Attached files

file filename
EX-32.1 - SECTION 906 CERTIFICATION - CEO - HEARTLAND PAYMENT SYSTEMS INChpyexhibit321section906ceo.htm
EX-32.2 - SECTION 906 CERTIFICATION - CFO - HEARTLAND PAYMENT SYSTEMS INChpyexhibit322section906cfo.htm
EX-31.1 - SECTION 302 CERTIFICATION - CEO - HEARTLAND PAYMENT SYSTEMS INChpyexhibit311section302ceo.htm
EX-31.2 - SECTION 302 CERTIFICATION - CFO - HEARTLAND PAYMENT SYSTEMS INChpyexhibit312section302cfo.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-32594
__________________________________ 
HEARTLAND PAYMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3755714
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
90 Nassau Street, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-3831
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
As of November 2, 2015, there were 36,755,918 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 



INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.



PART I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements

Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,148

 
$
70,793

Funds held for customers
180,458

 
176,492

Receivables, net
258,378

 
234,104

Investments
107

 
106

Inventory
10,279

 
12,048

Prepaid expenses
21,625

 
22,658

Current tax assets
749

 
15,082

Current deferred tax assets, net
12,311

 
9,308

Total current assets
527,055

 
540,591

Capitalized customer acquisition costs, net
83,192

 
73,107

Property and equipment, net
168,244

 
154,303

Goodwill
475,317

 
425,712

Intangible assets, net
197,254

 
192,553

Deposits and other assets, net
1,677

 
1,507

Total assets
$
1,452,739

 
$
1,387,773

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
49,266

 
$
31,165

Accounts payable
58,576

 
58,460

Customer fund deposits
180,458

 
176,492

Processing liabilities
119,884

 
119,398

Current portion of accrued buyout liability
17,471

 
15,023

Current portion of borrowings
48,793

 
36,792

Current portion of unearned revenue
53,150

 
46,601

Accrued expenses and other liabilities
49,050

 
41,517

Total current liabilities
576,648

 
525,448

Deferred tax liabilities, net
59,057

 
45,804

Reserve for unrecognized tax benefits
8,630

 
7,315

Long-term borrowings
450,041

 
523,122

Long-term portion of accrued buyout liability
38,175

 
32,970

Long-term portion of unearned revenue
3,025

 
2,354

Total liabilities
1,135,576

 
1,137,013

Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,752,588 and 36,344,921 shares issued and outstanding at September 30, 2015 and December 31, 2014
37

 
36

Additional paid-in capital
271,171

 
255,921

Accumulated other comprehensive loss
(8
)
 
(130
)
Retained earnings (accumulated deficit)
45,963

 
(5,067
)
Total equity
317,163

 
250,760

Total liabilities and equity
$
1,452,739

 
$
1,387,773

See accompanying notes to condensed consolidated financial statements.

1


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
705,667

 
$
600,626

 
$
1,983,818

 
$
1,706,768

Costs of services:
 
 
 
 
 
 
 
Interchange
425,572

 
373,372

 
1,194,461

 
1,059,241

Dues, assessments and fees
65,506

 
57,864

 
180,548

 
163,218

Processing and servicing
85,817

 
69,328

 
246,227

 
204,985

Customer acquisition costs
15,501

 
12,289

 
44,284

 
34,907

Depreciation and amortization
11,541

 
7,981

 
33,382

 
20,472

Total costs of services
603,937

 
520,834

 
1,698,902

 
1,482,823

General and administrative
59,216

 
49,381

 
174,212

 
137,241

Total expenses
663,153

 
570,215

 
1,873,114

 
1,620,064

Income from operations
42,514

 
30,411

 
110,704

 
86,704

Other income (expense):
 
 
 
 
 
 
 
Interest income
29

 
33

 
82

 
95

Interest expense
(3,647
)
 
(2,142
)
 
(11,178
)
 
(4,450
)
Other, net
(9
)
 
3,581

 
(309
)
 
3,869

Total other (expense) income
(3,627
)
 
1,472

 
(11,405
)
 
(486
)
Income before income taxes
38,887

 
31,883

 
99,299

 
86,218

Provision for income taxes
15,006

 
11,727

 
37,274

 
34,579

Net income
23,881

 
20,156

 
62,025

 
51,639

Less: Net loss attributable to noncontrolling interests

 
(302
)
 

 
(2,011
)
Net income attributable to Heartland
$
23,881

 
$
20,458

 
$
62,025

 
$
53,650

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
      Basic
$
0.65

 
$
0.57

 
$
1.69

 
$
1.47

      Diluted
$
0.64

 
$
0.56

 
$
1.67

 
$
1.44

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
36,744

 
36,069

 
36,600

 
36,388

Diluted
37,281

 
36,850

 
37,186

 
37,249

 
 
 
 
 
 
 
 
Dividends declared per share:
$
0.10

 
$
0.085

 
$
0.30

 
$
0.255


See accompanying notes to condensed consolidated financial statements.

2


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
23,881

 
$
20,156

 
$
62,025

 
$
51,639

Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification of losses (gains) on investments, net of income tax of
$(7), $5, $(7) and $108
12

 
(6
)
 
12

 
(170
)
Unrealized gains (losses) on investments, net of income tax of
$11, $(5), $16 and $5
28

 
(8
)
 
43

 
6

Unrealized gains on derivative financial instruments, net of income tax of
$17, $28, $50 and $83
11

 
45

 
67

 
140

Comprehensive income
23,932

 
20,187

 
62,147

 
51,615

Less: Comprehensive loss attributable to noncontrolling interests

 
(302
)
 

 
(2,011
)
Comprehensive income attributable to Heartland
$
23,932

 
$
20,489

 
$
62,147

 
$
53,626



See accompanying notes to condensed consolidated financial statements.

3



Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(In thousands)
(unaudited)
 
Heartland Stockholders’ Equity
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
 Loss
 

Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
36,951

 
$
37

 
$
245,055

 
$
(88
)
 
$
35,960

 
$
(20,489
)
 
$
6,188

 
$
266,663

Issuance of common stock–
options exercised
346

 

 
4,482

 

 

 

 

 
4,482

Issuance of common stock –
RSU’s vested
230

 

 
(5,225
)
 

 

 

 

 
(5,225
)
Excess tax benefit on employee
share-based compensation

 

 
5,670

 

 

 

 

 
5,670

Repurchase of common stock
(1,348
)
 

 

 

 

 
(54,455
)
 

 
(54,455
)
Retirement of treasury stock

 
(1
)
 
(12,368
)
 

 
(62,575
)
 
74,944

 

 

Share-based compensation

 

 
10,936

 

 

 

 

 
10,936

Acquisition of noncontrolling
interest

 

 
3,577

 

 

 

 
(4,177
)
 
(600
)
Other comprehensive loss

 

 

 
(24
)
 

 

 

 
(24
)
Dividends on common stock

 

 

 

 
(9,249
)
 

 

 
(9,249
)
Net income (loss) for the period
 
 

 

 

 
53,650

 

 
(2,011
)
 
51,639

Balance, September 30, 2014
36,179

 
$
36

 
$
252,127

 
$
(112
)
 
$
17,786

 
$

 
$

 
$
269,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
36,345

 
$
36

 
$
255,921

 
$
(130
)
 
$
(5,067
)
 
$

 
$

 
$
250,760

Issuance of common stock–
options exercised
173

 

 
2,677

 

 

 

 

 
2,677

Issuance of common stock –
RSU’s vested
235

 
1

 
(7,145
)
 

 

 

 

 
(7,144
)
Excess tax benefit on employee
share-based compensation

 

 
5,578

 

 

 

 

 
5,578

Share-based compensation

 

 
14,140

 

 

 

 

 
14,140

Other comprehensive income

 

 

 
122

 

 

 

 
122

Dividends on common stock

 

 

 

 
(10,995
)
 

 

 
(10,995
)
Net income for the period

 

 

 

 
62,025

 

 

 
62,025

Balance, September 30, 2015
36,753

 
$
37

 
$
271,171

 
$
(8
)
 
$
45,963

 
$

 
$

 
$
317,163


See accompanying notes to condensed consolidated financial statements.

4


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
62,025

 
$
51,639

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
44,420

 
38,056

Other depreciation and amortization
46,283

 
33,516

Addition to loss reserves
2,528

 
3,000

Provision for doubtful receivables
4,991

 
3,010

Deferred taxes
3,611

 
8,361

Share-based compensation
14,140

 
10,936

Write off of fixed assets and other
1,223

 
(3,315
)
Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(27,594
)
 
(11,339
)
Decrease (increase) in inventory
1,896

 
(287
)
Payment of signing bonuses, net
(33,855
)
 
(27,647
)
Increase in capitalized customer acquisition costs
(20,650
)
 
(18,349
)
Decrease (increase) in current tax assets
19,870

 
(2,957
)
Decrease in prepaid expenses, deposits and other assets
1,190

 
29

Excess tax benefits on employee share-based compensation
(5,578
)
 
(5,670
)
Increase in reserve for unrecognized tax benefits
1,315

 
1,136

Increase in due to sponsor banks
18,101

 
22,074

Decrease in accounts payable
(1,443
)
 
(12,509
)
Increase (decrease) in unearned revenue
4,620

 
(2,414
)
Decrease in accrued expenses and other liabilities
(2,809
)
 
(12,304
)
Decrease in processing liabilities
(2,076
)
 
(29,016
)
Payouts of accrued buyout liability
(12,861
)
 
(9,621
)
Increase in accrued buyout liability
20,514

 
15,199

Net cash provided by operating activities
139,861

 
51,528

Cash flows from investing activities
 
 
 
Purchase of investments
(1,546
)
 
(31,017
)
Sales of investments

 
17,215

Maturities of investments
1,800

 

Decrease in funds held for customers
42,055

 
18,849

Decrease in customer fund deposits
(42,309
)
 
(5,064
)
Acquisitions of businesses, net of cash acquired
(60,969
)
 
(355,066
)
Capital expenditures
(42,734
)
 
(39,140
)
Net cash used in investing activities
(103,703
)
 
(394,223
)
Cash flows from financing activities
 
 
 
Proceeds from borrowings, net
171,000

 
436,392

Principal payments on borrowings
(232,063
)
 
(17,500
)
Proceeds from exercise of stock options
2,677

 
4,482

Excess tax benefits on employee share-based compensation
5,578

 
5,670

Repurchases of common stock

 
(54,455
)
Dividends paid on common stock
(10,995
)
 
(9,249
)
Net cash (used in) provided by financing activities
(63,803
)
 
365,340

 
 
 
 
Net (decrease) increase in cash
(27,645
)
 
22,645

Cash at beginning of year
70,793

 
71,932

Cash at end of period
$
43,148

 
$
94,577

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
9,946

 
$
3,559

Income taxes
12,311

 
28,038

See accompanying notes to condensed consolidated financial statements.

5


Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Operations
Basis of Financial Statement Presentation— The accompanying consolidated financial statements include those of Heartland Payment Systems, Inc. (the "Company," “we,” “us,” or “our”) and its wholly-owned subsidiaries, Heartland Payroll Solutions, Inc., Heartland Payment Solutions, Inc., Heartland Acquisition LLC, TouchNet Information Systems, Inc. (“TouchNet”) and Heartland Commerce, Inc. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions with the Company's subsidiaries have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of the Company's management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position at September 30, 2015, its results of operations for the three and nine months ended September 30, 2015 and 2014 and changes in equity and cash flows for the nine months ended September 30, 2015 and 2014. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2015. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K"). For a summary of all significant accounting policies, refer to Note 2 of the 2014 Form 10-K. The December 31, 2014 Condensed Consolidated Balance Sheet was derived from the audited 2014 consolidated financial statements.

Out of Period Adjustments Recorded in Prior Year—In the second quarter of 2014, the Company recorded out-of-period adjustments decreasing its revenue and increasing bad debt expense (included in Processing and Servicing in its Consolidated Statements of Income) by $1.4 million and $0.9 million, respectively. These adjustments related to immaterial errors that originated in 2013 in the Company's Heartland School Solutions business. These adjustments included revenue which was incorrectly recorded in prior periods and a reassessment of the collectability of certain customer accounts receivable. These out-of-period adjustments reduced earnings before income taxes and net income in the year ended December 31, 2014 by $2.3 million and $1.4 million, respectively, and reduced diluted earnings per share by $0.04. The Company considered existing guidance in evaluating whether a restatement of prior financial statements was required as a result of these misstatements. The guidance requires corrections of errors to be recorded by restatement of prior periods, if material. The Company quantitatively and qualitatively assessed the materiality of the errors and concluded that the errors were not material to its earnings for the year ended December 31, 2014, and accordingly, no restatement of prior period financial statements was warranted.

Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, among other things, the accrued buyout liability, capitalized customer acquisition costs, goodwill and intangible asset impairment review, revenue recognition for multiple element arrangements, loss reserves, certain accounts payable and accrued expenses and certain tax assets and liabilities as well as the related valuation allowances, if any. Actual results could differ from those estimates.
Business Description—The Company’s primary business is to provide payment processing services to merchants throughout the United States. This involves providing end-to-end electronic payment processing services to merchants by facilitating the exchange of information and funds between them and cardholders' financial institutions. To accomplish this, the Company undertakes merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management. The Company also provides additional services, including those provided through its subsidiaries, such as:

Integrated commerce solutions, payment processing, higher education loan services and open and closed-loop payment solutions to higher-education institutions through Campus Solutions,
School nutrition, point-of-sale solutions ("POS"), and associated payment solutions, including online prepayment solutions, to kindergarten through 12th grade ("K-12") schools through Heartland School Solutions,

6

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Full-service payroll processing and related tax filing services, through Heartland Payroll Solutions, and
Others including (1) prepaid and stored-value card solutions through Micropayments, (2) POS solutions and other adjacent business service applications through Heartland Commerce, and (3) marketing solutions including loyalty and gift cards which the Company provides through Heartland Marketing Solutions.

Approximately 72% of the Company's revenue is derived from processing and settling Visa and MasterCard bankcard transactions for its merchant customers. Because the Company is not a ''member bank'' as defined by Visa and MasterCard, in order to process and settle these bankcard transactions for its merchants, the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement with a member bank permits the Company to route Visa and MasterCard bankcard transactions under the member bank's control and identification numbers to clear credit and signature debit bankcard transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering funding files to the member bank, which in turn transfers settlement funds to the merchants' bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.
The sponsorship agreements with the member banks require, among other things, that the Company abide by the bylaws and regulations of the Visa and MasterCard networks, and certain sponsor banks require a cash balance in a deposit account. If the Company were to breach a sponsorship agreement and under certain other circumstances, the sponsor banks may terminate the agreement and, under the terms of the agreement, the Company would have six months to identify an alternative sponsor bank. The Company is generally dependent on its sponsor banks, Visa and MasterCard for notification of any compliance breaches. As of September 30, 2015, the Company has not been notified of any such issues by its sponsor banks, Visa or MasterCard.

As of September 30, 2015, the Company is party to three bank sponsorship agreements.
Processing for the majority of the Company’s small and mid-sized merchants (referred to as "Small and Midsized Enterprises," or “SME merchants”) is performed under a February 8, 2012, sponsorship agreement with Wells Fargo Bank, N.A. ("WFB"). The WFB sponsorship agreement is in effect until February 8, 2016 and would automatically renew for three years unless either party provides written notice of non-renewal to the other party. On November 5, 2015, the Company provided written notice of non-renewal to WFB. Under the terms of the WFB sponsorship agreement, the Company has up to six months beyond February 8, 2016 to complete a conversion of its SME merchants to another sponsorship arrangement.

On November 5, 2015, the Company entered into a sponsorship agreement with Deutsche Bank Trust Company Americas ("Deutsche Bank") for its SME merchants. The Company is highly confident it will complete the conversion of its SME merchants to the Deutsche Bank sponsorship arrangement within the six-month conversion period beginning February 8, 2016. The sponsorship agreement with Deutsche Bank involves substantially the same terms as applied in the February 8, 2012 agreement with WFB. The agreement with Deutsche Bank is for a five-year term expiring on November 5, 2020 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.

In November 2009, the Company entered into a sponsorship agreement with The Bancorp Bank ("TBB") to sponsor processing for the Company's Network Services merchants, which are predominantly petroleum industry merchants of all sizes (referred to as "Network Services Merchants"), and since October 2013, certain of the Company's SME merchants. In August 2015, the agreement with TBB automatically renewed until February 2017. The agreement with TBB expires in February 2017 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
On March 24, 2011, the Company entered into a sponsorship agreement with Barclays Bank Delaware to sponsor processing for certain of the Company's large national merchants. In September 2015, the agreement with Barclays Bank Delaware automatically renewed until March 2017. The agreement with Barclays Bank Delaware expires in March 2017 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
  

7

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The following is a breakout of the Company’s total Visa and MasterCard settled card processing volume for the month ending September 30, 2015 by percentage processed under its individual bank sponsorship agreements:
 
% of
September 2015
Sponsor Bank
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
71%
The Bancorp Bank
20%
Barclays Bank Delaware
9%

The Company also provides card transaction processing for DFS Services, LLC ("Discover") and is designated as an
acquirer by Discover. The agreement with Discover allows the Company to acquire, process and fund transactions directly
through Discover's network without the need of a bank sponsor. The Company processes Discover transactions similarly to
the way it processes Visa and MasterCard transactions. The Company must comply with Discover's acquirer operating regulations and uses its sponsor banks to assist in funding its merchants' Discover transactions.

Under a prior sales and servicing program agreement with American Express Travel Related Services Company, Inc.
("American Express") the Company: (a) provided solicitation services by signing new-to-American Express merchants directly
with American Express; (b) provided transactional support services on behalf of American Express to the Company's American
Express accepting merchants; and (c) provided processing, settlement, customer support and reporting to merchants, similar to
the services provided for the merchants' Visa, MasterCard and Discover transactions. In May 2014, the Company began offering a new American Express Card Acceptance Program (referred to as "OptBlue") to new merchants. The Company converted a majority of its existing merchants who were processing under the prior sales and servicing agreement with American Express to OptBlue during the third quarter of 2014.  As a participant in OptBlue, the Company acquires, contracts, and establishes pricing, as well as provides customer service to merchants, similar to the transaction processing services the Company provides through Discover, Visa and MasterCard. The Company also uses its sponsor banks to assist in funding its merchants' American Express transactions.

New Accounting Pronouncements— From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that the Company adopts as of the specified effective date.
    
In May 2014, the FASB issued guidance on revenue from contracts with customers, which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This made the new guidance effective December 15, 2017 for annual reporting periods beginning after that date. The FASB also approved early adoption of the standard, but not before the original effective date which was for reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the adoption of this guidance will have on the Company's consolidated financial statements and disclosures.

In April 2015, the FASB issued guidance on debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the FASB issued updated guidance to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In April 2015, the FASB issued guidance that defines specific criteria entities must apply to determine if a cloud computing arrangement includes an in-substance software license. The new guidance clarifies that software licenses included in a cloud computing software should be accounted for in the same manner as other software licenses. This amendment is

8

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new guidance can be applied on either a prospective or retrospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In July 2015, the FASB issued guidance to more clearly articulate the requirements for the subsequent measurement of inventory and related disclosures. The new guidance clarifies the basis for measuring inventory at the lower of cost and net realizable value. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2016. Early adoption is permitted. The new guidance should be applied on a prospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

In September 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments for business combinations. The new guidance eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This amendment is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2015. Early adoption is permitted. The new guidance should be applied on a prospective basis. The effect on the Company’s consolidated financial statements is still being evaluated.

2. Supplementary Financial Statement Information
Cash—At September 30, 2015, cash included approximately $16.5 million of processing-related cash in transit and collateral, compared to approximately $17.8 million of processing-related cash in transit and collateral at December 31, 2014. Processing-related cash in transit and collateral includes merchant deposits, collateral deposits, and funds in transit relating to timing differences for the Company's card and non-card payment processing businesses.
Other Income (Expense)Other income (expense) consists of interest income on cash and investments, the interest cost on the Company's borrowings, gains or losses on the disposal of assets, write downs of capitalized information technology development projects and other non-operating income or expense items.

As a result of the stock purchase agreement that the Company entered into on August 6, 2014 with the noncontrolling shareholders of Leaf Acquisition, LLC ("Leaf"), the Company was released from a contingent earn-out liability to those noncontrolling shareholders and recognized a pre- and after-tax gain of $3.6 million in the three and nine months ended September 30, 2014. The non-cash impact of the gain associated with the release of the contingent earn-out liability is recorded in "Other, net" in the Condensed Consolidated Statements of Income and "Write off of fixed assets and other" in the Condensed Consolidated Statement of Cash Flows.

Income Taxes—The Company accounts for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates. The impact on deferred assets and liabilities of a change in tax rates is recognized in the period that the rate change is enacted. Valuation allowances are recorded when it is determined that it is more likely than not that a deferred tax asset will not be realized.
The provision for income taxes for the three and nine months ended September 30, 2015 and 2014 and the resulting effective tax rates were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Provision for income taxes
$
15,006

 
$
11,727

 
$
37,274

 
$
34,579

Effective tax rate
38.6
%
 
36.8
%
 
37.5
%
 
40.1
%
    
The effective tax rate for the three months ended September 30, 2015, reflects an increase as compared to the three months ended September 30, 2014 due to a benefit recognized in the three months ended September 30, 2014 for the permanent non-taxable status of the gain recognized on the release of a contingent earn-out liability to the former noncontrolling shareholders of Leaf.


9

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The decrease in the effective tax rate for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, primarily reflects the partial recognition of deferred tax benefits during the first quarter of 2015 from past accumulated losses of Leaf due to the generation of future taxable income resulting from the Company's acquisition of Dinerware, Inc. ("Dinerware"). The structure of this acquisition along with the corresponding preliminary purchase price allocation resulted in the recording of deferred tax liabilities on finite lived intangible assets that will provide a source of future taxable income. Additionally, the Company’s effective tax rate benefited from its ability to utilize the losses generated from Leaf against consolidated taxable income since its August 6, 2014 acquisition of the shares held by the former noncontrolling shareholders of Leaf.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the Company's estimated tax rate changes, it makes a cumulative adjustment in that period.
The Company regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions, which have been deemed reasonable by management. The Company does not expect any material changes to unrecognized tax benefits in the next twelve months. At September 30, 2015, the reserve for unrecognized tax benefits related to uncertain tax positions was $8.6 million, of which $5.8 million would, if recognized, impact the effective tax rate. At December 31, 2014, the reserve for unrecognized tax benefits related to uncertain tax positions was $7.3 million, of which $4.9 million would, if recognized, impact the effective tax rate.

Share–Based Compensation— The Company expenses employee share-based compensation under the fair value method. Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company grants three types of Restricted Share Units (“RSUs”): service-based RSUs, performance-based RSUs (“PRSUs”), and total shareholder return RSUs (“TRSUs”). The Company's Board of Directors approves grants of PRSUs and TRSUs with grant-specific vesting and performance target terms. The methods and assumptions used in the determination of the fair value of share-based awards and measurement of performance targets are consistent with those described in the 2014 Form 10-K. Share-based compensation costs recognized were $4.4 million and $3.4 million, respectively, for the three months ended September 30, 2015 and 2014 and $14.1 million and $10.9 million, respectively, for the nine months ended September 30, 2015 and 2014.
    
Common Stock Repurchases— On May 8, 2013, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. During the nine months ended September 30, 2014, the Company had repurchased 1,347,817 shares for $54.5 million at an average cost of approximately $40.40 per share. Total repurchases under this authorization were 1,882,417 shares for $74.9 million at an average cost of approximately $39.81 per share. Repurchases under this authorization were completed during the second quarter of 2014. These repurchases were made through the open market in accordance with applicable laws and regulations. On May 8, 2014, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. As of September 30, 2015, the Company has not repurchased any shares under the May 8, 2014 authorization.

The Company intends to fund any repurchases with cash flow from operations, existing cash on the balance sheet, and other sources, including the 2014 Revolving Credit Facility. The manner, timing and amount of repurchases, if any, will be determined by management and will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions and other corporate liquidity requirements. The repurchase program may be modified or discontinued at any time.

Noncontrolling Interests— Prior to August 6, 2014, the Company owned 66.67% of the outstanding capital stock of Leaf. Noncontrolling shareholders' share of after-tax net loss of Leaf was included in Net loss attributable to noncontrolling interests in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2014. On August 6, 2014, the Company entered into a stock purchase agreement with the noncontrolling shareholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. As a result of this transaction, Leaf became a wholly-owned subsidiary of the Company and there is no noncontrolling interest on the Condensed Consolidated Balance Sheet as of September 30, 2015 and December 31, 2014.

10

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Subsequent Events—The Company evaluated subsequent events through the issuance date with respect to the condensed consolidated financial statements as of and for the nine months ended September 30, 2015. On October 30, 2015, the Company acquired the stock of Menusoft Systems Corporation (a.k.a. “Digital Dining”) for a cash payment of $18.7 million. The purchase price was financed under the 2014 Revolving Credit Facility.

3. Acquisitions

Campus Solutions

TouchNet Information Systems, Inc.
On September 4, 2014, the Company completed the acquisition of TouchNet for a cash payment of $375 million, less a net working capital deficit, for all outstanding common shares. The purchase was funded through a new five-year $375 million term loan.

The transaction was accounted for under the acquisition method of accounting. Beginning September 4, 2014, TouchNet's results of operations are included in the Company's results of operations. The fair values of the TouchNet assets acquired and liabilities assumed were estimated as of their acquisition date. The excess of the purchase price over the net assets, approximately $221.6 million, was recorded as goodwill, which is deductible for income tax reporting.  Acquisition-related costs of approximately $2.3 million for advisory, legal and regulatory costs incurred in connection with the TouchNet acquisition have been expensed in general and administrative expenses.
The following table summarizes the purchase price allocation (in thousands):
 
Cash and cash equivalents
$
34,576

 
 
Receivables, net
12,243

 
 
Inventory
66

 
 
Prepaid expenses
601

 
 
Property and equipment, net
3,360

 
 
Intangible assets, net
144,400

 
 
Goodwill
221,575

 
 
    Total assets acquired
416,821

 
 
Accounts payable
2,236

 
 
Accrued expenses and other liabilities
2,896

 
 
Current portion of unearned revenue
24,014

 
 
Current tax liability
13,914

 
 
Long-term portion of unearned revenue
2,037

 
 
    Net assets acquired
$
371,724

 

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of TouchNet is as follows:
 
Weighted average amortization life
 
 
 
 
(In years)
 
 
 
Customer relationships
20
 
 
 
Software
15
 
 
 
Trademark
5
 
 
 
Non-compete agreements
5
 
 
 
Overall
18
 
 

The following pro forma information shows the results of the Company's operations for the three and nine months ended September 30, 2014 as if the TouchNet acquisition had occurred on January 1, 2013. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisition had been made as of that date. The pro forma information is also not intended to be a projection of future results due to the integration of the acquired business.

11

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
(In thousands, except share data)
Total revenues
$
619,861

 
$
1,760,516

Net income attributable to Heartland
$
19,205

 
$
55,538

Basic earnings per share
$
0.53

 
$
1.53

Diluted earnings per share
$
0.52

 
$
1.49


Heartland School Solutions
    
MCS Software Corporation
On April 1, 2014, the Company purchased the net assets of MCS Software Corporation ("MCS Software") for a $17.3 million cash payment. The purchase price was financed under an existing credit facility and from operating cash flows.

The transaction was accounted for under the acquisition method of accounting. Beginning April 1, 2014, MCS Software's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $11.2 million to goodwill, $6.4 million to intangible assets and $0.3 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of MCS Software is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
14
 
 
Software
5
 
 
Non-compete agreement
5
 
 
Overall
11
 

Heartland Payroll Solutions

Payroll 1, Inc.
On February 27, 2015, the Company purchased the stock of Payroll 1, Inc. ("Payroll 1") for a $30.0 million cash payment, plus net working capital. The purchase price was financed under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning February 27, 2015, Payroll 1's results of operations were included in the Company's results of operations. The allocation of the total purchase price was as follows: $20.8 million to goodwill, $14.5 million to intangible assets and $4.5 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.

The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of Payroll 1 is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
13
 
 
Software
6
 
 
Non-compete agreement
4
 
 
Overall
12
 

12

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

Heartland Commerce

Dinerware, LLC
On February 11, 2015, the Company purchased the stock of Dinerware for a $15.0 million cash payment, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning on February 11, 2015, Dinerware's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $12.8 million to goodwill, $2.6 million to intangible assets, and $0.2 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.
The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of Dinerware is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
17
 
 
Software
5
 
 
Trademark
5
 
 
Non-compete agreement
3
 
 
Overall
13
 

pcAmerica, LLC
On January 30, 2015, the Company purchased the assets of Automation, Inc. ("pcAmerica") for a $15.0 million cash payment, plus net working capital. The cash purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning on January 30, 2015, pcAmerica's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $14.9 million to goodwill, $1.5 million to intangible assets, and $1.3 million to net tangible liabilities. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition date, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2015 acquired finite lived intangible assets related to the acquisition of pcAmerica is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
20
 
 
Software
5
 
 
Trademark
5
 
 
Non-compete agreement
5
 
 
Overall
14
 

Xpient Solutions, LLC
On October 31, 2014, the Company acquired the net assets of Xpient Solutions, LLC (“Xpient”) for a cash payment of $30.0 million, plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility.

The transaction was accounted for under the acquisition method of accounting. Beginning October 31, 2014, Xpient's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $21.5 million to goodwill, $9.5 million to intangible assets and $3.0 million to net tangible assets. The fair values of Xpient's assets acquired and liabilities assumed were estimated as of their acquisition date. Pro forma results of operations

13

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of Xpient is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
21
 
 
Software
10
 
 
Trademark
5
 
 
Non-compete agreement
3
 
 
Overall
14
 

Liquor Point of Sale
On February 14, 2014, the Company purchased the assets of Merchant Software Corporation (referred to as
"Liquor POS") for a $3.3 million cash payment. The cash purchase price was funded from operating cash flows.

The transaction was accounted for under the acquisition method of accounting. Beginning on February 15, 2014, Liquor POS's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $2.2 million to goodwill, $1.2 million to intangible assets, and $0.1 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.
The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of Liquor POS is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
10
 
 
Software
7
 
 
Patents
5
 
 
Non-compete agreement
5
 
 
Overall
9
 

4. Receivables
A summary of receivables by major class was as follows at September 30, 2015 and December 31, 2014:

 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Accounts receivable from merchants and customers
$
222,422

 
$
200,912

Accounts receivable from bankcard networks
33,613

 
31,279

Accounts receivable from others
4,297

 
3,465

 
260,332

 
235,656

Less allowance for doubtful accounts
(1,954
)
 
(1,552
)
Total receivables, net
$
258,378

 
$
234,104


Included in accounts receivable from others are amounts due from employees (predominantly salespersons), which were $2.7 million and $1.6 million at September 30, 2015 and December 31, 2014, respectively. Accounts receivable related to bankcard networks are primarily amounts due from Discover and American Express for bankcard transactions.

14

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

A summary of the activity in the allowance for doubtful accounts for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
1,593

 
$
1,780

 
$
1,552

 
$
1,032

Out-of-Period adjustment (a)

 

 

 
875

Additions to allowance
2,285

 
557

 
4,991

 
1,685

Charges against allowance
(1,924
)
 
(1,234
)
 
(4,652
)
 
(2,489
)
Additions for acquisitions (b)

 
450

 
63

 
450

Ending balance
$
1,954

 
$
1,553

 
$
1,954

 
$
1,553

(a) See Note 1, Organization and Operations for a discussion of an Out-of-Period adjustment.
(b) Consists of allowances of businesses acquired during the nine months ended September 30, 2015 and 2014.


5. Funds Held for Customers
A summary of Funds held for customers, including the amortized cost, gross unrealized gains (losses) and estimated fair value for available-for-sale securities by major security type and class of security were as follows at September 30, 2015 and December 31, 2014:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
September 30, 2015
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
13,012

 
$

 
$
(29
)
 
$
12,983

Fixed income - municipal bonds - available for sale
14,031

 
32

 
(8
)
 
14,055

Cash and cash equivalents held for customers
153,420

 

 

 
153,420

Total funds held for customers
$
180,463

 
$
32

 
$
(37
)
 
$
180,458

 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2014
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
13,012

 
$

 
$
(16
)
 
$
12,996

Fixed income - municipal bonds - available for sale
14,688

 
2

 
(51
)
 
14,639

Cash and cash equivalents held for customers
148,857

 

 

 
148,857

Total funds held for customers
$
176,557

 
$
2

 
$
(67
)
 
$
176,492


Expected maturities of the Fixed income - municipal bonds at September 30, 2015 are as follows:

 
Total
 
Less Than 1 Year
 
1 To 5 Years
 
5 To 10 Years
 
(In thousands)
September 30, 2015
 
 
 
 
 
 
 
Funds held for customers:
 
 
 
 
 
 
 
Fixed income - municipal bonds - available for sale cost
$
14,031

 
$
2,931

 
$
11,100

 
$

Fixed income - municipal bonds - available for sale estimated fair value
$
14,055

 
$
2,933

 
$
11,122

 
$

During the nine months ended September 30, 2015, the Company did not experience any other-than-temporary losses on its investments.

15

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)


During the nine months ended September 30, 2014, the Company sold available for sale securities for $17.2 million and realized a gain of $0.3 million which was recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2014.

6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of September 30, 2015 and December 31, 2014 was as follows:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Capitalized signing bonuses
$
111,155

 
$
98,879

Less accumulated amortization
(51,539
)
 
(47,238
)
 
59,616

 
51,641

Capitalized customer deferred acquisition costs
61,570

 
54,583

Less accumulated amortization
(37,994
)
 
(33,117
)
 
23,576

 
21,466

Capitalized customer acquisition costs, net
$
83,192

 
$
73,107


A summary of the activity in capitalized customer acquisition costs, net for the three and nine month periods ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Balance at beginning of period
$
78,640

 
$
66,433

 
$
73,107

 
$
61,027

Plus additions to:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
12,468

 
9,468

 
33,855

 
27,647

Capitalized customer deferred acquisition costs
7,521

 
6,192

 
20,650

 
18,349

 
19,989

 
15,660

 
54,505

 
45,996

Less amortization expense on:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
(8,928
)
 
(7,703
)
 
(25,880
)
 
(22,357
)
Capitalized customer deferred acquisition costs
(6,509
)
 
(5,423
)
 
(18,540
)
 
(15,699
)
 
(15,437
)
 
(13,126
)
 
(44,420
)
 
(38,056
)
Balance at end of period
$
83,192

 
$
68,967

 
$
83,192

 
$
68,967


Net signing bonus adjustments from estimated amounts to actual were $(1.5) million and $(0.7) million for the three months ended September 30, 2015 and 2014, respectively and $(3.8) million and $(2.8) million, respectively, for the nine months ended September 30, 2015 and 2014. Net signing bonus adjustments are netted against additions in the table above. Negative signing bonus adjustments occur when the actual gross margin generated by the merchant contract during the first year is less than the estimated gross margin for that year, resulting in the overpayment of the up-front signing bonus and would be recovered from the relevant salesperson. Positive signing bonus adjustments result from the prior underpayment of signing bonuses and would be paid to the relevant salesperson.

Fully amortized signing bonuses of $6.6 million and $6.9 million, respectively, were written off during the three month periods ended September 30, 2015 and 2014 and $21.6 million and $19.4 million, respectively, were written off during the nine month periods ended September 30, 2015 and 2014. In addition, fully amortized customer deferred acquisition costs of $4.4 million and $3.9 million, respectively, were written off during the three months ended September 30, 2015 and 2014 and $13.3 million and $11.3 million, respectively, were written off during the nine months ended September 30, 2015 and 2014.

The Company believes that no impairment of capitalized customer acquisition costs has occurred as of September 30, 2015.


16


7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
176,175

 
$
31,349

 
$
144,826

 
5 to 21 years—proportional cash flow
Merchant portfolios
4,214

 
3,456

 
758

 
7 years—proportional cash flow
Software
61,404

 
16,953

 
44,451

 
3 to 15 years—straight line
Non-compete agreements
6,162

 
3,713

 
2,449

 
3 to 5 years—straight line
Other
6,076

 
1,306

 
4,770

 
5 to 9 years—straight line
 
$
254,031

 
$
56,777

 
$
197,254

 
 
 
December 31, 2014
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
159,925

 
$
22,011

 
$
137,914

 
6 to 21 years—proportional cash flow
Merchant portfolios
4,214

 
3,161

 
1,053

 
7 years—proportional cash flow
Software
58,377

 
13,300

 
45,077

 
1 to 15 years—straight line
Non-compete agreements
5,947

 
2,830

 
3,117

 
5 years—straight line
Other
5,800

 
408

 
5,392

 
5 to 9 years—straight line
 
$
234,263

 
$
41,710

 
$
192,553

 
 
Amortization expense related to the intangible assets was $5.1 million and $3.4 million, respectively, for the three months ended September 30, 2015 and 2014 and $15.1 million and $8.3 million, respectively, for the nine months ended September 30, 2015 and 2014. The estimated amortization expense related to intangible assets for the remainder of 2015 and the next five fiscal years are as follows:
For the Fiscal Year Ending December 31,
 
(In thousands)
2015
$
5,031

2016
19,018

2017
17,472

2018
15,662

2019
14,236

2020
12,426

Thereafter
113,409

 
$
197,254




17


Goodwill — The changes in the carrying amount of goodwill by segment for the nine months ended September 30,
2015 and 2014 were as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Payment Processing
 
Campus Solutions
 
Heartland School Solutions
 
Heartland Payroll Solutions
 
Leaf
 
Other
 
Total
Balance, January 1, 2014
$
43,701

 
$
35,789

 
$
53,350

 
$
31,018

 
$
20,619

 
$
6,501

 
$
190,978

 
Goodwill acquired during the period

 
222,076

 
13,592

 

 

 
2,247

 
237,915

 
Other (a)

 

 
(2,493
)
 

 
(2,130
)
 

 
(4,623
)
Balance, September 30, 2014
43,701

 
257,865

 
64,449

 
31,018

 
18,489

 
8,748

 
424,270

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
43,701

 
257,337

 
64,522

 
31,018

 

 
29,134

 
425,712

 
Goodwill acquired during the period

 

 

 
21,915

 

 
27,927

 
49,842

 
Other (a)

 
26

 

 
(1,165
)
 

 
902

 
(237
)
Balance, September 30, 2015
$
43,701

 
$
257,363

 
$
64,522

 
$
51,768

 
$

 
$
57,963

 
$
475,317

(a) Reflects adjustments to allocations of purchase price after the quarter of acquisition.
The percentage of total reportable segments' assets comprised of goodwill as of September 30, 2015 and 2014 was as follows:
 
 
Percent of Goodwill to Reportable Segments' Total Assets
 
 
 
September 30, 2015
 
September 30, 2014
 
 
Payment Processing
7.9%
 
8.0%
 
 
Campus Solutions
53.4%
 
51.4%
 
 
Heartland School Solutions
75.3%
 
70.3%
 
 
Heartland Payroll Solutions
22.0%
 
23.3%
 
 
Leaf
—%
 
44.7%
 
 
Other
61.6%
 
37.3%
 

In the fourth quarter of 2014, the Company considered the overlapping cloud-based POS systems in development at Heartland Commerce businesses (see Note 3, Acquisitions) and decided that it would stop POS development efforts at Leaf, a previous Heartland Commerce business. This decision caused a significant adverse change in the extent or manner in which the long-lived asset group of Leaf would be used, including Prosper, an internally developed POS software technology. Due to these changes in circumstances, the implied fair value of the Leaf reporting unit was determined to be significantly below its carrying value. This led to a Goodwill impairment charge for the full balance of Leaf goodwill as of December 31, 2014. In the fourth quarter of 2014, the Company recorded pre-tax goodwill and asset impairment charges of $18.5 million and $18.9 million, respectively.

8. Processing Liabilities
Processing liabilities result primarily from the Company's card processing activities and include merchant deposits maintained to offset potential liabilities arising from merchant chargebacks. A summary of processing liabilities and loss reserves was as follows at September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Merchant processing
$
111,634

 
$
109,361

Merchant deposits
6,758

 
6,655

Loss reserves
1,492

 
3,382

 
$
119,884

 
$
119,398


The timing for presentment of transaction funding files to the bankcard networks results in the Company's sponsor banks receiving settlement cash one day before payment is made to merchants, thereby increasing funding obligations to its SME merchants, which are carried in processing liabilities. The Company funds interchange advances to SME merchants first from this settlement cash received from bankcard networks, then from the Company's available cash or by incurring a liability to its sponsor banks. At September 30, 2015 and December 31, 2014, the Company did not use any of its available cash to fund merchant advances. The amount due to sponsor banks for funding merchant advances was $47.7 million at September 30, 2015

18


and $29.9 million at December 31, 2014. The liability to sponsor banks is repaid at the beginning of the following month out of the fees the Company collects from its merchants.

The Company's merchants have the liability for any charges properly reversed by the cardholder through a mechanism known as a chargeback. If the merchant is unable to pay this amount, the Company will be liable to the card brand networks for the reversed charges. The Company has determined that the fair value of its obligation to stand ready to perform is minimal. The Company requires personal guarantees and merchant deposits from certain merchants to minimize its obligation.

The card brand networks generally allow chargebacks within four months after the later of (1) the date the transaction is processed, or (2) the delivery of the product or service to the cardholder. As the majority of the Company's SME merchant transactions involve the delivery of the product or service at the time of the transaction, a reasonable basis for determining an estimate of the Company's exposure to chargebacks is the last four months' processing volume on the SME portfolio, which was $32.5 billion and $27.8 billion for the four months ended September 30, 2015 and December 31, 2014, respectively. However, for the four months ended September 30, 2015 and December 31, 2014, the Company was presented with $17.5 million and $16.0 million, respectively, in chargebacks by issuing banks. In the nine months ended September 30, 2015 and 2014, the Company incurred merchant losses of $2.6 million and $2.5 million, respectively, or 0.37 basis points and 0.42 basis points, respectively, on total SME card processing volumes processed of $69.1 billion and $60.1 billion, respectively. These losses are included in processing and servicing costs in the Company's Condensed Consolidated Statements of Income.

The loss recorded by the Company for chargebacks associated with any individual merchant is typically small, due both to the relatively small size and the processing profile of the Company's SME merchants. However, from time to time the Company will encounter instances of merchant fraud, and the resulting chargeback losses may be considerably more significant to the Company. The Company has established a contingent reserve for estimated currently existing credit and fraud losses on its Condensed Consolidated Balance Sheets, amounting to $1.5 million and $3.4 million at September 30, 2015 and December 31, 2014, respectively. This reserve is determined by performing an analysis of the Company's historical loss experience applied to current processing volumes and exposures.

A summary of the activity in the loss reserve for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
1,437

 
$
1,762

 
$
3,382

 
$
1,505

Additions to reserve
759

 
943

 
2,528

 
3,000

Charges against reserve
(704
)
 
(1,073
)
 
(4,418
)
 
(2,873
)
Ending balance
$
1,492

 
$
1,632

 
$
1,492

 
$
1,632


9. Accrued Buyout Liability
A summary of the accrued buyout liability was as follows as of September 30, 2015 and December 31, 2014:
 
September 30,
2015
 
December 31,
2014
 
(In thousands)
Vested Relationship Managers and sales managers
$
53,971

 
$
46,301

Unvested Relationship Managers and sales managers
1,675

 
1,692

 
55,646

 
47,993

Less current portion
(17,471
)
 
(15,023
)
Long-term portion of accrued buyout liability
$
38,175

 
$
32,970


In calculating the accrued buyout liability for unvested Relationship Managers and sales managers, the Company has assumed that 31% of the unvested Relationship Managers and sales managers will vest in the future, which represents the Company’s historical vesting rate. A 5% increase to 36% in the expected vesting rate would have increased the accrued buyout liability for unvested Relationship Managers and sales managers by $0.2 million at September 30, 2015 and December 31, 2014, respectively.

19


A summary of the activity in the accrued buyout liability for the three and nine months ended September 30, 2015 and 2014 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Beginning balance
$
51,140

 
$
41,268

 
$
47,993

 
$
39,379

Increase in settlement obligation, net
7,585

 
5,354

 
20,514

 
15,199

Buyouts
(3,079
)
 
(1,665
)
 
(12,861
)
 
(9,621
)
Ending balance
$
55,646

 
$
44,957

 
$
55,646

 
$
44,957


10. Credit Facilities

On September 4, 2014, the Company entered into an amended and restated senior secured credit facility (the "2014 Credit Agreement") with Bank of America, N.A., as administrative agent, and certain lenders who are a party to the 2014 Credit Agreement. The 2014 Credit Agreement provides for a revolving credit facility in the aggregate amount of up to $400 million (the “2014 Revolving Credit Facility”) and a term loan in an initial principal amount of $375 million (the “2014 Term Credit Facility”).

The following is a summary of the Company's borrowings under its credit facilities as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
Amount outstanding:
 
 
 
2014 Term Credit Facility
$
356,250

 
$
370,000

2014 Revolving Credit Facility
142,500

 
189,500

Total amount outstanding
$
498,750

 
$
559,500


The weighted average interest rate at September 30, 2015 was 2.3%. Remaining unamortized fees and direct costs incurred for the Company's credit facilities as of September 30, 2015 were $4.9 million.

11. Commitments and Contingencies
LitigationThe Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. In the opinion of the Company, based on consultations with outside counsel, material losses in addition to amounts previously accrued are not considered reasonably possible in connection with these ordinary course legal proceedings.

Contingencies—The Company collects and stores sensitive data about its merchant customers and bankcard holders. If the Company’s network security is breached or sensitive merchant or cardholder data is misappropriated, the Company could be exposed to assessments, fines or litigation costs that could be material.

Leases—The Company leases various office spaces and certain equipment under operating leases with remaining terms ranging up to 15 years. The majority of the office space lease agreements contain renewal options and generally require the Company to pay certain operating expenses.

20

Table of Contents            
Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements—(Continued)
(unaudited)

The future minimum lease payments for all non-cancelable leases for the remainder of 2015 and the next five fiscal years are as follows:

For the Fiscal Year Ending December 31,
Operating Leases (a)
 
(In thousands)
2015
$
3,696

2016
16,610

2017
13,964

2018
12,054

2019
9,247

2020
7,618

Thereafter
43,826

Total future minimum lease payments
$
107,015

(a) There were no material capital leases at September 30, 2015.

Rent expense for leased facilities and equipment was $4.3 million and $2.9 million, respectively, for the three months ended September 30, 2015 and 2014, and $13.5 million and $8.7 million, respectively, for the nine months ended September 30, 2015 and 2014.
Commitments—Certain officers of the Company have entered into employee confidential information and non-competition agreements under which they are entitled to severance pay equal to their base salary and medical benefits for one year or two years depending on the officer and a pro-rated bonus in the event they are terminated by the Company other than for cause. The Company paid $0.6 million under one of these agreements in the nine months ended September 30, 2014.
The following table reflects the Company’s other significant contractual obligations, including leases from above, as of September 30, 2015:
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 year
 
1 to 3
Years
 
3 to 5
years
 
More than 5
years
 
 
(In thousands)
Processing providers (a)
 
$
9,008

 
$
4,013

 
$
4,995

 


 
$

Telecommunications providers (b)
 
6,818

 
3,307

 
3,511

 

 

Facility and equipment leases
 
107,015

 
16,673

 
26,777

 
17,843

 
45,722

2014 Term Credit Facility
 
356,250

 
18,750

 
51,563

 
285,937

 

2014 Revolving Credit Facility (c)
 
142,500

 

 

 
142,500

 

Capital Lease Obligation
 
84

 
43

 
41

 

 

 
 
$
621,675

 
$
42,786

 
$
86,887