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Section 1: 10-Q (10-Q)

HPY 03.31.2014 10Q
Table of Contents


 
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 March 31, 2014

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 May 5, 2014, there were 35,836,601 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 


Table of Contents


INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
       for the three months ended March 31, 2014 and 2013 (unaudited)
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.


Table of Contents


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)
 
March 31,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
73,145

 
$
71,932

Funds held for customers
155,557

 
127,375

Receivables, net
201,662

 
200,040

Investments
4,094

 
4,101

Inventory
10,928

 
11,087

Prepaid expenses
16,720

 
15,284

Current tax assets
6,863

 
10,426

Current deferred tax assets, net
6,788

 
9,548

Total current assets
475,757

 
449,793

Capitalized customer acquisition costs, net
62,628

 
61,027

Property and equipment, net
151,803

 
147,388

Goodwill
191,145

 
190,978

Intangible assets, net
48,821

 
49,857

Deposits and other assets, net
1,130

 
1,262

Total assets
$
931,284

 
$
900,305

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
49,443

 
$
19,109

Accounts payable
65,375

 
70,814

Customer fund deposits
155,557

 
127,375

Processing liabilities
101,089

 
130,871

Current portion of accrued buyout liability
14,015

 
13,943

Accrued expenses and other liabilities
40,498

 
49,861

Total current liabilities
425,977

 
411,973

Deferred tax liabilities, net
40,003

 
40,600

Reserve for unrecognized tax benefits
6,022

 
5,633

Long-term borrowings
180,000

 
150,000

Long-term portion of accrued buyout liability
27,285

 
25,436

Total liabilities
679,287

 
633,642

Commitments and contingencies (Note 11)

 

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 37,666,727 and 37,485,486 shares issued at March 31, 2014 and December 31, 2013; 36,436,572 and 36,950,886 outstanding at March 31, 2014 and December 31, 2013
37

 
37

Additional paid-in capital
247,188

 
245,055

Accumulated other comprehensive loss
(29
)
 
(88
)
Retained earnings
48,598

 
35,960

Treasury stock, at cost (1,230,155 and 534,600 shares at March 31, 2014 and December 31, 2013)
(49,157
)
 
(20,489
)
Total stockholders’ equity
246,637

 
260,475

Noncontrolling interests
5,360

 
6,188

Total equity
251,997

 
266,663

Total liabilities and equity
$
931,284

 
$
900,305

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
March 31,
 
2014
 
2013
Total revenues
$
523,283

 
$
501,239

Costs of services:
 
 
 
Interchange
318,096

 
307,072

Dues, assessments and fees
49,668

 
47,332

Processing and servicing
68,609

 
59,397

Customer acquisition costs
10,250

 
10,733

Depreciation and amortization
5,812

 
4,090

Total costs of services
452,435

 
428,624

General and administrative
44,486

 
45,840

Total expenses
496,921

 
474,464

Income from operations
26,362

 
26,775

Other income (expense):
 
 
 
Interest income
32

 
34

Interest expense
(1,050
)
 
(1,234
)
Other, net
(132
)
 
(90
)
Total other expense
(1,150
)
 
(1,290
)
Income from continuing operations before income taxes
25,212

 
25,485

Provision for income taxes
10,300

 
9,840

Net income from continuing operations
14,912

 
15,645

Income from discontinued operations, net of income tax of $2,135

 
3,970

Net income
14,912

 
19,615

Less: Net (loss) income attributable to noncontrolling interests
 
 
 
     Continuing operations
(828
)
 

     Discontinued operations

 
56

Net income attributable to Heartland
$
15,740

 
$
19,559

 
 
 
 
Amounts Attributable to Heartland:
 
 
 
Net income from continuing operations, net of noncontrolling interests
$
15,740

 
$
15,645

Income from discontinued operations, net of income tax and noncontrolling interests

 
3,914

Net income attributable to Heartland
$
15,740

 
$
19,559

 
 
 
 
Basic earnings per share:
 
 
 
      Income from continuing operations
$
0.43

 
$
0.42

      Income from discontinued operations

 
0.11

      Basic earnings per share
$
0.43

 
$
0.53

 
 
 
 
Diluted earnings per share:
 
 
 
      Income from continuing operations
$
0.42

 
$
0.41

      Income from discontinued operations

 
0.10

      Diluted earnings per share
$
0.42

 
$
0.51

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
36,731

 
36,841

Diluted
37,735

 
38,374

 
 
 
 
Dividends declared per share:
$
0.085

 
$
0.07


See accompanying notes to condensed consolidated financial statements.

2

Table of Contents


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

 
Three Months Ended
March 31,
 
2014
 
2013
 
 
 
 
Net income
$
14,912

 
$
19,615

Other comprehensive income (loss):
 
 
 
Unrealized gains on investments, net of income tax of $9 and $4
12

 
3

Unrealized gains on derivative financial instruments, net of tax of $28 and $43
47

 
80

Foreign currency translation adjustment

 
(54
)
Comprehensive income
14,971

 
19,644

Less: Comprehensive (loss) income attributable to noncontrolling interests
(828
)
 
40

Comprehensive income attributable to Heartland
$
15,799

 
$
19,604








































See accompanying notes to condensed consolidated financial statements.

3

Table of Contents



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
Income (Loss)
 

Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
36,856

 
$
38

 
$
222,705

 
$
(399
)
 
$
7,629

 
$
(20,187
)
 
$
1,375

 
$
211,161

Issuance of common stock–
options exercised
89

 

 
1,158

 

 

 

 

 
1,158

Issuance of common stock -
     RSU's vested
144

 

 
(2,839
)
 

 

 

 

 
(2,839
)
Excess tax benefit on employee
share-based compensation

 

 
1,753

 

 

 

 

 
1,753

Repurchase of common stock
(491
)
 

 

 

 

 
(15,261
)
 

 
(15,261
)
Share-based compensation

 

 
3,866

 

 

 

 

 
3,866

Other comprehensive income
(loss)

 

 

 
45

 

 

 
(16
)
 
29

Changes in equity from sale of
      discontinued operation

 

 

 
83

 

 

 
(1,415
)
 
(1,332
)
Dividends on common stock

 

 

 

 
(2,580
)
 

 

 
(2,580
)
Net income for the period

 

 

 

 
19,559

 

 
56

 
19,615

Balance,
March 31, 2013
36,598

 
$
38

 
$
226,643

 
$
(271
)
 
$
24,608

 
$
(35,448
)
 
$

 
$
215,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 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
21

 

 
246

 

 

 

 

 
246

Issuance of common stock-
RSU's vested
161

 

 
(4,125
)
 

 

 

 

 
(4,125
)
Excess tax benefit on employee
share-based compensation

 

 
2,174

 

 

 

 

 
2,174

Repurchase of common stock
(696
)
 

 

 

 

 
(28,668
)
 

 
(28,668
)
Share-based compensation

 

 
3,838

 

 

 

 

 
3,838

Other comprehensive income
(loss)

 

 

 
59

 

 

 

 
59

Dividends on common stock

 

 

 

 
(3,102
)
 

 

 
(3,102
)
Net income (loss) for the period

 

 

 

 
15,740

 

 
(828
)
 
14,912

Balance,
March 31, 2014
36,437

 
$
37

 
$
247,188

 
$
(29
)
 
$
48,598

 
$
(49,157
)
 
$
5,360

 
$
251,997


See accompanying notes to condensed consolidated financial statements.

4

Table of Contents


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
14,912

 
$
19,615

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
11,985

 
11,256

Other depreciation and amortization
9,864

 
7,214

Addition to loss reserves
866

 
802

Provision (recoveries) for doubtful receivables
337

 
(292
)
Deferred taxes
4,205

 
1,251

Share-based compensation
3,838

 
3,866

Gain on sale of business

 
(3,786
)
Write off of fixed assets and other
225

 
57

Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(1,959
)
 
(45,664
)
Decrease (increase) in inventory
163

 
(608
)
Payment of signing bonuses, net
(8,055
)
 
(5,780
)
Increase in capitalized customer acquisition costs
(5,531
)
 
(4,798
)
Increase in prepaid expenses
(1,436
)
 
(3,128
)
Decrease in current tax assets
5,737

 
598

Decrease (increase) in deposits and other assets
122

 
(1,054
)
Excess tax benefits on employee share-based compensation
(2,174
)
 
(1,753
)
Increase in reserve for unrecognized tax benefits
390

 
317

Increase (decrease) in due to sponsor banks
30,335

 
(35,836
)
(Decrease) increase in accounts payable
(6,871
)
 
4,051

Decrease in accrued expenses and other liabilities
(13,071
)
 
(14,197
)
(Decrease) increase in processing liabilities
(30,597
)
 
64,803

Payouts of accrued buyout liability
(1,875
)
 
(2,929
)
Increase in accrued buyout liability
3,796

 
4,275

Net cash provided by (used in) operating activities
15,206

 
(1,720
)
Cash flows from investing activities
 
 
 
Purchase of investments

 
(609
)
Maturities of investments

 
201

Increase in funds held for customers
(28,160
)
 
(10,599
)
Increase in customer fund deposits
28,182

 
10,606

Acquisitions of businesses, net of cash acquired
(3,250
)
 

Proceeds from sale of business

 
19,343

Purchases of property and equipment
(12,846
)
 
(11,351
)
Net cash (used in) provided by investing activities
(16,074
)
 
7,591

Cash flows from financing activities
 
 
 
Proceeds from borrowings
30,000

 

Principal payments on borrowings

 
(5,000
)
Proceeds from exercise of stock options
246

 
1,158

Excess tax benefits on employee share-based compensation
2,174

 
1,753

Repurchases of common stock
(27,237
)
 
(14,280
)
Dividends paid on common stock
(3,102
)
 
(2,580
)
Net cash provided by (used in) financing activities
2,081

 
(18,949
)
 
 
 
 
Net increase (decrease) in cash
1,213

 
(13,078
)
Effect of exchange rates on cash

 
1

Cash at beginning of year
71,932

 
50,581

Cash at end of period
$
73,145

 
$
37,504

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
788

 
$
1,041

Income taxes
(33
)
 
7,683

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents


Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Operations
Basis of Financial Statement Presentation— The accompanying condensed consolidated financial statements include those of Heartland Payment Systems, Inc. (the “Company,” “we,” “us,” or “our”) and its wholly-owned subsidiaries, Heartland Ovation Payroll, Inc. ("Ovation"), Heartland Payment Solutions, Heartland Acquisition LLC (“Network Services”), and as of September 11, 2013, Leaf Acquisition, LLC (which holds 66.67% of the outstanding capital stock of Leaf Holdings, Inc (collectively, "Leaf")), and until January 31, 2013, its previously 70% owned subsidiary Collective POS Solutions Ltd. (“CPOS”). The Company entered into an agreement during the fourth quarter of 2012 to sell CPOS. The transaction was settled on January 31, 2013 and the Company recorded a gain on the sale in the first quarter of 2013. The Company presented CPOS as a discontinued operation in the accompanying condensed consolidated financial statements. See Note 15, Discontinued Operations for more detail. 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 March 31, 2014, its results of operations, changes in equity and cash flows for the three months ended March 31, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2014. 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, 2013. The December 31, 2013 Condensed Consolidated Balance Sheet was derived from the audited 2013 consolidated financial statements.

Business Description—The Company’s primary business is to provide card payment processing services to merchants throughout the United States, and until January 31, 2013 in Canada (See Note 15, Discontinued Operations for more detail). 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. Card payment processing services also includes selling and renting point-of-sale devices. The Company also provides additional services, including those provided through subsidiaries, such as:
School nutrition, point-of-sale solutions, and associated payment solutions, including online prepayment solutions to kindergarten through 12th grade ("K to 12") schools throughout the United States provided by Heartland School Solutions,
Full-service payroll processing and related tax filing services throughout the United States provided by Heartland Ovation Payroll,
Payment processing, higher education loan services and open- and closed-loop payment solutions to colleges and universities throughout the United States and Canada provided by Campus Solutions, and
Prepaid Card and Other including stored-value card solutions throughout the United States and Canada provided by Micropayments, and marketing solutions including loyalty and gift cards throughout the United States, provided through Heartland Marketing Solutions.

Over 71% 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 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.

6

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

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 of the sponsor banks require a certificate of deposit or 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 180 days 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 March 31, 2014, the Company has not been notified of any such issues by its sponsor banks, Visa or MasterCard.

As of March 31, 2014, the Company is party to three bank sponsorship agreements.
On February 8, 2012, the Company entered into a sponsorship agreement with Wells Fargo Bank, N.A.
("WFB"). The WFB sponsorship agreement will be in effect until February 8, 2016 and will automatically
renew for successive three-year periods unless either party provides six months written notice of non-renewal to the other party. Processing for small and mid-sized merchants (referred to as "Small and Midsized Enterprises," or “SME merchants”) under the WFB sponsorship commenced in August 2012, when that activity was transferred from its previous sponsor, KeyBank, National Association.

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. The agreement with TBB expires in February 2015 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 October 1, 2013, the Company transfered sponsorship and processing for a portfolio of SME merchants from Heartland Bank to TBB. The Company was party to a prior sponsorship agreement with Heartland Bank, an unrelated third party, to sponsor SME merchant processing. In March 2013, the Company notified Heartland Bank of its intention to terminate the sponsorship agreement and made arrangements for continuing sponsorship with TBB under the terms of the November 2009 sponsorship agreement.

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. The agreement with Barclays Bank Delaware expires in March 2016 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
The following is a breakout of the Company’s total Visa and MasterCard settled card processing volume for the month ending March 31, 2014 by percentage processed under its individual bank sponsorship agreements:
 
% of
March 2014
Sponsor Bank
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
65%
The Bancorp Bank
23%
Barclays Bank Delaware
12%

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
how it processes Visa and MasterCard transactions. The Company must comply with Discover acquirer operating regulations
and uses its sponsor banks to assist in funding its merchants' Discover transactions.

Under a sales and servicing program agreement with American Express Travel Related Services Company, Inc.
("American Express") the Company: (a) provides solicitation services by signing new-to-American Express merchants directly
with American Express; (b) provides transactional support services on behalf of American Express to the Company's American
Express accepting merchants; and (c) provides processing, settlement, customer support and reporting to merchants, similar to
the services provided for the merchants' Visa, MasterCard and Discover transactions.


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

2. Summary of Significant Accounting Policies
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the condensed 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, 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.
Cash and Cash Equivalents—At March 31, 2014, cash included approximately $37.5 million of processing-related cash in transit and collateral, compared to approximately $32.1 million of processing-related cash in transit and collateral at December 31, 2013. Processing-related cash in transit and collateral includes funds in transit associated with timing differences arising between the amounts our sponsor banks receive from the bankcard networks and the amounts funded by the Company’s merchants. Processing-related cash in transit and collateral also includes merchant deposits, collateral deposits, and funds in transit relating to timing differences for non-card payment processing businesses.
Receivables—The Company's primary receivables are from its bankcard processing merchants. In addition to receivables for transaction fees the Company charges its merchants for processing transactions, these receivables include amounts resulting from the Company's practice of advancing interchange fees to most of its SME merchants during the month and collecting those fees at the beginning of the following month. The Company does not advance interchange fees to its Network Services merchants. Network Services merchants are invoiced monthly, on payment terms of 30 days net from date of invoicing. Receivables from merchants also include receivables from the sale of point of sale terminal equipment.
Historically, the Company funded interchange advances to its SME merchants first with its available cash, and when that cash had been expended, by directing its sponsor banks to fund advances, thereby incurring a payable to sponsor banks. In the fourth quarter of 2012, the Company accelerated the end-of-day presentment of transaction funding files to the bankcard networks resulting in its sponsor banks receiving settlement cash one day earlier and increasing funding obligations to its SME merchants, which are carried in processing liabilities. As a result of accelerated presentment, the Company funds these merchant interchange advances/receivables first from the accelerated settlement cash received from bankcard networks, then from the Company's available cash or by incurring a payable to its sponsor banks. At March 31, 2014 and December 31, 2013, the Company did not fund any merchant advances from its available cash. The amount due to sponsor banks for funding merchant advances was $47.0 million at March 31, 2014 and $17.8 million at December 31, 2013. The Company pays its sponsor banks the prime rate on these payables. The payable to sponsor banks is repaid at the beginning of the following month out of the fees the Company collects from its merchants.

Receivables also include amounts resulting from the pre-funding of Discover and American Express transactions to the Company's merchants. These amounts are recovered the next business day following the date of processing the transaction.

Receivables also include amounts resulting from the sale, installation, training and repair of payment system hardware and software for Campus Solutions, Heartland School Solutions and Prepaid Card and Other systems. These receivables are mostly invoiced on terms of 30 days net from date of invoicing.

Receivables are stated net of allowance for doubtful accounts. The Company estimates its allowance based on experience with its merchants, customers, and sales force and its judgment as to the likelihood of their ultimate payment. The Company also considers collection experience and makes estimates regarding collectability based on trends in the aging. Historically, the Company has not experienced significant charge offs for its merchant and customer receivables.

Investments and Funds Held for Customers—Investments, including those carried on the Condensed Consolidated Balance Sheets as Funds held for customers, consist primarily of equity investments, bond funds and certificates of deposit. Funds held for customers also include overnight bank deposits. The majority of investments carried in Funds held for customers are available-for-sale and recorded at fair value based on quoted market prices. Certificates of deposit are classified as held to maturity and recorded at cost. In the event of a sale, cost is determined on a specific identification basis. At March 31, 2014, Funds held for customers included cash and cash equivalents of $142.3 million and investments available for sale of $13.3 million.


8

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

The asset funds held for customers and the liability customer fund deposits include: (1) amounts collected from customers prior to funding their payroll liabilities, as well as related tax and fiduciary liabilities for those customers, and (2) amounts collected by Campus Solutions in its capacity as loan servicer, which will be remitted to the customer/owner of the student loans the following month.

Capitalized Customer Acquisition Costs, net—Capitalized customer acquisition costs consist of (1) up-front signing bonus payments made to Relationship Managers and sales managers (the Company's sales force, which are referred to as "salespersons") for the establishment of new merchant relationships, and (2) a deferred acquisition cost representing the estimated cost of buying out the residual commissions of vested salespersons. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The capitalized customer acquisition costs are amortized using a method which approximates a proportional revenue approach over the initial three-year term of the merchant contract.
The up-front signing bonus paid for new SME bankcard, payroll and loyalty marketing accounts is based on the estimated gross margin for the first year of the merchant contract. The signing bonus, amount capitalized, and related amortization are adjusted after the first year to reflect the actual gross margin generated by the merchant contract during that year. The deferred customer acquisition cost asset is accrued over the first year of SME bankcard, payroll and loyalty marketing merchant processing, consistent with the build-up in the accrued buyout liability, as described below.

Management evaluates the capitalized customer acquisition costs for impairment on an annual basis by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying merchant relationships to the carrying amount of the capitalized customer acquisition costs. If the estimated future net cash flows are lower than the recorded carrying amount, indicating an impairment of the value of the capitalized customer acquisition costs, the impairment loss will be charged to operations. The Company believes that no impairment has occurred as of March 31, 2014.

Accrued Expenses and Other Liabilities— Accrued expenses and other liabilities on the Condensed Consolidated
Balance Sheets includes deferred revenue of $8.9 million and $18.2 million at March 31, 2014 and December 31, 2013,
respectively, which is primarily related to the Company's Heartland School Solutions, Campus Solutions, and Payroll businesses.

Also included in accrued expenses and other liabilities at March 31, 2014 and December 31, 2013 is $2.8 million and $3.4 million, respectively, relating to the allocation of purchase price to an unfavorable processing contract associated with the September 30, 2011 acquisition of School-Link Technologies, Inc. During the three months ended March 31, 2014 and 2013, the Company amortized $0.6 million and $0.7 million, respectively of this accrued liability against the cash processing costs paid under that contract. During the three months ended March 31, 2013, the Company recorded an adjustment to the carrying value of this unfavorable processing contract of $1.6 million to adjust the liability to reflect the latest estimate of the expected cash processing costs to be paid over the remainder of the contract. The amortization for the quarter and adjustment to the fair value were included in cost of services in our Condensed Consolidated Statements of Income.

Processing Liabilities—Processing liabilities result primarily from the Company's card processing activities. Processing liabilities primarily reflect funds in transit associated with differences arising between the amounts our sponsor banks receive from the bankcard networks and the amounts funded to the Company's merchants. Such differences arise from timing differences, interchange expense, merchant advances, merchant reserves and chargeback processing. These differences result in payables or receivables. If the settlement received from the bankcard networks precedes the funding obligation to the merchant, the Company records a processing liability. Conversely, if funding to the merchant precedes the settlement from the bankcard networks, the Company records a receivable from the bankcard network. The amounts are generally collected or paid the following business day.
Chargebacks periodically arise due to disputes between a cardholder and a merchant resulting from the cardholder's dissatisfaction with merchandise quality or the merchant's service, and the disputes may not always be resolved in the merchant's favor. In some of these cases, the transaction is ''charged back'' to the merchant and the purchase price is refunded to the cardholder by the credit card-issuing institution. If the merchant is unable to fund the refund, the Company is liable for the full amount of the transaction. The Company's obligation to stand ready to perform is minimal. The Company maintains a deposit or the pledge of a letter of credit from certain merchants as an offset to potential contingent liabilities that are the responsibility of such merchants. The Company evaluates its ultimate risk and records an estimate of potential loss for chargebacks based upon an assessment of actual historical loss rates compared to recent bankcard processing volume levels. The Company believes that the liability recorded as loss reserves approximates fair value.

9

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


Accrued Buyout Liability—The Company's Relationship Managers and sales managers are paid residual commissions based on the gross margin generated by monthly SME merchant processing activity. The Company has the right, but not the obligation, to buy out some or all of these commissions, and intends to do so periodically. Such purchases of the commissions are at a fixed multiple of the last twelve months' commissions. Because of the Company's intent and ability to execute purchases of the residual commissions, and the mutual understanding between the Company and the Relationship Managers and sales managers, the Company has accounted for this deferred compensation arrangement pursuant to the substantive nature of the plan. The Company therefore records the amount that it would have to pay (the ''settlement cost'') to buy out non-servicing related commissions in their entirety from vested Relationship Managers and sales managers, and an accrual, based on their progress towards vesting, for those unvested Relationship Managers and sales managers who are expected to vest in the future. As noted above, as the liability increases over the first year of a SME merchant contract, the Company also records a related deferred acquisition cost asset for currently vested Relationship Managers and sales managers. The accrued buyout liability associated with unvested Relationship Managers and sales managers is not included in the deferred acquisition cost asset since future services are required in order to vest. Subsequent changes in the estimated accrued buyout liability due to merchant attrition, same-store sales growth and changes in gross margin are included in the same income statement caption as customer acquisition costs expense.

Relationship Managers and sales managers earn portfolio equity on their newly installed payroll and loyalty marketing merchant accounts based on the residual commissions they earn on those accounts. The accrued buyout liability and deferred acquisition cost asset are accrued in the same manner as the SME bankcard merchant portfolio equity.

The accrued buyout liability is based on merchants under contract at the balance sheet date, the gross margin generated by those merchants over the prior twelve months, and the contractual buyout multiple. The liability related to a new merchant is therefore zero when the merchant is installed, and increases over the twelve months following the installation date. The same procedure is applied to unvested commissions over the expected vesting period, but is further adjusted to reflect the Company's estimate that 31% of unvested Relationship Managers and sales managers become vested, which represents the Company's historical vesting rate.

The classification of the accrued buyout liability between current and non-current liabilities on the Condensed Consolidated Balance Sheets is based upon the Company's estimate of the amount of the accrued buyout liability that it reasonably expects to pay over the next twelve months. This estimate is developed by calculating the cumulative annual average percentage that total historical buyout payments represent of the accrued buyout liability. That percentage is applied to the period-end accrued buyout liability to determine the current portion.

Revenue—The Company classifies its revenues into five categories: (i) Card Payment Processing, (ii) Heartland School Solutions, (iii) Heartland Ovation Payroll, (iv) Campus Solutions and (v) Prepaid Card and Other. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.
Card Payment Processing revenue primarily consists of discount, per-transaction and periodic (primarily monthly) fees from the processing of Visa, MasterCard, American Express and Discover transactions for SME merchants and per-transaction fees for the authorization and settlement of transactions for Network Services merchants. Also included in this category are American Express and Discover servicing fees, merchant service fees, fees for processing chargebacks, termination fees on terminated contracts and fees from selling, renting and deploying point-of-sale devices. Interchange fees, which are the Company’s most significant expense, are set by the card networks and paid to the card issuing banks. For the majority of SME card processing revenue, the Company does not offset processing revenues and interchange fees because its business practice is to advance the interchange fees to most SME merchants when settling their daily transactions (thus paying the full amount of the transaction to the merchant), and then to collect the full discount fees from merchants on the first business day of the next month. The Company has merchant portability, credit risk, and the ultimate responsibility to the merchant and, as such, revenue is reported at the time of settlement on a gross basis. Payment processing services are transaction based and priced either as a fixed fee per transaction or calculated as a percentage of the transaction value. The fees are charged for the processing services provided and do not include the gross sales price paid by the ultimate buyer to the merchant. For SME merchants to whom the Company does not advance interchange, it records card processing revenues net of interchange fees. As Network Services does not advance interchange fees to its merchants, the Company records its card processing revenues net of interchange fees.


10

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

The Company evaluates its contractual arrangements for indications that multiple element arrangements may exist. For contracts with multiple deliverables, the Company records revenue based on vendor specific objective evidence of selling price where applicable, or based on the best estimate of the selling price.

Heartland School Solutions revenues include fees from sales and maintenance of cafeteria point-of-sale solutions and associated payment solutions, including online prepayment solutions, back office management and hardware and technical support. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Heartland Ovation Payroll revenue includes fees charged for payroll processing services, including check printing, direct deposit, related federal, state and local tax deposits and providing accounting documentation and interest income earned on funds held for customers. Revenues are recorded at the time service is provided.

Campus Solutions revenue includes fees associated with providing solutions to support administrative services for higher education, including student loan payment processing, delinquency and default services, refund management, tuition payment plans, electronic billing and payment, tax document services, and business outsourcing. Campus Solutions revenue also includes fees from the sale and maintenance of open- and closed-loop payment hardware and software solutions for college or university campuses to process small value electronic transactions. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Prepaid Card and Other revenues include Micropayments fees from selling hardware and software for unattended online wireless credit card based payment systems, and unattended value top up systems for off-line closed-loop smart (chip) card based payment systems. Also included in this category are Heartland Marketing Solutions fees from selling mobile and card-based marketing services, gift cards and rewards services. Revenues are recorded at the time of shipment, over the maintenance period, or at the provision of services.

Loss Contingencies and Legal ExpensesThe Company records a liability for loss contingencies when the liability is probable and the amount is reasonably estimable. Legal fees associated with loss contingencies are recorded when the legal fees are incurred.
The Company records recoveries from its insurance providers when cash is received from the provider.

Other Income (Expense)Other income (expense) consists of interest income on cash and investments, the interest cost on our borrowings, the gains or losses on the disposal of property and equipment and other non-operating income or expense items.

Other income (expense) also includes the pretax charges or recoveries related to the provision for processing system intrusion costs. See Note 11, Commitments and Contingencies for information on the Processing System Intrusion.

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 provision for income taxes for the three months ended March 31, 2014 and 2013 and the resulting effective tax rates were as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Provision for income taxes
$
10,300

 
$
9,840

Effective tax rate
40.9
%
 
38.6
%
 
 
 
 
The increase in the effective tax rate for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, reflects the impact of providing a valuation allowance against deferred tax assets resulting from operating losses recorded by Leaf. Leaf is less than 80 percent owned and projects losses in the near term.

11

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

The Company's tax provision for interim periods is determined using an estimate of it's annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates it's 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. However, if management's estimates are not representative of actual outcomes, the Company's results could be materially impacted. The Company does not expect any material changes to unrecognized tax benefits in the next twelve months. At March 31, 2014, the reserve for unrecognized tax benefits related to uncertain tax positions was $6.0 million, of which $4.1 million would, if recognized, impact the effective tax rate. At December 31, 2013, the reserve for unrecognized tax benefits related to uncertain tax positions was $5.6 million, of which $3.8 million would, if recognized, impact the effective tax rate.

Share–Based Compensation— In the fourth quarters of 2012 and 2013, the Company's Board of Directors approved grants of performance-based Restricted Share Units with grant-specific vesting and performance target terms as shown in the following table:
 
 
 
 
 
 
 
4th Quarter 2012
 
4th Quarter 2013
 
RSU's Granted
 
60,507
 
115,223
 
Vested during 2014
 
 
 
Vesting during 2015
 
50%
 
 
Vesting during 2016
 
50%
 
 
Vesting during 2017
 
 
50%
 
Vesting during 2018
 
 
50%
 
Grant Performance Target
 
(a)
 
(b)
 
 
 
 
 
 
(a)
These Restricted Share Units would vest only if the Company achieves a Pro Forma diluted earnings per share compound annual growth rate ("CAGR") of fifteen percent (15%) for the two-year period ending December 31, 2014. For each 1% that the CAGR actually achieved for the two year period ending on December 31, 2014 is above the 15% target, the number of shares underlying the Restricted Share Units awarded would be increased by 2.08%; provided, however, that the maximum increase in the number of shares that may be awarded is 125%. Likewise, for each 1% that the CAGR actually achieved for the two-year period ending on December 31, 2014 is below the 15% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.31%. If the target CAGR is missed by 67% or more, then the number of shares awarded is zero. The Company records expense on these Restricted Share Units based on achieving the 15% target.

(b)
These Restricted Share Units will vest only if the Company achieves a pro forma diluted earnings per share growth rate of forty percent (40%) over the three-year period ending December 31, 2016. For each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is above the 40% target, the number of shares underlying the Restricted Share Units awarded would be increased by 1.20%; provided, however, that the maximum increase in the number of shares that may be awarded is 150%. Likewise, for each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is below the 40% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.50%. If the target growth rate is missed by 50% or more, then the number of shares awarded is zero. The Company has recorded expense on these Restricted Share Units based on achieving the 40% target.

Pro Forma diluted earnings per share for (a) and (b) performance targets will be calculated excluding non-operating gains and losses, if any, and excluding the after-tax impact of share-based compensation expense. The closing price of the Company's common stock on the grant date equals the grant date fair value of these nonvested Restricted Share Units awards and will be recognized as compensation expense over their vesting periods.
    
In the fourth quarter of 2012, the Company's Board of Directors approved target grants of 60,793 Relative Total
Shareholder Return Restricted Share Units (referred to as “TSRs”). These TSRs are nonvested share awards for which vesting
percentages and ultimate number of units vesting will be calculated based on the total shareholder return of our common stock

12

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

as compared to the total shareholder return of 86 peers. The payout schedule can produce vesting percentages ranging from 0%
to 225%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending
December 9, 2015, divided by the closing price on December 10, 2012. The target number of units is based on achieving a total
shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these TSRs.

In the fourth quarter of 2013, the Company's Compensation Committee approved target grants of 57,598 Relative TSRs. These Relative TSRs are nonvested share awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return of the Company's common stock as compared to the total shareholder return of 91 peer companies. The payout schedule can produce vesting percentages ranging from 0% to 200%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 6, 2016, divided by the closing price on December 6, 2013. The target number of units is based on achieving a total shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these Relative TSRs.

In the fourth quarter of 2013, the Compensation Committee approved target grants of 59,533 Absolute Total
Shareholder Return Restricted Share Units (referred to as “Absolute TSRs”). These Absolute TSRs are nonvested share awards
for which vesting percentages and ultimate number of units vesting will be calculated based on the Company's three or four
year total shareholder return of our common stock. The payout schedule can produce vesting percentages ranging from 0% to
200%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending
December 6, 2016 or December 6, 2017, divided by the closing price on December 6, 2013. The target number of units is based
on achieving a total shareholder return of 33% over three years or 46% over four years. The Company recorded expense on these Absolute TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of
these Absolute TSRs.
    
Earnings per Share— Basic earnings per share was computed by dividing net income by weighted average number of common shares outstanding during the period. Diluted earnings per share was computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options and vesting of Restricted Share Units, where dilutive.

Common Stock Repurchases— On November 2, 2012, the Company's Board of Directors authorized the repurchase of up to $50 million of the Company's outstanding common stock, and these repurchases were completed during the second quarter of 2013. 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. As of March 31, 2014, repurchases under the May 8, 2013 authorization were ongoing. Repurchases under these programs were made through the open market in accordance with applicable laws and regulations. The Company intends to fund any repurchases with cash flow from operations, existing cash on the balance sheet, and other sources including the Company's Revolving Credit Facility (as defined in Note 10 herein) and the proceeds of options exercises. 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 corporation liquidity requirements. The repurchase program may be modified or discontinued at any time.


13

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

A summary of repurchase activity under these authorizations is as follows:
 
Repurchase Programs by Authorization Date
 
 
 
Activity For the Three Months Ended March 31, 2014
November 2012
 
May 2013
 
Total
Shares repurchased

 
 
695,555
 
695,555

 
Cost of shares repurchased (in thousands)

 
 
$28,668
 
$28,668
 
Average cost per share

 
 
$41.22
 
$41.22
 
Remaining authorization (in thousands)

 
 
$25,843
 
$25,843
 
 
 
 
 
 
 
 
 
Activity For the Three months ended March 31, 2013
 
 
 
 
 
 
Shares repurchased
491,300

 
 

 
491,300

 
Cost of shares repurchased (in thousands)
$15,261
 
 

 
$15,261
 
Average cost per share
$31.06
 
 

 
$31.06
 
 
 
 
 
 
 
 
 
Activity For the Year ended December 31, 2013
 
 
 
 
 
 
 
Shares repurchased
952,183
 
 
534,600
 
1,486,783

 
Cost of shares repurchased (in thousands)
$29,813
 
 
$20,488
 
$50,301
 
Average cost per share
$31.31
 
 
$38.32
 
$33.83
 
 
 
 
 
 
 
 
 

On November 1, 2012, the Company's board of directors resolved to retire all common shares repurchased and include the retired shares in the authorized and unissued shares of the Company. Until November 1, 2012, the final disposition of the repurchased shares had not been decided. The excess of the purchase price of the treasury stock over the stated value was allocated between additional paid-in-capital and retained earnings. It is expected that future retirements of common shares repurchased will be recorded as repurchase authorizations are completed.

Derivative Financial Instruments—The Company utilizes derivative instruments to manage interest rate risk on certain borrowings under its Credit Agreement (as defined in Note 10 herein). The Company recognizes the fair value of derivative financial instruments in the Condensed Consolidated Balance Sheets in investments, or accrued expenses and other liabilities. Changes in fair value of derivative instruments are recognized immediately in earnings unless the derivative is designated and qualifies as a hedge of future cash flows. For derivatives that qualify as hedges of future cash flows, the effective portion of changes in fair value is recorded in other comprehensive income and reclassified into interest expense in the same periods during which the hedged item affects earnings. Any ineffectiveness of cash flow hedges would be recognized in other income (expense) in the Condensed Consolidated Statements of Income during the period of change.
    
The Company has entered into fixed-pay amortizing interest rate swaps as a hedge of future cash flows on certain variable rate debt outstanding under its credit facility. These interest rate swaps convert the related notional amount of variable rate debt to fixed rate. The following table summarizes the components of the interest rate swaps.
 
 
March 31, 2014
 
December 31, 2013
 
 
(in thousands)
Notional value
 
$
22,500

 
$
25,000

Fair value (a)
 
(337
)
 
(411
)
Deferred tax benefit
 
126

 
153

(a) Recorded as a liability in accrued expenses and other liabilities

Noncontrolling Interests—Noncontrolling interests represent noncontrolling stockholders' share of the equity and after-tax net loss of Leaf as of December 31, 2013 and after-tax net income of CPOS until it was sold in a transaction settled on January 31, 2013. See Note 15, Discontinued Operations for more detail.
Noncontrolling stockholders' share of after-tax net loss of Leaf is included in Net income (loss) attributable to noncontrolling interests from continuing operations as of March 31, 2014 in the Consolidated Statements of Income for the three months ended March 31, 2014. The minority stockholders' interests included in noncontrolling interests in the March 31, 2014 and December 31, 2013 Consolidated Balance Sheet is $5.4 million and $6.2 million, respectively, and reflects the original investments by these minority shareholders in Leaf, along with their proportionate share of losses of Leaf. Noncontrolling stockholders' share of after-tax net income of CPOS is included in Net income (loss) attributable to noncontrolling interests from discontinued operations as of March 31, 2013 in the Condensed Consolidated Statements of Income for the three months ended March 31, 2013.

14

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 three months ended March 31, 2014.
On April 1, 2014, the Company purchased the net assets of MCS Software for a $17.3 million cash payment.  This acquisition further expands our Heartland School Solutions business.

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 are adopted by us as of the specified effective date.
    
In July 2013, the FASB issued an accounting standard update which provides guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item's fair value or a hedged transaction's cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk). This update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The implementation of this update did not have a material effect on the Company's condensed consolidated financial statements.

In July 2013, the FASB issued an accounting standard update which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this update are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments would be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The implementation of this update did not have a material effect on the Company's condensed consolidated financial statements.

In April 2014, the FASB issued updated guidance on reporting discontinued operations. Under this updated guidance, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The guidance raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The guidance expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The updated guidance is effective prospectively for interim and annual reporting periods beginning on or after December 15, 2014, with early application permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated and will depend on the nature of future disposal transactions, if any.

3. Acquisitions

2013 Acquisition:

Leaf Holdings, Inc.
On September 11, 2013, the Company purchased 66.67% of the outstanding capital stock of Leaf for a $14.5 million cash payment. The cash purchase price was financed from operating cash flows.

The transaction was accounted for under the purchase method of accounting. Beginning on September 11, 2013, Leaf's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $18.5 million to goodwill, $6.9 million to intangible assets, $4.1 million to net tangible liabilities and $6.8 million to noncontrolling interest. 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.

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

The weighted average amortization life for the 2013 acquired finite lived intangible assets related to acquisition of Leaf is as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Software
7.0
 
 
Patents
5.0
 
 
Overall
6.9
 

2014 Acquisition:

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 financed from operating cash flows.

The transaction was accounted for under the purchase method of accounting. Beginning on February 15, 2014, Liquor POS 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 acquisition of Liquor POS is as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Customer relationships
10.0
 
 
Software
7.0
 
 
Non-compete agreements
5.0
 
 
Patents
5.0
 
 
Overall
8.9
 

4. Receivables
A summary of receivables by major class was as follows at March 31, 2014 and December 31, 2013:

 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Accounts receivable from merchants
$
178,026

 
$
172,147

Accounts receivable from bankcard networks
22,460

 
26,842

Accounts receivable from others
2,333

 
2,083

 
202,819

 
201,072

Less allowance for doubtful accounts
(1,157
)
 
(1,032
)
Total receivables, net
$
201,662

 
$
200,040


Included in accounts receivable from others are amounts due from employees (predominately salespersons), which were $1.1 million at March 31, 2014 and at December 31, 2013. Accounts receivable related to bankcard networks are primarily amounts which were pre-funded to merchants for processing Discover and American Express bankcard transactions.

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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 months ended March 31, 2014 and 2013 was as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,032

 
$
1,438

Additions (reductions) to allowance
337

 
(306
)
Charges against allowance
(212
)
 
(188
)
Ending balance
$
1,157

 
$
944


5. Funds Held for Customers and Investments
A summary of Funds held for customers and investments, including the cost, gross unrealized gains (losses) and estimated fair value for investments held to maturity and investments available-for-sale by major security type and class of security was as follows at March 31, 2014 and December 31, 2013:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
12,000

 
$
22

 
$

 
$
12,022

Fixed income bond fund - available for sale
968

 
264

 

 
1,232

Cash held for payroll customers
125,393

 

 

 
125,393

Cash held for Campus Solutions customers
16,910

 

 

 
16,910

Total Funds held for customers
$
155,271

 
$
286

 
$

 
$
155,557

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit (a)
$
33

 
$

 
$

 
$
33

Total investments
$
33

 
$

 
$

 
$
33

(a) Certificate of deposit has a remaining term of 5 months.

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2013
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
12,000

 
$
10

 
$

 
$
12,010

Fixed income bond fund - available for sale
968

 
254

 

 
1,222

Cash held for payroll customers
88,376

 

 

 
88,376

Cash held for Campus Solutions customers
25,767

 

 

 
25,767

Total Funds held for customers
$
127,111

 
$
264

 
$

 
$
127,375

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit
$
33

 
$

 
$

 
$
33

Total investments
$
33

 
$

 
$

 
$
33

 
 
 
 
 
 
 
 

Also included in Investments on the Consolidated Balance Sheet are other investments, at cost. As of March 31, 2014 and December 31, 2013, other investments, at cost, include a $4.0 million investment in the equity of ATX Innovation, Inc. ("Tabbedout").

During the three months ended March 31, 2014 and during the twelve months ended December 31, 2013, the Company did not experience any other-than-temporary losses on its investments.

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


All available-for-sale debt securities and held to maturity investments, having aggregate amortized cost of $13.0 million and estimated fair value of $13.3 million, respectively, as of March 31, 2014, are due in one year or less.

6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of March 31, 2014 and December 31, 2013 was as follows:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Capitalized signing bonuses
$
88,520

 
$
86,886

Less accumulated amortization
(44,484
)
 
(43,775
)
 
44,036

 
43,111

Capitalized customer deferred acquisition costs
47,231

 
45,241

Less accumulated amortization
(28,639
)
 
(27,325
)
 
18,592

 
17,916

Capitalized customer acquisition costs, net
$
62,628

 
$
61,027


A summary of the activity in capitalized customer acquisition costs, net for the three month periods ended March 31, 2014 and 2013 was as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Balance at beginning of period
$
61,027

 
$
56,425

Plus additions to:
 
 
 
Capitalized signing bonuses, net
8,055

 
5,780

Capitalized customer deferred acquisition costs
5,531

 
4,798

 
13,586

 
10,578

Less amortization expense on:
 
 
 
Capitalized signing bonuses, net
(7,130
)
 
(7,101
)
Capitalized customer deferred acquisition costs
(4,855
)
 
(4,155
)
 
(11,985
)
 
(11,256
)
Balance at end of period
$
62,628

 
$
55,747

 
 
 
 

Net signing bonus adjustments from estimated amounts to actual were $(1.0) million and $(0.8) million, respectively, for the three months ended March 31, 2014 and 2013. 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 $6.4 million and $6.9 million, respectively, were written off during the three month periods ended March 31, 2014 and 2013. In addition, fully amortized customer deferred acquisition costs of $3.5 million and $3.2 million, respectively, were written off during the three months ended March 31, 2014 and 2013.
The Company believes that no impairment of capitalized customer acquisition costs has occurred as of March 31, 2014.


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

7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
50,329

 
$
15,468

 
$
34,861

 
3 to 18 years—proportional cash flow
Merchant portfolios
4,095

 
2,786

 
1,309

 
7 years—proportional cash flow
Software
21,367

 
11,534

 
9,833

 
2 to 5 years—straight line
Non-compete agreements
4,575

 
2,087

 
2,488

 
3 to 5 years—straight line
Other
400

 
70

 
330

 
2 to 9 years—straight line
 
$
80,766

 
$
31,945

 
$
48,821

 
 
 
December 31, 2013
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
49,814

 
$
14,107

 
$
35,707

 
3 to 18 years—proportional cash flow
Merchant portfolios
4,095

 
2,703

 
1,392

 
7 years—proportional cash flow
Software
20,750

 
10,934

 
9,816

 
2 to 5 years—straight line
Non-compete agreements
4,489

 
1,880

 
2,609

 
3 to 5 years—straight line
Other
385

 
52

 
333

 
2 to 9 years—straight line
 
$
79,533

 
$
29,676

 
$
49,857

 
 
Amortization expense related to the intangible assets was $2.3 million for the three months ended March 31, 2014 and 2013, respectively. The estimated amortization expense related to intangible assets in twelve month increments is as follows:
For the Twelve Months Ended March 31,
 
(In thousands)
2015
$
8,759

2016
7,995

2017
6,799

2018
5,461

2019
4,253

Thereafter
15,554

 
$
48,821


Goodwill — The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2014
and 2013 were as follows:
Card Payment Processing
 
Heartland Ovation Payroll
 
Heartland School Solutions
 
Campus Solutions
 
Other
 
Total
Balance at January 1, 2013
$
43,701

 
$
30,831

 
$
53,350

 
$
33,679

 
$
6,501

 
$
168,062

 
Goodwill acquired during the period

 

 

 

 

 

 
Other

 
420

 

 
1,967

 

 
2,387

Balance at March 31, 2013
43,701

 
31,251

 
53,350

 
35,646

 
6,501

 
170,449

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
64,320

 
31,018

 
53,350

 
35,789

 
6,501

 
190,978

 
Goodwill acquired during the period
2,247

 

 

 

 

 
2,247

 
Other (a)
(2,080
)
 

 

 

 

 
(2,080
)
Balance at March 31, 2014
$
64,487

 
$
31,018

 
$
53,350

 
$
35,789

 
$
6,501

 
$
191,145

(a) Reflects adjustments to allocations of purchase price.

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

Percentage of total reportable segments' assets that was goodwill as of March 31, 2014 and 2013 is as follows:
 
 
Percent of Goodwill to Reportable Segments' Total Assets
 
 
 
March 31, 2014
 
March 31, 2013
 
 
Card
11.3%
 
8.6%
 
 
Payroll
16.2%
 
17.1%
 
 
Heartland School Solutions
70.3%
 
77.2%
 
 
Campus Solutions
49.1%
 
51.2%
 
 
Other
35.7%
 
41.6%
 
 
 
 
 
 
 

8. Processing Liabilities
Processing liabilities result primarily from the Company's card processing activities and include merchant deposits maintained to offset potential liabilities from merchant chargeback processing. A summary of processing liabilities and loss reserves was as follows at March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Merchant bankcard processing
$
92,364

 
$
121,143

Merchant deposits
7,053

 
8,223

Loss reserves
1,672

 
1,505

 
$
101,089

 
$
130,871

 
 
 
 
In addition to the merchant deposits listed above, the Company held letters of credit related to merchant card payment processing totaling $250,000 and $260,000 at March 31, 2014 and December 31, 2013, respectively.

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 networks generally allow chargebacks up to 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 $24.2 billion and $24.4 billion for the four months ended March 31, 2014 and December 31, 2013, respectively. However, for the four months ended March 31, 2014 and December 31, 2013, the Company was presented with $11.9 million and $11.7 million, respectively, in chargebacks by issuing banks. In the three months ended March 31, 2014 and 2013, the Company incurred merchant credit losses of $0.7 million , on total SME card processing volumes processed of $18.0 billion and $17.3 billion, respectively. These credit losses are included in processing and servicing costs in the Company's Condensed Consolidated Statements of Income and Comprehensive 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 $1.7 million and $1.5 million at March 31, 2014 and at December 31, 2013, respectively. This reserve is determined by performing an analysis of the Company's historical loss experience applied to current processing volume and exposures.


20

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

A summary of the activity in the loss reserve for the three month periods ended March 31, 2014 and 2013 was as follows:
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,505

 
$
1,955

Additions to reserve
866

 
753

Charges against reserve (a)
(699
)
 
(753
)
Ending balance
$
1,672

 
$
1,955

(a)
Included in these amounts are Heartland Ovation Payroll segment losses of $77,000 and $57,000, respectively, for the three months ended March 31, 2014 and 2013.
9. Accrued Buyout Liability
A summary of the accrued buyout liability was as follows as of March 31, 2014 and December 31, 2013:
 
March 31,
2014
 
December 31,
2013
 
(In thousands)
Vested Relationship Managers and sales managers
$
39,510

 
$
38,082

Unvested Relationship Managers and sales managers
1,790

 
1,297

 
41,300

 
39,379

Less current portion
(14,015
)
 
(13,943
)
Long-term portion of accrued buyout liability
$
27,285

 
$
25,436

 
 
 
 
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 and $0.1 million at March 31, 2014 and December 31, 2013, respectively.
A summary of the activity in the accrued buyout liability for the three months ended March 31, 2014 and 2013 was as follows:
     
 
Three Months Ended
March 31,
 
2014
 
2013
 
(In thousands)
Beginning balance
$
39,379

 
$
35,410

Increase in settlement obligation, net
3,796

 
4,275

Buyouts
(1,875
)
 
(2,929
)
Ending balance
$
41,300

 
$
36,756


10. Credit Facilities

On October 23, 2013, the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and certain lenders who are a party to the Credit Agreement. This Credit Agreement replaces the Company's November 2010 Second Amended and Restated Credit Agreement (the "Prior Credit Agreement”). Credit extended under the Credit Agreement is guaranteed by the Company's subsidiaries and is secured by substantially all of the Company's assets and the assets of the Company's subsidiaries.

The Credit Agreement provides for a revolving credit facility in the aggregate amount of up to $350 million (the “Revolving Credit Facility”), of which up to $35 million may be used for the issuance of letters of credit and up to $35 million is available for swing line loans. The Revolving Credit Facility also provides for, upon the prior approval of the administrative agent and subject to the receipt of commitments, an increase to the total revolving commitments of $150 million for a total commitment under the Revolving Credit Facility of $500 million. The Revolving Credit Facility is available to the Company on a revolving basis until October 23, 2018. All principal and interest not previously paid on the Revolving Credit Facility

21

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

will mature and be due and payable on October 23, 2018.

The Credit Agreement contains covenants which include: maintenance of certain leverage and fixed charge coverage ratios; limitations on our indebtedness, liens on our properties and assets, investments in, and loans to other business units, our ability to enter into business combinations and asset sales; and certain other financial and non-financial covenants. These covenants also apply to the Company's subsidiaries. The Company was in compliance with these covenants as of March 31, 2014.

The Prior Credit Agreement provided a term credit facility (the “Term Credit Facility”). The Term Credit Facility required amortization payments in the amount of $5.0 million for each fiscal quarter during the fiscal year ended December 31, 2013.

On October 23, 2013, the Company drew down $150.0 million on its Revolving Credit Facility and used those proceeds to repay borrowings then outstanding under its Prior Credit Agreement; $55.0 million under the Term Credit Facility and $91.0 million under the Prior Credit Agreement revolving credit facility. The remainder of the proceeds from the Revolving Credit Facility was used to provide ongoing working capital and for other general purposes. At March 31, 2014 and December 31, 2013, the Company had $180.0 million and $150.0 million, respectively, under the Credit Agreement.

Under the terms of the Credit Agreement, the Company may borrow, at its option, at interest rates equal to one, two, three or six month adjusted LIBOR rates, or equal to the greater of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBOR rate plus 1%, in each case plus a margin determined by the Company's current leverage ratio.

The weighted average interest rate at March 31, 2014 was 1.7%. Total fees and direct costs paid for the Company's credit facilities as of March 31, 2014 were $3.3 million, including $2.6 million paid on October 23, 2013. These costs are being amortized to interest expense over the life of the Credit Agreement.

11. Commitments and Contingencies
Litigation-The 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.

The Company has also been subject to lawsuits, claims, and investigations which resulted from the criminal breach of its payment systems environment (the "Processing System Intrusion"). See Contingencies below for a description of the Processing System Intrusion.

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.

On January 20, 2009, the Company publicly announced the Processing System Intrusion. The Processing System Intrusion involved malicious software that appears to have been used to collect in-transit, unencrypted payment card data while it was being processed by the Company during the transaction authorization process. The Company believes the breach did not extend beyond 2008. The Company does not consider it a reasonable possibility that losses exceeding the amounts previously recognized on the matters subject to Processing System Intrusion settlement agreements entered into to date will be incurred. With regard to unsettled claims related to the Processing System Intrusion, the Company determined material losses in addition to those previously accrued are not considered reasonably possible on any such claim disclosed. The Company is prepared to vigorously defend itself against any unsettled claims relating to the Processing System Intrusion that have been asserted against it and feels it has strong defenses to all claims that have been asserted against it relating to the Processing System Intrusion.


22

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

Leases—The Company leases various office spaces and certain equipment under operating leases with remaining terms ranging up to 10 years. The majority of the office space lease agreements contain renewal options and generally require the Company to pay certain operating expenses.
Future minimum lease payments for all non-cancelable leases as of March 31, 2014 were as follows:
For the Twelve Months Ended March 31,
Operating Leases (a)
 
(In thousands)
2015
$
12,078

2016
9,635

2017
5,552

2018
3,643

2019
3,406

Thereafter
7,336

Total future minimum lease payments
$
41,650

(a) There were no material capital leases at March 31, 2014.

Rent expense for leased facilities and equipment was $2.6 million and $2.3 million, respectively, for the three months ended March 31, 2014 and 2013.
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 three months ended March 31, 2014.
The following table reflects the Company’s other significant contractual obligations, including leases from above, as of March 31, 2014:
 
 
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)
 
$
11,064

 
$
6,604

 
$
4,460

 
$

 
$

Telecommunications providers (b)
 
12,797

 
4,719

 
6,080

 
1,998

 

Facility and equipment leases
 
41,650

 
12,078

 
15,187

 
7,049

 
7,336

Credit Facility (c)
 
180,000

 

 

 
180,000

 

 
 
$
245,511

 
$
23,401

 
$
25,727

 
$
189,047

 
$
7,336

 
(a)
The Company has agreements with several third-party processors to provide to us on a non-exclusive basis payment processing and transmittal, transaction authorization and data capture services, and access to various reporting tools. The Company's agreements with third-party processors require it to submit a minimum monthly number of transactions or volume for processing. If the Company submits a number of transactions or volume that is lower than the minimum, it is required to pay the third-party processors the fees that they would have received if the Company had submitted the required minimum number or volume of transactions.
(b)
The Company has agreements in place with several large telecommunications companies that provide data center services, wide area network connectivity, and voice services that are used by both the Company call center and card payment processing platforms. These providers require both dollar and term commitments for the services they provide. If the Company does not meet the minimum terms, then there is a requirement to pay the remaining commitments.
(c)
Interest rates on the Revolving Credit Facility are variable in nature; however, the Company is party to fixed-pay amortizing interest rate swaps having a remaining notional amount of $22.5 million. If interest rates were to remain at the March 31, 2014 level, the Company would make interest payments of $1.3 million in the next 1 year and $0.3 million in the next 1 to 3 years or a total of $1.6 million including net settlements on the fixed-pay amortizing interest rate swaps. The Revolving Credit Facility is available on a revolving basis until October 23, 2018.

12. Segments
The Company bases its business segments on how it monitors and manages the performance of its operations as determined by the Company's chief operating decision maker or decision making group. The Company's operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different marketing strategies, personnel skill sets and technology.

The Company has the following five reportable segments: (1) Card Payment Processing, which provides card payment processing and related services to our SME merchants and Network Services Merchants (2) Heartland Ovation Payroll, which

23

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

provides payroll processing and related tax filing services, (3) Heartland School Solutions, which provides school nutrition and point-of-sale solutions and associated payment solutions, (4) Campus Solutions, which provides payment processing, higher education loan services and open- and closed-loop payment solutions, and (5) Prepaid Card and Other. The Prepaid Card and Other segment consists of Prepaid Card, which provides prepaid card, stored-value card and loyalty and gift card marketing solutions and other miscellaneous income. The components of the Prepaid Card and Other segment do not meet the defined thresholds for being an individually reportable segment under applicable accounting guidance.
SME merchants and Network Services merchants are aggregated for financial reporting purposes in the Card Segment, as they both provide processing services related to bankcard transactions, exhibit similar economic characteristics, and share the same systems to provide services.
The Company allocates revenues, expenses, assets and liabilities to segments only where directly attributable. The unallocated corporate administration amounts consist primarily of costs attributed to finance, corporate administration, human resources and corporate services. Reconciling items include eliminations of intercompany investments and receivables.
    
The accounting policies of the operating segments are the same as described in the summary of significant accounting policies. The Company believes the terms and conditions of transactions between the segments are comparable to those which could have been obtained in transactions with unaffiliated parties.
At March 31, 2014 and 2013, 72% and 70%, respectively, of Heartland Ovation Payroll's total assets were funds that the Company holds as a fiduciary in its payroll processing services activities for payment to taxing authorities. At March 31, 2014 and 2013, 23% and 20%, respectively, of the Campus Solutions segment's total assets represent funds held for our loan servicing customers related to payment processing services provided for federal student loan billing and processing that is payable to higher education institutions and other businesses. See Note 7, Intangible Assets and Goodwill for goodwill as a percentage of the reportable segments' total assets.
A summary of the Company’s segments for the three months ended March 31, 2014 and 2013 was as follows:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Revenues
 
(In thousands)
    Card Payment Processing
 
$
475,479

 
$
459,025

    Heartland School Solutions
 
14,501

 
12,095

    Heartland Ovation Payroll
 
14,217

 
12,809

    Campus Solutions
 
13,318

 
11,519

    Prepaid Card and Other
 
5,768

 
5,791

         Total revenues
 
$
523,283

 
$
501,239

Depreciation and amortization
 
 
    Card Payment Processing
 
$
7,385

 
$
6,491

    Heartland School Solutions
 
508

 
453

    Heartland Ovation Payroll
 
846

 
833

    Campus Solutions
 
626

 
505

    Prepaid Card and Other
 
382

 
404

    Unallocated corporate administration amounts
 
117

 
(1,507
)
         Total depreciation and amortization
 
$
9,864

 
$
7,179

Interest income
 
 
    Card Payment Processing
 
$
32

 
$
34

         Total interest income
 
$
32

 
$
34

Interest expense
 
 
    Card Payment Processing
 
$
1,050

 
$
1,236

    Campus Solutions
 

 
1

    Reconciling
 

 
(3
)
         Total interest expense
 
$
1,050

 
$
1,234


24

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

Net income from continuing operations
 
 
    Card Payment Processing
 
$
12,936

 
$
15,031

    Heartland School Solutions
 
2,026

 
2,558

    Heartland Ovation Payroll
 
2,343

 
1,450

    Campus Solutions
 
2,374

 
1,194

    Prepaid Card and Other
 
421

 
77

    Unallocated corporate administration amounts
 
(5,188
)
 
(4,665
)
         Total net income from continuing operations
 
$
14,912

 
$
15,645

Assets
 
 
    Card Payment Processing
 
$
572,830

 
$
510,146

    Heartland School Solutions
 
75,908

 
69,071

    Heartland Ovation Payroll
 
191,423

 
182,574

    Campus Solutions
 
72,916

 
69,566

    Other
 
18,207

 
15,641

 &