposits, making electronic transfers and filing service requests. It also integrates institution-specific features, including management of payroll, financial aid refunds and automatic replenishment of campus accounts through Campus Auto-Load. This website also allows attractive opportunities for co-branding with our higher education institutional clients.

CashNet.com

This web application is used to administer and initiate transactions in our payment suite of products. Higher education institution administrators can change certain confirmation settings and run reports, while students and parents can perform certain functions, such as viewing electronic bills, making payments and enrolling in payment plans.

HigherOneSupport.com

We maintain this administrative website for use by our higher education institutional clients and our internal staff. It offers institutions useful functions, including real-time reports, research on cards and students, access control for administrators to the website and an audit trail of all cash movement. Our internal staff performs customer service, transaction flow monitoring, access control for employees and site administration for this website.

HigherLink

HigherLink is our batch file processing engine for integrating our technology with the systems of our higher education institutional clients and other external parties. It handles import and processing of cardholder demographic data, photos and disbursement files, as well as export of card status files and other integration files.

Technology Audits

Our development team, consisting of both in-house and third party contractor team members, develops and tests our proprietary software applications, including our regular software releases. Since

 

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2006, we have conducted technology audits that are designed to identify weaknesses in our information technology infrastructure and to provide recommendations for how to improve it. We incorporate the audit findings into our strategic planning process.

Our payment suite was certified as PCI-compliant in January 2010 by Trustwave. We are discontinuing a legacy licensed software product in use by less than four clients rather than making continued security investments. Each of our critical systems, other than our customer service call center, has internal redundancy functions and often includes secondary sites. While our customer service representatives are geographically dispersed, the customer service related telephone system housed in our New Haven office must be functioning to keep customer service phone lines open. In order to reduce the risk of our customer service representatives losing the ability to take live inbound calls, we have begun a project to create a secondary site for our telephone system.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other agreements and technical measures to protect our technology and intellectual property rights, including our proprietary software.

We have three registered patents and several patent applications in the United States relating to our products and services. In addition, we use a variety of unregistered trademarks and have seven registered trademarks in the United States: Higher One®, OneDisburse®, Refund Management®, CASHNet®, CASHNet (service mark)®, CASHNet... any payment, anytime, anywhere® and CASHNet Business Office®. Our domain names include “HigherOne.com,” “HigherOneSupport.com,” “HigherOneAccount.com” and “CASHNet.com” and our proprietary software includes both internal and customer facing applications. See “—Technology”. Finally, we also license certain intellectual property from third parties.

Although our business is not dependent on any single item of our intellectual property portfolio, we believe that our intellectual property provides a competitive advantage, and from time to time we have taken steps to enforce our intellectual property rights. See “—Legal Proceedings.”

Competition

We do not believe there is a competitor that provides a suite of products and services to the higher education industry that is as comprehensive, integrated and tailored as ours. However, the market for payment services in the higher education industry is competitive. Other companies, including SLM Corporation (Sallie Mae®), Nelnet, Inc. and TouchNet Information Systems, Inc., provide payment software, products and services that are competitive to those that we offer. For student banking and debit card services, we compete with banks active in the higher education industry, including U.S. Bancorp and Wells Fargo & Company.

Many of our competitors have substantially greater financial and other resources than we have, may in the future offer a wider range of products and services and may use advertising and marketing strategies that achieve broader brand recognition. See “Risk Factors—Risks Related to Our Business—Our operating results may suffer because of substantial and increasing competition in the industries in which we do business.”

 

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Government Regulation

As a payments processor to higher education institutions that takes payment instructions from institutions and their constituents, including students and employees, and gives them to our bank partner, we are directly or indirectly subject to a variety of federal and state laws and regulations. Because we focus on the higher education industry unlike many of our competitors, we regard our ability to maintain the highest standards of regulatory compliance as an important competitive advantage. We believe that our focus on the higher education industry gives us a superior ability to anticipate and adapt to regulatory change. We have developed and intend to continue to develop innovative solutions to regulatory compliance issues that are specifically tailored to our higher education institutional clients and their students. We believe that our focus on the higher education industry allows us to adapt quickly to regulatory change and adopt more efficient solutions than many of our competitors who focus on multiple industries.

Our contracts with most of our higher education institutional clients and our bank partner require us to comply with applicable laws and regulations, including, where applicable, regulations promulgated by the Department of Education regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV; FERPA; the Electronic Fund Transfer Act and Regulation E promulgated thereunder, or Regulation E; the USA PATRIOT Act and related anti-money laundering requirements; and certain federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of GLBA.

Higher Education Regulations

Because of the services we provide to some institutions with regard to the handling of Title IV funds, the Department of Education may deem us to be a “third-party servicer” under the Title IV regulations. Those regulations require a third-party servicer annually to submit a compliance audit conducted by outside independent auditors that covers the servicer’s Title IV activities. Accordingly, each year we submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the Department of Education, which includes a report by an independent audit firm. We also provide this audit report to clients upon request to help them fulfill their compliance audit obligations as Title IV participating institutions.

If we were deemed to be a third-party servicer, certain other Title IV regulations would apply to our business. These include, for example, regulations making a third-party servicer jointly and severally liable with its client institution for any liability to the Department of Education arising out of the servicer’s violation of Title IV or its implementing regulations, which could subject us to material fines related to acts or omissions of entities beyond our control. The Department of Education is also empowered to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil penalties on the violating servicer.

Our higher education institutional clients are subject to FERPA, which prohibits educational institutions that receive any federal funding from disclosing certain personally identifiable information of any student to third parties without the student’s consent, subject to certain exceptions. Our higher education institutional clients disclose to us certain information concerning their students, including contact information, student identification numbers and the amount of students’ credit balances. We believe that our higher education institutional clients may disclose this information to us pursuant to one or more exceptions to FERPA disclosure prohibition.

Additionally, as we are indirectly subject to FERPA, we may not permit the transfer of any personally identifiable information to another party other than in a manner in which an educational institution may disclose it. While we believe that we have adequate policies and procedures in place to

 

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safeguard against the risk of disclosure of this information to third parties, a breach of this prohibition could result in a five-year suspension of our access to the related client’s records. We may also be subject to similar state laws and regulations that restrict higher education institutions from disclosing certain personally identifiable information of students. For example, an Illinois law passed in 2009 prohibits certain public higher education institutions in Illinois from providing personally identifiable information of students to businesses that issue credit or debit cards.

Banking Regulations

The Bancorp Bank is an insured depository institution, and funds held at our bank partner are insured by the FDIC up to applicable limits. As an insured depository institution, our bank partner is subject to comprehensive government regulation and, in the course of making its services available to our customers, we are required to assist the bank in complying with certain of its regulatory obligations. In particular, the anti-money laundering provisions of the USA PATRIOT Act require that customer identifying information be obtained and verified whenever a bank account is established. For example, because we facilitate the opening of deposit accounts at The Bancorp Bank on behalf of our customers, we assist the bank in collecting the basic customer identification information that is necessary to open an account. In addition, both we and the bank are subject to the laws and regulations enforced by the Office of Foreign Assets Control, which prohibit U.S. persons from engaging in transactions with certain prohibited persons. As a service provider to an insured depository institution, we are required under federal law to agree to submit to examination by our bank partner’s primary federal regulator, which is currently the FDIC. We also are subject to audit by our bank partner to ensure that we comply with our obligations to it appropriately. Failure to comply with our responsibilities properly could negatively affect our operations. Our bank partner is required under its agreement with us to, and we rely on our bank partner’s ability to, comply with state and federal banking regulations.

The Bancorp Bank provides demand deposit services for OneAccounts through a private label relationship. We provide processing services for these OneAccounts for The Bancorp Bank. These services are subject to, among other things, the requirements of the Electronic Fund Transfer Act and the Federal Reserve Board’s Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs, debit cards and other electronic banking services. Regulation E, among other things, requires initial disclosures of the terms and conditions of electronic fund transfers, dissemination of periodic statements to consumers for each monthly cycle in which an electronic fund transfer has occurred and prompt investigation and resolution of reported errors in electronic funds transfers. Regulation E also provides for limits on customer liability for transactions made with lost or stolen debit cards based upon the timeliness of the customer’s notification of the loss or theft. In conjunction with The Bancorp Bank, we promptly investigate and seek to resolve any reported errors related to the electronic banking services provided to our customers.

Regulation of the financial services industry could undergo substantial changes in the near future. Legislation has been passed in the U.S. House of Representatives, or the House Bill, and the U.S. Senate is expected to consider its version of the financial reform legislation, or the Senate Bill, shortly. Such legislation would further increase regulation and oversight of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. For example, under the House Bill, a Consumer Financial Protection Agency would be established to regulate any person engaged in a “financial activity” in connection with a consumer financial product or service, including those that process financial services products and services. Although it is unclear at this time whether the Senate Bill would provide for such an agency, it is expected that the Senate Bill would include some consumer protection measures. Federal and state regulatory agencies also propose and adopt changes to their regulations or change the manner in which existing regulations are applied.

 

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In addition, in 2009, the U.S. House of Representatives introduced a bill seeking to regulate interchange fees by allowing merchants to collectively seek to lower their interchange costs by exempting such action from the U.S. antitrust laws. Individual state legislatures are also reviewing interchange fees, and legislators in a number of states have proposed bills that purport to limit interchange fees or merchant discount rates or to prohibit their application to portions of a transaction.

The Federal Reserve Board recently amended Regulation E to limit the ability of financial institutions, effective July 1, 2010, to assess an overdraft fee for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to the institution’s payment of overdrafts for these services. In the absence of such a consent, a financial institution may not assess an overdraft fee on a consumer for an ATM or one-time debit card transaction.

Federal and state regulatory agencies also frequently propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, although enactment of the proposed legislation would affect how we and our bank partner operate and could significantly increase costs, impede the efficiency of internal business processes and limit our ability to pursue business opportunities in an efficient manner. See “Risk Factors—Risks Related to our Business” and “Risk Factors—Legal and Regulatory Risks.”

Privacy and Data Regulation

We are subject to laws and regulations relating to the collection, use, retention, security and transfer of personally identifiable information and data regarding our customers and their financial information. In addition, we are bound by our own privacy policies and practices concerning the collection, use and disclosure of user data, which are posted on certain of our websites.

In conjunction with the disbursement, payroll and tuition payment services we make available through our bank partner, it is necessary to collect certain information from our customers (such as bank account and routing numbers) to transmit to the bank. The bank uses this information to execute the funds transfers requested by our customers. These funds transfers are accomplished primarily by means of ACH networks and other wire transfer systems, such as FedWire. To the extent the data required by these electronic funds networks change, the information that we will be required to request from our clients may also change.

We are subject, either directly or by virtue of our contractual relationship with our bank partner, to the privacy and security standards of the GLBA privacy regulations, as well as certain state data protection laws and regulations. The GLBA privacy regulations require that we develop, implement and maintain a written comprehensive information security program prescribing safeguards that are appropriate to our size and complexity, the nature and scope of our activities and the sensitivity of any personally identifiable information we access for processing purposes or otherwise maintain. As a service provider of The Bancorp Bank, we also are limited in our use and disclosure of the personal information we receive from the bank, which we may use and disclose only for the purposes for which it was provided to us, and consistent with the bank’s own data privacy and security obligations. We also are subject to the standards set forth in guidance on data security issued by the Federal Financial Institution Examination Council, as well as the data security standards imposed by the card associations, including Visa, Inc., and MasterCard International. In addition, we are subject to similar data security breach laws enacted by a number of states. Several other states are considering similar legislation.

New legislation and regulations in this area have been proposed, both at the federal and state level. Such measures, including pending Federal legislation, would potentially impose additional

 

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obligations on us, including requiring that we provide notifications to consumers and government authorities in the event of a data breach or unauthorized access or disclosure, beyond what state law already requires. The interpretation of pending legislation and regulations, as well as some of the existing laws and regulations, is evolving and, therefore, these laws and regulations may be applied inconsistently. Under some interpretations, it is possible that our current data protection policies and practices may be deemed inconsistent with legal requirements, and breaches in the security of our technology systems and infrastructure could result in a violation of these laws and regulations.

Compliance

We monitor our compliance through a robust internal audit program. Our full-time internal auditor works with a third-party internal audit firm to conduct annual reviews to ensure compliance with the regulatory requirements described above. The costs of these audits and the costs of complying with the applicable regulatory requirements are significant. Increased regulatory requirements on our products and services, such as in connection with the matters described above, could materially increase our costs or reduce revenue.

Regulatory Inquiry

Because our technology services are provided in connection with the financial products of our bank partner, our activities are occasionally reviewed by regulatory agencies to ensure that we do not impermissibly engage in activities that require licensing at the state or federal level. In the ordinary course of business, we receive letters and inquiries concerning the nature of our business as it applies to state “money transmitter” licensing and regulations from different state regulatory agencies including but not limited to the State of Texas Department of Banking, the State of Washington Department of Financial Institutions and the State of Oregon Department of Consumer and Business Services. To date, we have cooperated with such inquiries by explaining the nature of our business, which, to our knowledge, has satisfied the inquiring authorities. In 2007, the New York Attorney General launched an investigation into practices in the higher education industry involving certain of our higher education institutional clients. Pursuant to a subpoena, we have provided certain information about our clients’ and our business practices to the New York Attorney General. We most recently submitted information in October 2009. We cannot predict whether we will become subject to any formal investigation or other action by the New York Attorney General or any other state agencies.

Employees

As of February 28, 2010, we had approximately 380 employees. In addition, during periods of peak activity, we add temporary staff to supplement our customer service department. None of our employees is a member of any labor union or subject to any collective bargaining agreement and we have never experienced any business interruption as a result of any labor dispute.

Properties

We do not own any real property. Our corporate headquarters is located in New Haven, Connecticut, where we lease approximately 51,150 square feet of general office space pursuant to a lease which is currently due to expire on July 31, 2011.

We also have operations in Alameda, California, where we lease approximately 8,439 square feet of general office space pursuant to a lease which is currently due to expire on April 30, 2010. We have an option to extend this lease for an additional five years.

 

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We believe that our facilities are generally adequate for our current use. We anticipate that we will require additional space in the future and that this additional space will be available as needed.

History and Operating Structure

Higher One, Inc. was founded in 2000 in New Haven, Connecticut by Mark Volchek, Miles Lasater and Sean Glass. Higher One, Inc. is currently our principal operating subsidiary, which directly or indirectly runs all of our businesses. In June 2008, we acquired EduCard, LLC, which provided prepaid debit card processing and other payment solutions, and entered into a related integration agreement with EduCard’s parent company, Evisions, Inc., to integrate a software application. In July 2008, Higher One, Inc. formed Higher One Holdings, Inc., a Delaware corporation, which is now the holding company for all of our operations. In November 2009, we acquired Informed Decisions Corporation, which we renamed Higher One Payments, Inc., a California corporation. Higher One Payments, Inc. does business as CASHNet and provides payment services to higher education institutions. Higher One, Inc. owns Higher One Payments, Inc. as well as Higher One Machines, Inc., a Delaware corporation, which operates our ATMs and provides customer service through a team of home-based agents.

Legal Proceedings

We and our subsidiaries are involved in legal proceedings concerning matters arising in the ordinary course of our business, including the matter described below. Although the outcome of such proceedings, including the matter described below, cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations.

In February 2009, we filed a complaint against TouchNet Information Systems, Inc., or TouchNet, in the United States District Court for the District of Connecticut alleging patent infringement related to TouchNet’s offering for sale and sales of its “eRefund” product in violation of our patents. TouchNet answered the complaint and asserted a number of defenses and counterclaims, including that it does not infringe our patent, that our patent is invalid or unenforceable and certain allegations of unfair competition. The parties are currently in the discovery stage of the proceeding. We intend to pursue the matter vigorously. There can be no assurances of our success in these proceedings.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information about individuals who currently serve as our executive officers and/or directors.

 

Name

   Age   

Title

Dean Hatton

   49    President, Chief Executive Officer and Director

Mark Volchek

   32    Chairman of the Board of Directors and Chief Financial Officer

Miles Lasater

   32    Chief Operations Officer and Director

Casey McGuane

   35    Chief Service Officer

Robert Reach

   53    Chief Sales Officer

Paul Biddelman

   64    Director

David Cromwell

   65    Director

Stewart Gross

   50    Director

Shamez Kanji

   43    Director

Patrick McFadden

   73    Director

Charles Moran

   55    Director

Set forth below is certain biographical information for each of these individuals.

Dean Hatton has been our president, chief executive officer and director since March 2002. From 2001 to 2002, Mr. Hatton was president and chief executive officer of Yclip, Inc., a direct marketing promotion company that was sold to First Data Corporation. From 1999 to 2001, Mr. Hatton was executive vice president and chief operations officer of Carlson Wagonlit Travel, a corporate travel and expense management company, and from 1997 to 1999, he was senior vice president at Citigroup, where he was chief executive officer of Travelers Property Casualty Direct Response. Mr. Hatton is also a director of Higher One, Inc. Mr. Hatton holds a BA in Economics from Franklin and Marshall College and a graduate degree in bank management from the Stonier Graduate School of Banking. As a result of his service as our president and chief executive officer for over 8 years, we believe Mr. Hatton provides the board with a deep understanding of all aspects of our business.

Mark Volchek is one of our founders and has been our chairman and chief financial officer since 2000 and 2002, respectively. From 2000 to 2002, Mr. Volchek was our chief executive officer. Prior to founding Higher One, Mr. Volchek worked at College Pro, where he most recently held the position of general manager. Mr. Volchek is also a founding officer of the Yale Entrepreneurial Society, a not-for-profit organization that promotes entrepreneurship among Yale students, faculty and alumni and has served on its board since 1999. Since 2007, Mr. Volchek has been the chairman of the board of the Tweed New Haven Airport Authority. Other civic roles have included positions on the New Haven Economic Development Commission and the Regional Growth Partnership strategic planning committee. Mr. Volchek holds a BA and an MA in economics from Yale University. Mr. Volchek, having served as our chief executive officer and then chief financial officer over the course of the last 10 years, brings institutional knowledge to the board, especially in regard to our finances.

Miles Lasater is one of our founders and has been our chief operations officer since 2000. Prior to founding Higher One, Mr. Lasater was a member of the invention team at Walker Digital, where he worked on intellectual property for companies such as Priceline and Retail DNA. Mr. Lasater has been a board member of the New Haven Port Authority since 2006, Chairman of SeeClickFix, a software-as-a- service company that provides a platform for governments and citizens to interact, since 2008, and a member of Yale University’s Advisory Committee on Investor Responsibility since 2007. Mr. Lasater is also a founding officer and board member of both the Yale Entrepreneurial Society and

 

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the Yale Entrepreneurial Institute since 1999 and 2008, respectively. Both are organizations at Yale University that promote entrepreneurship among Yale students, faculty and alumni. Mr. Lasater holds a BA in computer science from Yale University. Having served as our chief operations officer over the past 10 years, Mr. Lasater is involved with every aspect of our business, including our marketing strategies and operations.

Casey McGuane has been our chief service officer since January 2009. From 2005 to 2008, Mr. McGuane was our senior vice president of client operations and, from 2000 to 2005, he was our vice president of client operations. Prior to joining Higher One in 2000, Mr. McGuane was a business manager for SPS, Inc., where he managed sales and operations in his region for commercial contracting projects. Since July 2009, Mr. McGuane has served as a member of the board of the Connecticut Association of Human Services, a not-for-profit organization in Hartford, Connecticut. Mr. McGuane holds a BA in psychology from the University of Rhode Island.

Robert Reach has been our chief sales officer since 2009 and our vice president of sales from 2004 to 2009. From 1985 to 1990, Mr. Reach was the branch manager and national sales manager in the Financial Services Group for CompuServe and, from 1990 to 1995, he was the national sales manager in Lotus Development Corporations’ One Source division. He also served as the vice president of sales for Metatec Corporation from 1995 to 1997. Additionally, from 2000 to 2001, Mr. Reach served as director of partner relations for HNC Software, an industry leader in credit card fraud prevention and analytic software. Mr. Reach holds a BA in English from Franklin and Marshall College.

Paul Biddelman has been a director of Higher One since 2002. Mr. Biddelman has been president of Hanseatic Corporation, a private investment company and the manager of our investor, Hanseatic Americas LDC, since 1997, where he has primary investment responsibilities. He is also a director of DocuSys, Inc., Passlogix, Inc., and SystemOne Technologies, Inc. Mr. Biddelman served as a director of Celadon Group, Inc. from 1992 to 2006, Insituform Technologies, Inc. from 1988 to 2005, Six Flags, Inc. from 1992 to 2006, Star Gas LP from 1999 to 2006 and ApplyYourself, Inc. from 2001 to 2007. Mr. Biddelman is also currently the chairman of the Lehigh University College of Arts & Sciences Advisory Board. Mr. Biddelman holds a BS from Lehigh University, a JD from Columbia Law School and an MBA from Harvard Business School. Due to his long-standing relationship with us, Mr. Biddelman knows our business well and, having served on the board of numerous public companies, is versed in the issues faced by such companies.

David Cromwell has been a director of Higher One since 2001. Mr. Cromwell has been an adjunct professor of entrepreneurship at the Yale School of Management since 1996. Prior to that, he worked for 30 years in various positions at JPMorgan & Company in New York and London. From 2000 to 2009, Mr. Cromwell was chairman of the board and co-founder of CE University, Inc., an online provider of continuing education for insurance professionals. He helped found and serves as a faculty advisor to one of our early investors, Sachem Ventures, a student-run venture capital fund at the Yale School of Management. Mr. Cromwell has served as an advisor to numerous venture-backed and growth companies in Connecticut. Mr. Cromwell holds a BA in Economics from Ohio Wesleyan University and an MBA from New York University, Stern School of Business. Mr. Cromwell brings to the board substantial experience as an advisor to high-growth companies.

Stewart Gross has been a director of Higher One since 2008. Mr. Gross is a managing director and member of the investment committee of one of our investors, Lightyear Capital, a private equity firm. Prior to joining Lightyear Capital in 2005, Mr. Gross spent 17 years at Warburg Pincus, where he was a managing director and member of the executive management group. Mr. Gross is currently a director of Flagstone Reinsurance Holdings Limited, Cetera Financial Group and Argus Software, Inc., a trustee of the Mt. Sinai Children’s Center Foundation and Boys & Girls Harbor and the chairman of Civic Capital Corporation, an affiliate of the NYC Investment Fund. Mr. Gross holds an AB in

 

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Government from Harvard University and an MBA from Columbia Business School. Mr. Gross has been an investor in, and director of, public and private companies focused on financial services and financial technology and so is a source of background knowledge with respect to regulatory and other issues specific to such companies for our board.

Shamez Kanji has been a director of Higher One since 2003. Since 2000, Mr. Kanji has been a general partner of one of our investors, North Hill Ventures, a venture capital fund. He is currently a director of Metatomix, Inc., Interactions Corporation and the Doug Flutie Jr. Foundation for Autism. From 2004 to 2006, Mr. Kanji served as a director of eCredit, Inc. Mr. Kanji holds a BA in Social Studies from Harvard University and an MBA from Harvard Business School. Mr. Kanji brings to the board substantial experience as an investor and director in financial services and financial technology companies and experience evaluating financial results.

Patrick McFadden has been a director of Higher One since 2008. Mr. McFadden is the non-executive chairman and director of UIL Holdings Corporation and the United Illuminating Company, a regional utility company, since 1987. Mr. McFadden is also a director of Godspeed Opera in Haddam, Connecticut since 2007 and a director and the vice-chairman of the Yale-New Haven Health Services Corporation since 1984. Previously, Mr. McFadden served as a director of Citizen’s Bank of Connecticut in New Haven and the South Central Connecticut Regional Water Authority. Mr. McFadden has also held executive positions at the Bank of New Haven, which was sold to Citizens Bank of Connecticut, the Connecticut National Bank and First National Bank. Mr. McFadden holds a BS in management from the University of Notre Dame and a graduate degree from the Stonier Graduate School of Banking. Mr. McFadden has served as an executive at numerous financial institutions and as the chairman of a public company and brings experience in executive management, corporate governance and risk management to our board.

Charles Moran has been a director of Higher One since 2009. Mr. Moran is the founder of SkillSoft PLC where since 1998 he has held various positions, including member of the board of directors, president, chief executive officer and, since November 2006, chairman of the board. SkillSoft PLC is a leading software-as-a-service provider of on demand e-learning and performance solutions for global enterprises, government, educational institutions and small-to-medium size businesses. Mr. Moran holds a BS in General Management from Boston College and an MBA from Suffolk University. We believe Mr. Moran is qualified to serve on our board because of his experience as the chairman and chief executive officer of a leading publicly traded technology company.

Board of Directors

We currently have nine directors. All members of the board are elected annually. Our board has determined all of our directors other than Messrs. Gross (for purposes of the audit and compensation committees only), Hatton, Volchek and Lasater meet the independence requirements of The NASDAQ Global Select Market and the federal securities laws.

Committees of the Board of Directors

Our board of directors has established standing committees in connection with the discharge of its responsibilities. These committees include an audit committee, a compensation committee and a nominating and corporate governance committee. The board of directors will also establish such other committees as it deems appropriate, in accordance with applicable law and regulations and our certificate of incorporation and bylaws.

 

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Audit Committee

The audit committee of our board of directors, which consists of Messrs. McFadden (chair), Biddelman and Kanji, assists our board in overseeing the preparation of our financial statements, the independent registered public accounting firm’s qualifications and independence, the performance of our internal audit function and independent registered public accounting firm and our compliance with legal and regulatory requirements. Mr. McFadden qualifies as an “audit committee financial expert” as such term is defined in the regulations under the Exchange Act. We expect that upon the consummation of this offering, all of the members of the audit committee will be independent, as determined in accordance with the rules of The NASDAQ Global Select Market and any relevant federal securities laws and regulations.

Compensation Committee

The compensation committee of our board of directors consists of Messrs. Biddelman, Cromwell and Kanji. We expect that upon the consummation of this offering, all of the members of the compensation committee will be independent, as determined in accordance with the terms of The NASDAQ Global Select Market and any relevant federal securities laws and regulations. The compensation committee has overall responsibility for evaluating and approving our executive officer incentive compensation, benefit, severance, equity-based or other compensation plans, policies and programs. The compensation committee will also produce an annual report on executive compensation for inclusion in our proxy statement.

Nominating and Governance Committee

Prior to this offering, our board of directors established a nominating and governance committee, consisting of Messrs.             , and             . We expect that upon the consummation of this offering, all of the members of the nominating and governance committee will be independent, as determined in accordance with the rules of The NASDAQ Global Select Market and any relevant federal securities laws and regulations. The nominating and governance committee will assist our board of directors in implementing sound corporate governance principles and practices. Our nominating and governance committee will identify individuals qualified to become board members and recommend to our board of directors the director nominees for the next annual meeting of shareholders. It will also review the qualifications and independence of the members of our board of directors and its various committees on a regular basis and make any recommendations the committee members may deem appropriate from time to time concerning any recommended changes in the composition of our board.

We have no formal policy regarding board diversity. Our nominating and governance committee and board of directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. Our nominating and governance committee’s and board of directors’ priority in selecting board members is identification of persons who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members and professional and personal experiences and expertise relevant to our growth strategy.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee will be or have ever been an officer or employee of us. None of our executive officers serves or has served as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The purpose of this compensation discussion and analysis section is to provide information about the material elements of compensation that are paid, awarded to, or earned by our “named executive officers,” who consist of our principal executive officer, our principal financial officer, and the three other most highly compensated executive officers. For fiscal year 2009, our named executive officers were:

 

  Ÿ  

Dean Hatton, President and Chief Executive Officer

 

  Ÿ  

Mark Volchek, Chief Financial Officer

 

  Ÿ  

Miles Lasater, Chief Operations Officer

 

  Ÿ  

Casey McGuane, Chief Service Officer

 

  Ÿ  

Robert Reach, Chief Sales Officer

Compensation Philosophy and Objectives

Our compensation philosophy, objectives and structures have been very much informed by the history of our company. Messrs. Volchek and Lasater are founders of the company and Mr. Hatton has been with the company as president and chief executive officer since 2002. Our compensation program has reflected, and continues to reflect, the fact that our executive officers have long operated as a team with the shared goal of strengthening and expanding the company. It has also reflected the fact that our executive officers have been deeply involved in all aspects of our business and work together with the company’s employees at every level. Historically, our compensation philosophy has been to provide a base salary that was competitive among comparable venture-backed companies but to focus primarily on rewarding positive performance that encouraged our executive officers to grow the company. As a result, our executive compensation program emphasized incentive compensation over guaranteed base salaries. We have offered a mix of short-term and long-term incentives consisting of cash bonuses and stock options (and in 2009, restricted stock) respectively, in order to motivate achievement of the company’s annual business plan and creation of long-term stockholder value. Our executives have historically shared an annual cash bonus pool based on company performance. They have also received equity awards along with substantially all other employees. Our executive officers have received no benefits or perquisites in addition to those offered to all employees of the company.

We believe that our compensation program should remain focused on the essentials necessary to retain and reward our experienced executives and to attract others to the company as needed. However, while our basic philosophy and objectives remain unchanged, we recognize that we are now entering both a different stage in our company’s development and a different market for executive talent. As a result, as described further below for 2010 compensation, we have re-evaluated our executive compensation program and decided to adjust the balance between its component parts.

Role of the Compensation Committee

The compensation committee has the responsibility of evaluating, reviewing and approving the compensation plans, policies and programs of the company, and ensuring that such plans, policies and programs provide appropriate incentives to recruit, motivate and retain employees.

The committee has met at least one time per year, normally in December, in order to review the compensation from the prior year and set its compensation policy for the coming year. During that meeting, the compensation committee has historically reviewed and approved the compensation of executive officers, including base salary, annual incentive bonus and equity compensation.

 

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At its annual meeting, the committee has conferred with our chief executive officer to establish annual goals for him and the other executive officers. The committee also meets in executive session without the presence of executive officers in order to evaluate the officers’ performance with respect to the goals set by the committee, market compensation data, and our performance and shareholder return during the year.

In preparation for the initial public offering, the compensation committee engaged Steven Hall & Partners as its independent compensation consultant in January 2010. Steven Hall & Partners has assisted the committee in examining our compensation levels and structures in the context of other similar public companies and in designing programs that will properly compensate and motivate the executive team in light of the company’s changed circumstances. Before engaging Steven Hall & Partners, the committee did not consult a compensation consultant when determining compensation for our executive officers.

Steven Hall & Partners does not have any relationship or arrangement with the company other than its engagement as a consultant to the compensation committee.

Compensation Benchmarking and Peer Group

One basis for determining the structure of the company’s compensation program and establishing target compensation levels for the company’s named executive officers in anticipation of our initial public offering is the analysis of compensation packages offered to similarly situated executive officers of publicly-held peer group companies. As part of its engagement, the compensation committee directed Steven Hall & Partners to develop a comparative group of companies and to perform analyses of executive compensation levels and designs in that group. The comparative information provided by Steven Hall & Partners was obtained from publicly filed reports of each company in the comparative peer group, as well as from nationally recognized compensation surveys.

Steven Hall & Partners identified business services, financial transaction and/or technology companies with revenue, revenue growth, EBITDA, net income, total assets and market cap within a specified range above, below and on par with the company. The peer group identified in the report created by Steven Hall & Partners consisted of the following companies:

 

•   ACI Worldwide

  

•   Bottomline Technologies, Inc.

  

•   Online Resources Corporation

•   ArcSight, Inc

  

•   Concur Technologies, Inc.

  

•   Riskmetrics Group Inc.

•   athenahealth, Inc.

  

•   CyberSource Corporation

  

•   SolarWinds, Inc.

•   Blackbaud, Inc.

  

•   Ebix, Inc.

  

•   Wright Express Corporation

•   Blackboard Inc.

  

•   NetSuite Inc.

  

Steven Hall & Partners ultimately developed recommendations for 2010 compensation that were presented to the compensation committee for its consideration, as discussed below.

Elements of Compensation

Our historical executive compensation program, as set by the compensation committee consists of the following components:

 

  Ÿ  

Base salary;

 

  Ÿ  

Annual cash incentive awards linked to company performance;

 

  Ÿ  

Periodic grants of long-term equity-based compensation, such as stock options and restricted stock; and

 

  Ÿ  

Company-wide employee welfare and retirement benefits.

 

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For 2010 compensation, our executive compensation program will continue to be comprised of these elements. However, the committee has determined to provide our executive officers with compensation more evenly balanced between salary and incentive compensation, consistent with the model most commonly used by our peer group.

Base Salary

We pay an annual base salary to our executive officers in order to provide them with a fixed rate of cash compensation during the year. The compensation committee historically has conducted an annual review of each executive officer’s salary, and considered whether the amount of that salary is appropriate. In making this determination, the committee has taken into consideration the salary paid at other similar companies, based on the committee members’ collective experience with companies in similar stages of development and certain surveys brought to the committee’s attention by its members, but has not relied upon any formal benchmarking process. The committee also has considered the executive’s responsibilities, prior performance and other discretionary factors.

As part of this annual review process, the compensation committee approved salary increases for each of the named executive officers for 2009 from their 2008 levels. These increases for 2009 ranged from 4% to 17%, and were intended in part to minimize the gap between Mr. Hatton’s salary and the salaries of Mr. Volchek and Mr. Lasater, while providing Mr. Hatton with a reasonable minimum salary increase. Mr. Hatton’s salary increased from $             to $            ; Mr. Volchek’s salary increased from $             to $            ; Mr. Lasater’s salary increased from $             to $            ; Mr. McGuane’s salary increased from $             to $            ; Mr. Reach’s salary increased from $             to $            .

Steven Hall & Partners’ peer group data indicated that, while the overall cash and equity compensation paid to our named executive officers is similar to that paid by the peer group companies, our named executive officers received a much lower percentage of their total compensation as base salary. For fiscal year 2010, assuming no increase in salary, our named executive officers’ base salaries compared to executives in our peer group in the same or similar position as follows: Mr. Hatton’s salary was    % below median; Mr. Volchek’s salary was    % below median; Mr. Lasater’s salary was     % below median; Mr. McGuane’s salary was    % below median; and Mr. Reach’s salary was    % below median. In order to offer a mix of compensation that is more in line with market practice in our peer group, the compensation committee approved increases in base salary for each of our named executive officers for fiscal year 2010. Mr. Hatton’s salary increased from $             to $            ; Mr. Volchek’s salary increased from $             to $            ; Mr. Lasater’s salary increased from $             to $            ; Mr. McGuane’s salary increased from $             to $            ; Mr. Reach’s salary increased from $             to $            . The increased salary levels of Messrs. Hatton, Volchek and Lasater in the aggregate are at the median of the peer group. We believe that this combined analysis reflects the team attitude of our top executives and the fact that Messrs. Volchek and Lasater have responsibilities that exceed peer group executives holding the same titles.

Annual Bonus

We pay our executive officers an annual bonus as an incentive to achieve the short-term goals of the company as reflected in its annual business plan. All of our named executive officers are eligible to receive an annual cash bonus based on the achievement of certain pre-determined targets set by the compensation committee at its annual meeting. The compensation committee establishes the aggregate amount of the target bonus pool, which is shared among the executive officers at percentages also pre-determined by the compensation committee.

At its meeting on December 10, 2008, the compensation committee determined that the target bonus pool for 2009 would be $            . This number reflected the current status of the development of

 

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the company, how values will be driven in the future, and the suggestion of management. The targets and weightings were set as follows:

 

Performance Criteria

   Weighting    Threshold    Target

Revenues

   25%    $(    % of budget)    $ (    % of budget)

EBITDA(1)

   50%    $(    % of budget)    $ (    % of budget)

Management Objectives(2)

   25%    Discretionary    Discretionary

 

(1) EBITDA means earnings before interest, taxes, depreciation and amortization.
(2) Management objectives were agreed upon by the chief executive officer and the compensation committee and included .

The compensation committee also determined that the bonus pool would be shared in the following percentages:

 

Dean Hatton

   35

Mark Volchek

   25

Miles Lasater

   25

Casey McGuane

   12

Robert Reach

   3

The executive officers’ relative shares in the bonus pool reflect each officer’s relative duties and responsibilities to the company, and, with respect to Mr. Reach, the fact that he receives sales commissions in addition to his base salary and annual bonus as described below.

The compensation committee determined that in addition to the target bonus pool of $            , additional bonus amounts would be awarded according to the percentages set out above if the company achieved EBITDA at least 10% in excess of the budget for 2009 ($             million). The amount of the additional bonus was subject to a limit of 20% of the combined base salaries of the executive officers ($            ).

The compensation committee, during its meeting on December 4, 2009, recommended that the 2009 bonus pool be awarded at the full $            , based on an achievement of 100% of each of the three targets. The committee also determined that, based on preliminary forecast of 2009 results, the company was expected to achieve EBITDA at least 10% in excess of the budget for 2009, and that an additional bonus amount in a total of $             should be awarded to the executive officers, creating an aggregate pool of $            . It was also the conclusion of the committee that the cap on the excess bonus provision should be modified such that any amounts earned in excess of the $             cap should be paid in the form of restricted stock grants to each of the executive officers. The committee took this step in recognition of the extraordinary progress of the company during 2009, including the increases in school clients, the increases in active student accounts, the increases in revenues and EBITDA in excess of the annual business plan and the infrastructure improvements initiated and enhanced in preparation for the continued growth of the company, such as controls, key hires and IT strategic planning. The restricted stock grants were awarded in the relative percentages applicable to the entire bonus pool, and were calculated at the option exercise price established at the board meeting, with a vesting period of four years, commencing on the first anniversary date of the grant.

 

Name

  

Title

   Total Cash
Bonus
Received
   Number of
Restricted
Shares
Awarded

Dean Hatton

  

President and Chief Executive Officer

   $               

Mark Volchek

  

Chief Financial Officer

   $               

Miles Lasater

  

Chief Operations Officer

   $               

Casey McGuane

  

Chief Service Officer

   $               

Robert Reach

  

Chief Sales Officer

   $               

 

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Mr. Reach also receives compensation equal to    % of all commissions paid under our sales commission plans, which provide sales employees with pay for their performance. Under the Higher One, Inc. Sales Commission Plan 2009, commissions were earned for: (i) newly signed contracts, based on the number of undergraduate students in attendance at the institution, (ii) non-zero-balance accounts maintained for eight consecutive quarters, and (iii) 4-year schools with student populations of more than 5,000 undergraduates.

At its meetings on February 9, 2010 and February 22, 2010, the compensation committee determined that the target bonus pool for 2010 would be established at $             which is equal to the sum of 100% of the base salaries of Messrs. Hatton, Volchek and Lasater, 60% of the base salary of Mr. McGuane, and 15% of the base salary of Mr. Reach. The measures and weightings were set as follows: revenues (25%), EBITDA (50%), and management objectives (25%). The 2010 management objectives include (i) maintaining or improving our employee survey scores and keeping employee (other than customer service representatives) turnover below 10%, (ii) client retention, including maintaining a retention rate of 97% or higher, (iii) promoting efficient growth based on cost management and establishing efficiency initiatives, (iv) expanding product opportunities through internal development or acquisition, (v) completion of preparation for this offering and (vi) establishing a robust investor relations program.

As it did for 2009, the compensation committee determined that the 2010 bonus pool would be shared in the following percentages:

 

Dean Hatton

   35

Mark Volchek

   25

Miles Lasater

   25

Casey McGuane

   12

Robert Reach

   3

With respect to Mr. Reach, in 2010, we have two sales commission plans, the Higher One, Inc. Sales Commission Plan 2010 and the Higher One CASHNet Suite 2010 Business Development Commission Plan. In addition to the criteria under Higher One, Inc. Sales Commission Plan 2009, under the Higher One, Inc. Sales Commission Plan 2010 commissions may also be earned for contributing materially to the sale of CASHNet modules to a school that is not already a CASHNet customer. Under the Higher One CASHNet Suite 2010 Business Development Commission Plan, commissions may be earned for: (i) subscription and deployment of CASHNet suite contracts and (ii) new OneDisburse contracts, based on the number of undergraduate students in attendance at the institution.

Prior to the effective date, the company intends to adopt a new annual incentive plan for its executive officers that will comply with Section 162(m) of the Code.

Equity-Based Compensation

Our compensation committee believes that equity-based compensation is an important component of our executive compensation program, and that providing equity-based awards to our named executive officers aligns the incentives of our executives with the long-term interests of our shareholders and with our long-term corporate success and provides our executives with a powerful retention incentive.

Generally, each executive officer has received a stock option grant when he or she joined the company, and has then received periodic rewards thereafter in the discretion of the compensation committee, although the timing of these awards was not made according to an established policy. Until 2010, awards were made under the 2000 Stock Option Plan with varying vesting schedules ranging from

 

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one to five years, as set out in the respective stock option agreements. Stock option grants have typically been split between incentive stock options (within the meaning of Section 422 of the Code) and nonqualified stock options.

No grants of stock options were made in 2009 due to the large grants made to executive officers and other employees in 2008 in connection with the company’s recapitalization. As described above, the compensation committee granted shares of restricted stock to our executive officers in recognition of the company’s outstanding performance in 2009. Going forward, the compensation committee intends to make annual equity grants at its first meeting following the release of the company’s year-end financial results.

The 2000 Stock Option Plan will terminate by its terms in April 2010. Prior to the effective date, the company plans to adopt the 2010 Equity Incentive Plan.

Employee Welfare and Retirement Benefits.

We provide the following benefits to our executive officers on the same basis as all other eligible employees of the company:

 

  Ÿ  

Health insurance;

 

  Ÿ  

Vacation, personal holiday and sick days;

 

  Ÿ  

Life insurance;

 

  Ÿ  

Short-term and long-term disability insurance; and

 

  Ÿ  

401(k) plan with company matching contributions of 4%.

We believe these benefits are generally consistent with those offered by our peer group companies.

Policy on Code Section 162(m)

As a private company, prior to the consummation of this offering we were not subject to the limits on deductibility of compensation set forth in Section 162(m) of the Code. Section 162(m) denies publicly-held companies a tax deduction for annual compensation in excess of $1 million paid to their chief executive officer or any of their three other most highly compensated executive officers (other than the chief financial officer) employed on the last day of a given year, unless their compensation is based on qualified performance criteria. Subject to certain transition rules that apply to companies that first become publicly held in connection with an initial public offering such as this offering, to qualify for deductibility, these criteria must be established by a committee of independent directors and approved, as to their material terms, by that company’s stockholders. In future years, we intend to structure our bonus and equity-based incentive programs so that they qualify as performance-based compensation under Section 162(m). However, our compensation committee may approve compensation or changes to plans, programs or awards that may cause the compensation or awards not to comply with Section 162(m) if it determines that such action is appropriate and in our best interests.

 

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Summary Compensation Table

The following table sets forth the compensation paid to or earned during the fiscal year ended December 31, 2009, or fiscal 2009, by (i) our principal executive officer, (ii) our principal financial officer, and (iii) our three other most highly compensated executive officers who were serving as executive officers as of December 31, 2009 (collectively, the named executive officers or NEOs):

 

Name and Principal Position

  Year   Salary
($)
  Bonus
($)
  Stock
Awards ($)(1)
  Option
Awards
($)
  Non-Equity
Incentive
Plan
Compensation ($)(2)
  All Other
Compensation
($)(3)
  Total
($)

Dean Hatton

  2009              

President and Chief Executive Officer

               

Mark Volchek

  2009              

Chief Financial Officer

               

Miles Lasater

  2009              

Chief Operations Officer

               

Casey McGuane

  2009              

Chief Service Officer

               

Robert Reach

  2009              

Chief Sales Officer

               

 

(1) The amounts in this column reflect the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of restricted stock awards granted to our named executive officers in fiscal 2009 For a description of the assumptions used in determining grant date fair value, see Note 2 to our consolidated financial statements.
(2) The amounts in this column reflect annual cash bonuses earned by our named executive officers as described in the section “Elements of Compensation–Bonus” above.
(3) The amount shown for each named executive officer represents company matching contributions under our 401(k) plan.

Grants of Plan-Based Awards in Fiscal Year 2009

The following table sets forth, for each of the named executive officers, awards granted during fiscal 2009 under our annual cash bonus program and the 2000 Stock Option Plan.

 

Name

   Grant Date    Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
   All Other Stock
Awards:
Number of
Shares of
Stock(#)
   Grant Date Fair
Value of Stock
and Option
Awards

($)(1)
      Threshold($)    Target($)    Maximum ($)      

Dean Hatton

                 
   12/4/2009               

Mark Volchek

                 
   12/4/2009               

Miles Lasater

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