10-Q 1 hpy0331201310q.htm 10-Q HPY 03.31.2013 10Q
 
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, 2013

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 1, 2013, there were 36,329,939 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 



INDEX
 
 
 
Page
 
 
 
 
Item 1.

 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
       for the three months ended March 31, 2013 and 2012 (unaudited)
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.



PART I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements
Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
37,504

 
$
48,440

Funds held for customers
142,011

 
131,405

Receivables, net
226,485

 
180,448

Investments
1,299

 
1,199

Inventory
10,243

 
9,694

Prepaid expenses
13,712

 
10,421

Current deferred tax assets, net
10,311

 
10,475

Assets held for sale

 
17,044

Total current assets
441,565

 
409,126

Capitalized customer acquisition costs, net
55,747

 
56,425

Property and equipment, net
129,167

 
125,031

Goodwill
170,449

 
168,062

Intangible assets, net
48,905

 
53,594

Deposits and other assets, net
1,165

 
1,176

Total assets
$
846,998

 
$
813,414

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
1,749

 
$
37,586

Accounts payable
68,283

 
64,065

Customer fund deposits
142,011

 
131,405

Processing liabilities
160,928

 
95,273

Current portion of borrowings
102,001

 
102,001

Current portion of accrued buyout liability
11,468

 
10,478

Accrued expenses and other liabilities
36,541

 
47,817

Current tax liabilities
3,155

 
4,323

Liabilities related to assets held for sale

 
1,672

Total current liabilities
526,136

 
494,620

Deferred tax liabilities, net
31,618

 
29,632

Reserve for unrecognized tax benefits
3,386

 
3,069

Long-term portion of borrowings
45,000

 
50,000

Long-term portion of accrued buyout liability
25,288

 
24,932

Total liabilities
631,428

 
602,253

Commitments and contingencies

 

 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 37,804,792
and 37,571,708 shares issued at March 31, 2013 and December 31, 2012; 36,597,692
and 36,855,908 outstanding at March 31, 2013 and December 31, 2012
38

 
38

Additional paid-in capital
226,643

 
222,705

Accumulated other comprehensive loss
(271
)
 
(399
)
Retained earnings
24,608

 
7,629

Treasury stock, at cost (1,207,100 and 715,800 shares at March 31, 2013 and December 31, 2012)
(35,448
)
 
(20,187
)
Total stockholders’ equity
215,570

 
209,786

Noncontrolling interests

 
1,375

Total equity
215,570

 
211,161

Total liabilities and equity
$
846,998

 
$
813,414

See accompanying notes to condensed consolidated financial statements.

1


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
March 31,
 
2013
 
2012
Total revenues
$
501,239

 
$
467,576

Costs of services:
 
 
 
Interchange
307,072

 
297,948

Dues, assessments and fees
47,332

 
43,868

Processing and servicing
59,397

 
55,628

Customer acquisition costs
10,733

 
11,436

Depreciation and amortization
4,090

 
4,352

Total costs of services
428,624

 
413,232

General and administrative
45,840

 
31,549

Total expenses
474,464

 
444,781

Income from operations
26,775

 
22,795

Other income (expense):
 
 
 
Interest income
34

 
104

Interest expense
(1,234
)
 
(850
)
Provision for processing system intrusion costs
(206
)
 
(157
)
Other, net
116

 

Total other expense
(1,290
)
 
(903
)
Income from continuing operations before income taxes
25,485

 
21,892

Provision for income taxes
9,840

 
8,366

Net income from continuing operations
15,645

 
13,526

Income from discontinued operations, net of income tax of $2,135 and $133
3,970

 
326

Net income
19,615

 
13,852

Less: Net income attributable to noncontrolling interests
56

 
98

Net income attributable to Heartland
$
19,559

 
$
13,754

 
 
 
 
Amounts Attributable to Heartland:
 
 
 
Net income from continuing operations
$
15,645

 
$
13,526

Income from discontinued operations, net of income tax and non-controlling interests
3,914

 
228

Net income attributable to Heartland
$
19,559

 
$
13,754

 
 
 
 
Basic earnings per share:
 
 
 
      Income from continuing operations
$
0.42

 
$
0.34

      Income from discontinued operations
0.11

 
0.01

      Basic earnings per share
$
0.53

 
$
0.35

 
 
 
 
Diluted earnings per share:
 
 
 
      Income from continuing operations
$
0.41

 
$
0.33

      Income from discontinued operations
0.10

 
0.01

      Diluted earnings per share
$
0.51

 
$
0.34

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
36,841

 
38,837

Diluted
38,374

 
40,560


See accompanying notes to condensed consolidated financial statements.

2


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

 
Three Months Ended
March 31,
 
2013
 
2012
 
 
 
 
Net income
$
19,615

 
$
13,852

Other comprehensive income (loss):
 
 
 
Unrealized gains on investments, net of income tax of $4 and $7
3

 
11

Unrealized gains (losses) on derivative financial instruments, net of tax of $43 and ($6)
80

 
(6
)
Foreign currency translation adjustment
(54
)
 
231

Comprehensive income
19,644

 
14,088

Less: Comprehensive income attributable to noncontrolling interests
40

 
167

Comprehensive income attributable to Heartland
$
19,604

 
$
13,921








































See accompanying notes to condensed consolidated financial statements.

3



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

Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1, 2012
38,848

 
$
39

 
$
207,643

 
$
(680
)
 
$
29,236

 
$
(16,828
)
 
$
642

 
$
220,052

Issuance of common stock–
options exercised
545

 
1

 
6,842

 

 

 

 

 
6,843

Excess tax benefit on employee
share-based compensation

 

 
1,321

 

 

 

 

 
1,321

Repurchase of common stock
(419
)
 

 

 

 

 
(11,389
)
 

 
(11,389
)
Share-based compensation

 

 
2,934

 

 

 

 

 
2,934

Other comprehensive income

 

 

 
167

 

 

 
69

 
236

Dividends on common stock
($0.06 per share)

 

 

 

 
(2,336
)
 

 

 
(2,336
)
Net income for the period

 

 

 

 
13,754

 

 
98

 
13,852

Balance,
March 31, 2012
38,974

 
$
40

 
$
218,740

 
$
(513
)
 
$
40,654

 
$
(28,217
)
 
$
809

 
$
231,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Changes in equity from sale of
discontinued operation

 

 

 
83

 

 

 
(1,415
)
 
(1,332
)
Other comprehensive income

 

 

 
45

 

 

 
(16
)
 
29

Dividends on common stock
($0.07 per share)

 

 

 

 
(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


See accompanying notes to condensed consolidated financial statements.

4


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
19,615

 
$
13,852

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
11,256

 
11,197

Other depreciation and amortization
7,214

 
7,383

Addition to loss reserves
802

 
267

(Recovery) provision for doubtful receivables
(292
)
 
83

Deferred taxes
1,251

 
3,602

Share-based compensation
3,866

 
2,934

Write downs on fixed assets and system development costs
57

 

Gain on sale of business
(3,786
)
 

Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(45,664
)
 
(7,268
)
(Increase) decrease in inventory
(608
)
 
792

Payment of signing bonuses, net
(5,780
)
 
(7,554
)
Increase in capitalized customer acquisition costs
(4,798
)
 
(3,968
)
(Increase) decrease in prepaid expenses
(3,128
)
 
297

Decrease in current tax assets
598

 
2,378

Increase in deposits and other assets
(1,054
)
 
(28
)
Excess tax benefits on employee share-based compensation
(1,753
)
 
(1,321
)
Increase in reserve for unrecognized tax benefits
317

 
219

(Decrease) increase in due to sponsor banks
(35,836
)
 
2,454

Increase in accounts payable
4,051

 
2,614

Decrease in accrued expenses and other liabilities
(14,197
)
 
(10,263
)
Increase in processing liabilities
64,803

 
5,586

Payouts of accrued buyout liability
(2,929
)
 
(2,297
)
Increase in accrued buyout liability
4,275

 
4,207

Net cash (used in) provided by operating activities
(1,720
)
 
25,166

Cash flows from investing activities
 
 
 
Purchase of investments
(609
)
 
(206
)
Maturities of investments
201

 
575

Increase in funds held for customers
(10,599
)
 
(11,054
)
Increase in customer fund deposits
10,606

 
11,073

Proceeds from sale of business
19,343

 

Purchases of property and equipment
(11,351
)
 
(7,361
)
Net cash provided by (used in) investing activities
7,591

 
(6,973
)
Cash flows from financing activities
 
 
 
Principal payments on borrowings
(5,000
)
 
(3,751
)
Proceeds from exercise of stock options
1,158

 
6,842

Excess tax benefits on employee share-based compensation
1,753

 
1,321

Repurchases of common stock
(14,280
)
 
(10,672
)
Dividends paid on common stock
(2,580
)
 
(2,336
)
Net cash used in financing activities
(18,949
)
 
(8,596
)
 
 
 
 
Net (decrease) increase in cash
(13,078
)
 
9,597

Effect of exchange rates on cash
1

 
45

Cash at beginning of year
50,581

 
40,301

Cash at end of period
$
37,504

 
$
49,943

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
1,041

 
$
771

Income taxes
7,683

 
2,302

See accompanying notes to condensed consolidated financial statements.

5


Heartland Payment Systems, Inc. and Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Organization and Operations
Basis of Financial Statement Presentation— The accompanying condensed consolidated financial statements include those of Heartland Payment Systems, Inc. (the “Company,” “we,” “us,” or “our”) and its wholly-owned subsidiaries, Heartland Payroll Company (“HPC”), Ovation Payroll, Inc. ("Ovation"), Educational Computer Systems, Inc. ("ECSI"), Debitek, Inc. (“Debitek”) and Heartland Acquisition LLC (“Network Services”), and 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, 2013, its results of operations, changes in stockholders’ equity and cash flows for the three months ended March 31, 2013 and 2012. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2013. 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, 2012. The December 31, 2012 condensed consolidated balance sheet was derived from the audited 2012 consolidated financial statements.

Business Description—The Company’s principal business is to provide payment processing services related to bankcard transactions for merchants throughout the United States, and until January 31, 2013 in Canada (See Note 15, Discontinued Operations). In addition, the Company provides certain other merchant services, including the sale and rental of terminal equipment, sale of terminal supplies and loyalty and gift card marketing solutions ("Heartland Marketing Solutions"). The Company provides K to 12 school solutions ("Heartland School Solutions") in the United States including school nutrition and point-of-sale and payment solutions. HPC and Ovation provide payroll and related tax filing services throughout the United States. Debitek provides campus payment solutions ("Campus Solutions"), prepaid card and stored-value card payment solutions throughout the United States and Canada. ECSI also provides Campus Solutions, including higher education loan servicing, throughout the United States.
Over 72% of the Company's revenue is derived from processing and settling Visa and MasterCard bankcard transactions for its merchant customers. Because the Company is not a ''member bank'' as defined by Visa and MasterCard, in order to process and settle these bankcard transactions for its merchants, the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement permits the Company to route Visa and MasterCard bankcard transactions under the member bank's control and identification numbers to clear credit and signature debit bankcard transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering funding files to the member bank, which in turn transfers settlement funds to the merchants' bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.
The sponsorship agreements with the member banks require, among other things, that the Company abide by the bylaws and regulations of the Visa and MasterCard networks, and certain of the sponsor banks require a certificate of deposit or a cash balance in a deposit account. If the Company breaches a sponsorship agreement, 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 dependent on its sponsor banks, Visa and MasterCard for notification of any compliance breaches. As of March 31, 2013, the Company has not been notified of any such issues by its Sponsor banks, Visa or MasterCard.

As of March 31, 2013, the Company is party to four 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

6

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

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 to sponsor processing for the Company's large national and mid-tier merchants. The agreement with The Bancorp Bank expires in November 2014 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.
On March 24, 2011, the Company entered into a sponsorship agreement with Barclays Bank Delaware to sponsor processing for certain of the Company's large national merchants. The agreement with Barclays Bank Delaware expires in March 2016 with an automatic one-year renewal.
In 2007, the Company entered into a sponsorship agreement with Heartland Bank, an unrelated third party, to sponsor SME merchant processing. The agreement with Heartland Bank has been renewed through September 2013. The Agreement continues for successive three-year terms unless terminated by either party with 180 days prior written notice. In March 2013 the Company notified Heartland Bank it intends to terminate the sponsorship agreement and has made arrangements for continuing sponsorship with an alternative sponsor bank.
Following is a breakout of the Company’s total Visa and MasterCard settled bankcard processing volume for the month ending March 31, 2013 by percentage processed under its individual bank sponsorship agreements:
 
% of
March 2013
Sponsor Bank
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
64%
The Bancorp Bank
16%
Barclays Bank Delaware
13%
Heartland Bank
7%

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.

Working Capital- The Company's working capital, defined as current assets less current liabilities, was negative by $84.6 million at March 31, 2013 and $85.5 million at December 31, 2012. The negative working capital primarily reflects the Company (a) borrowing $82.0 million under the Revolving Credit Facility to fund the acquisitions of ECSI and Ovation as described above an in Note 3, Acquisitions, (b) using $103.4 million of operating cash to repurchase 3.6 million shares of the Company's common stock during 2012 and (c) using $14.3 million of operating cash to repurchase 491,300 shares during the three months ended March 31, 2013. See Note 10, Credit Facilities for information on the Company's Revolving Credit Facility. The Company believes that its current cash and investment balances, cash generated from operations and its agreements with its sponsor banks to fund SME merchant advances will provide sufficient liquidity to meet its anticipated needs for operating capital for at least the next twelve months.

Processing System IntrusionOn January 20, 2009, the Company publicly announced the discovery of a criminal breach of its payment systems environment (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

7

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

processed by the Company during the transaction authorization process. The Company believes the breach did not extend beyond 2008.
Since its announcement of the Processing System Intrusion on January 20, 2009 and through March 31, 2013, the Company has expensed a total of $147.9 million, before reducing those charges by $31.2 million of total insurance recoveries. The majority of the total charges of approximately $114.7 million relates to settlements of claims. Approximately $33.2 million of the total charges were for legal fees and costs the Company incurred for investigations, defending various claims and actions, remedial actions and crisis management services.

During the three months ended March 31, 2013, the Company incurred approximately $0.2 million, or less than one cent per share, for legal fees and costs it incurred related to the Processing System Intrusion. During the three months ended March 31, 2012, the Company expensed approximately $0.2 million, or less than one cent per share, related to the Processing System Intrusion.

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 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, 2013, cash included approximately $19.3 million of processing-related cash in transit and collateral, compared to approximately $31.6 million of processing-related cash in transit and collateral at December 31, 2012.
Receivables—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 aging. Historically, the Company has not experienced significant charge offs for its merchant 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, then 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, these merchant interchange advances/receivables are first funded 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, 2013, the Company used $4.0 million of its available cash to fund merchant advances and at December 31, 2012, the Company used $3.8 million of its cash to fund merchant advances. The amount due to sponsor banks for funding advances was $36.3 million at December 31, 2012, but at March 31, 2013 no merchant advances were funded from payables to our sponsor banks. 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 due from bankcard networks which reflects multiple days' processing volume at March 31, 2013 as the current quarter ended on a weekend, as well as pre-funding of Discover and American Express transactions to the Company's merchants and are due from the related bankcard networks. These amounts are recovered the next business day from the date of processing the transaction.


8

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

Receivables also include amounts resulting from the sale, installation, training and repair of payment system hardware and software for prepaid card and stored-value card payment systems, campus payment solutions, and Heartland School Solutions. These receivables are mostly invoiced on terms of 30 days net from date of invoicing.

Investments and Funds Held for Customers—Investments, including those carried on the Condensed Consolidated Balance Sheets as Funds held for customers, consist primarily of fixed income bond funds and certificates of deposit. Funds held for customers also include overnight bank deposits. The majority of investments carried in Funds held for payroll 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, 2013, Funds held for customers included cash and cash equivalents of $140.8 million and investments available for sale of $1.2 million.

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) for the establishment of new merchant relationships, and (2) a deferred acquisition cost representing the estimated cost of buying out the commissions of vested sales employees. 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 one 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 merchant processing, consistent with the build-up in the accrued buyout liability, as described below. Beginning in June 2012, 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 developed the same as the SME bankcard merchant portfolio equity.

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, 2013.

Accrued Expenses and Other Liabilities— Accrued expenses and other liabilities on the Condensed Consolidated
Balance Sheets includes deferred revenue of $7.6 million and $13.0 million at March 31, 2013 and December 31, 2012,
respectively, which is primarily related to our Heartland School Solutions and Campus Solutions businesses.

Also included in accrued expenses and other liabilities at March 31, 2013 and December 31, 2012 is $5.1 million and $7.3 million, respectively, relating to the allocation of purchase price to an unfavorable processing contract associated with our September 30, 2011 acquisition of School-Link Technologies, Inc. During the three months ended March 31, 2013 and 2012, we amortized $0.7 million and $1.0 million of this accrued liability against the cash processing costs paid under that contract. During the three months ended March 31, 2013, we 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. Card 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

9

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

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. In addition, certain bankcard networks limit the Company from accessing merchant settlement funds and require that these funds be controlled by the Company's sponsor banks. 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 related to merchant fraud based upon an assessment of actual historical fraud loss rates compared to recent bankcard processing volume levels. The Company believes that the liability recorded as loss reserves approximates fair value.

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.

Beginning in June 2012, 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 identically 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—Revenues are mainly comprised of gross processing revenue, payroll processing revenue and equipment-related revenue. Gross processing revenue primarily consists of discount fees, per-transaction fees and periodic fees (primarily monthly) from the processing of Visa, MasterCard, American Express and Discover bankcard transactions for merchants. The Company passes through to its customers any changes in interchange or network fees. Gross processing revenue also includes fees for servicing American Express accounts, customer service fees, fees for processing chargebacks, termination fees on terminated contracts, gift and loyalty card fees, fees generated by our Heartland School Solutions business, and other

10

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

miscellaneous revenue. Payroll processing revenue includes periodic and annual fees charged by HPC and Ovation for payroll processing services and interest earned from investing tax impound funds held for our customers. Revenue is recorded as bankcard and other processing transactions are processed or payroll services are performed.
Equipment-related revenue includes revenues from the sale, rental and deployment of bankcard terminals, and from the sale of hardware, software and associated services for prepaid card and stored-value card payment systems, and from the sale of hardware, software and associated services for campus and K to 12 payment solutions. Revenues are recorded at the time of shipment, or the provision of service.

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. For the three months ended March 31, 2013, other income (expense) included pre-tax income of approximately $0.1 million reflecting the first payment relating to the sale of a group of merchant contracts within our Prepaid Card business.

Other income (expense) also includes the pretax charges or recoveries related to the provision for processing system intrusion costs.

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, 2013 and 2012 and the resulting effective tax rates were as follows:
 
Three Months Ended
March 31,
 
2013
 
2012
 
(In thousands)
Provision for income taxes
$
9,840

 
$
8,366

Effective tax rate
38.6
%
 
38.2
%
 
 
 
 
The increase in the effective tax rate for the three months ended March 31, 2013, as compared to March 31, 2012, is due to higher state income tax rates in entities acquired in the fourth quarter 2012.
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make 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, 2013, the reserve for unrecognized tax benefits related to uncertain tax positions was $3.4 million, of which $2.2 million would, if recognized, impact the effective tax rate. At December 31, 2012, the reserve for unrecognized tax benefits related to uncertain tax positions was $3.1 million, of which $2.0 million would, if recognized, impact the effective tax rate.

The Company has received a final determination letter from the Joint Committee of Taxation for 2010 and such Committee has agreed to the “no change" findings of the IRS audit.


11

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

Share–Based Compensation— In the fourth quarters of 2010, 2011, and 2012, 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:
 
 
 
Performance Awards by Grant Date
 
 
 
 
 
4th Quarter 2010
 
4th Quarter 2011
 
4th Quarter 2012
 
 
 
RSU's Granted
 
508,800
 
164,808
 
72,004
 
 
 
Vested during 2013
 
50%
 
 
 
 
 
Vesting during 2014
 
25%
 
50%
 
 
 
 
Vesting during 2015
 
25%
 
50%
 
50%
 
 
 
Vesting during 2016
 
 
 
50%
 
 
 
Grant Performance Target
 
(a)
 
(b)
 
(c)
 
 
 
 
 
 
 
 
 
 
 
 
(a)
50% vested on March 1, 2013 since the 2012 diluted earnings per share target of $1.48 was achieved.The remaining Restricted Share Units would vest only if, over the term, the following Pro Forma diluted earnings per share targets for the years ended December 31, 2013, and 2014 are achieved:
 
 
 
2013
2014
 
Diluted Earnings Per Share
 
$1.74
$2.04
Management believes that achieving the performance targets is probable to occur and records share-based compensation expense on these Restricted Share Units.
    
(b)
These Restricted Share Units would vest only if the Company achieves a Pro Forma diluted earnings per share compound annual growth rate ("CAGR") of seventeen percent (17%) for the two-year period ending December 31, 2013. For each 1% that the CAGR actually achieved by the Company for the two-year period ending on December 31, 2013 is above the 17% target, the number of shares underlying the Restricted Share Units awarded would be increased by 3.09%; provided, however, that the maximum increase in the number of shares that may be awarded is 100%. Likewise, for each 1% that the CAGR actually achieved by the Company for the two-year period ending on December 31, 2013 is below the 17% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.13%. If the target CAGR is missed by 80% or more, then the number of shares awarded is zero. Management determined that achieving a CAGR for the two-year period ending December 31, 2013 which would result in earning the maximum 100% increase in the number of shares that may be awarded was probable to occur, and records share-based compensation expense for these Restricted Share Units based on 329,616 shares.

(c)
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.

Pro Forma diluted earnings per share for (a), (b) and (c) 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 72,345 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
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

12

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

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.
    
Diluted earnings per share for the three months ended March 31, 2013 and 2012 were 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 October 21, 2011, July 27, 2012, and November 2, 2012, the Company's Board of Directors authorized the repurchase of up to $50 million worth of the Company's outstanding common stock under each authorization. Repurchases under the October 21, 2011 and July 27, 2012 authorizations were completed during the year ended December 31, 2012. Repurchases under these programs were made through the open market, or in privately negotiated transactions, from time to time 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 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 corporate liquidity requirements. The repurchase program may be modified or discontinued at any time.
 
Repurchase Programs by Authorization Date
 
 
 
Activity For the Three Months Ended March 31, 2013
October 2011
 
July 2012
 
November 2012
 
Total
Shares repurchased

 
 

 
 
491,300
 
491,300

 
Cost of shares repurchased (in thousands)

 
 

 
 
$15,261
 
$15,261
 
Average cost per share

 
 

 
 
$31.06
 
$31.06
 
Remaining authorization (in thousands)

 
 

 
 
$14,552
 
$14,552
 
 
 
 
 
 
 
 
 
 
 
 
Activity For the Three months ended March 31, 2012
 
 
 
 
 
 
 
 
Shares repurchased
419,249
 
 

 
 

 
419,249

 
Cost of shares repurchased (in thousands)
$11,388
 
 

 
 

 
$11,388
 
Average cost per share
$27.16
 
 

 
 

 
$27.16
 
 
 
 
 
 
 
 
 
 
 
 
Activity For the Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
 
Shares repurchased
1,157,440
 
 
1,760,804
 
 
715,800
 
3,634,044

 
Cost of shares repurchased (in thousands)
$33,172
 
 
$50,000
 
 
$20,187
 
$103,359
 
Average cost per share
$28.66
 
 
$28.40
 
 
$28.20
 
$28.44
 
 
 
 
 
 
 
 
 
 
 
 
Future repurchases will be made in accordance with applicable securities laws in the open market or in privately negotiated transactions. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without prior notice.

Derivative Financial Instruments—The Company utilizes derivative instruments to manage interest rate risk on its 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.
    
In January 2011, the Company entered into fixed-pay amortizing interest rate swaps having an initial notional amount of $50 million as a hedge of future cash flows on the variable rate debt outstanding under its Term Credit Facility (as defined in Note 10 herein). 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, 2013
 
December 31, 2012
 
 
(in thousands)
Remaining notional value
 
$
32,500

 
$
35,000

Fair value (a)
 
(696
)
 
(817
)
Deferred tax benefit
 
270

 
313

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


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

Foreign Currency—The Canadian dollar is the functional currency of CPOS, which operates in Canada. CPOS' revenues and expenses are translated at the average exchange rates prevailing during the period. The foreign currency assets and liabilities of CPOS were translated at the period-end rate of exchange. The resulting translation adjustment was allocated between the Company and CPOS' noncontrolling interests and was recorded as a component of other comprehensive income or noncontrolling interests in total equity. At March 31, 2012, the cumulative foreign currency translation reflected a loss of $0.1 million. CPOS was sold in a transaction which settled on January 31, 2013. See Note 15, Discontinued Operations for more detail.
Noncontrolling Interests— Noncontrolling interests represent noncontrolling minority stockholders' share of the equity and after-tax net income or loss of CPOS. Noncontrolling minority stockholders' share of after-tax net income or loss of CPOS is included in “Net income attributable to noncontrolling interests” in the Condensed Consolidated Statements of Income. The minority stockholders’ interests included in “noncontrolling interests” in the December 31, 2012 Condensed Consolidated Balance Sheet was $1.4 million and reflected the original investments by these minority shareholders in CPOS, along with their proportionate share of the earnings or losses of CPOS. CPOS was sold in a transaction which settled on January 31, 2013.
Subsequent Events—The Company evaluated subsequent events with respect to the Consolidated Financial Statements as of and for the three months ended March 31, 2013.
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 December 2011, the FASB issued an accounting standard update on disclosures about offsetting financial assets and liabilities. This guidance requires entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on the entity's financial position. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. The update is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The implementation of this update did not have a material effect on the Company's Consolidated Financial Statements.

In July 2012, the FASB issued an accounting standard update on testing indefinite-lived intangible assets for impairment. This guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is permitted). The implementation of this update did not have a material effect on the Company's Consolidated Financial Statements.

In February 2013, the FASB issued an accounting standard update on improving the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under generally accepted accounting principles to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. This update is effective for annual reporting periods beginning after December 15, 2012. The implementation of this update did not have a material effect on the Company's Consolidated Financial Statements.

3. Acquisitions

Acquisition transactions in 2012 included:

Lunch Byte Systems, Inc.
On June 29, 2012, the Company expanded its Heartland School Solutions business through its acquisition of the net assets of Lunch Byte Systems, Inc. ("Nutrikids"). The $26.0 million cash payment made on June 29, 2012 for the purchase

14

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

price was funded through our Revolving Credit Facility and subsequently repaid with cash on hand in July 2012. Beginning July 1, 2012, Nutrikids' results of operations are included in the Company's results of operations. The transaction was accounted for under the purchase method of accounting. The allocation of the total purchase price was as follows: $16.1 million to goodwill, $7.0 million to intangible assets and $2.9 million to net tangible assets. The fair values of the Nutrikids' assets acquired and liabilities assumed were estimated as of their acquisition date. Pro forma results of operations have not been presented because the effect of this acquisition was not material. The entire amount of goodwill is expected to be deductible for income tax reporting. The weighted average amortization life for the 2012 acquired finite lived intangible assets related to acquisition of Nutrikids is as follows:
Weighted-average amortization life
 
(In years)
Customer relationships
6.0
Software
3.3
Non-compete agreements
5.0
Overall
5.9
 
 
Educational Computer Systems, Inc.
On December 14, 2012, the Company purchased for a $37.6 million cash payment, the stock of Educational Computer Systems, Inc. ("ECSI") and net assets of related entities. The cash purchase price was financed under the Company's Revolving Credit Facility. The acquisition expands the Company's Campus Solutions division. ECSI supports the entire life cycle of higher education and post-graduation school/student services, including student loan payment processing, default solutions, refund services, tuition payment plans, electronic billing and payment, tax document services, and business outsourcing to more than 1,800 colleges and universities nationwide. With this acquisition, the Company's Campus Solutions business gained ECSI’s client portfolio, increasing the number of higher education clients to more than 2,000 colleges and universities throughout North America.

The transaction was accounted for under the purchase method of accounting. Beginning December 15, 2012, ECSI results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $32.3 million to goodwill, $10.5 million to intangible assets and $5.2 million to net tangible liabilities. The fair values of ECSI's assets acquired and liabilities assumed were estimated as of their acquisition date and adjusted during the three months ended March 31, 2013 based on the finalization of the purchase price allocation. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Only a portion of the goodwill is expected to be deductible for income tax reporting.
The weighted average amortization life for the 2012 acquired finite lived intangible assets related to acquisition of ECSI is as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Customer relationships
12.0
 
 
Software
5.0
 
 
Non-compete agreements
5.0
 
 
Overall
9.2
 
 
 
 
 
Ovation Payroll, Inc.
On December 31, 2012, the Company purchased for a $44.2 million cash payment, the stock of Ovation Payroll, Inc. ("Ovation"). The cash purchase price was financed under the Company's Revolving Credit Facility. The acquisition expands the Company's existing payroll processing business. Ovation serves over 10,000 clients in 48 states providing payroll processing, payroll tax preparation, Internet payroll reporting, and direct deposit.

The transaction was accounted for under the purchase method of accounting. Beginning January 1, 2013, Ovation's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $31.3 million to goodwill, $6.6 million to intangible assets and $6.3 million to net tangible assets. The fair values of Ovation's assets acquired and liabilities assumed were estimated as of their acquisition date and adjusted during the three months ended March 31, 2013 based on the finalization of the purchase price allocation. 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 2012 acquired finite lived intangible assets related to acquisition of Ovation is as follows:
 
Weighted-average amortization life
 
 
 
(In years)
 
 
Customer relationships
6.7
 
 
Software
1.5
 
 
Non-compete agreements
5.0
 
 
Overall
5.9
 

4. Receivables
A summary of receivables by major class was as follows at March 31, 2013 and December 31, 2012:
 
March 31,
2013
 
December 31,
2012
 
(In thousands)
Accounts receivable from merchants
$
165,281

 
$
160,702

Accounts receivable from bankcard networks
59,409

 
19,588

Accounts receivable from others
2,739

 
1,596

 
227,429

 
181,886

Less allowance for doubtful accounts
(944
)
 
(1,438
)
Total receivables, net
$
226,485

 
$
180,448

Included in accounts receivable from others are amounts due from employees which are $0.6 million and $0.4 million at March 31, 2013 and December 31, 2012, respectively. Accounts receivable from bankcard networks at March 31, 2013 reflect multiple days' processing volume as the quarter ended on a weekend, and both March 31, 2013 and December 31, 2012 include amounts which were pre-funded to merchants for processing Discover and American Express bankcard transactions.
A summary of the activity in the allowance for doubtful accounts for the three months ended March 31, 2013 and 2012 was as follows:
 
Three Months Ended
March 31,
 
2013
 
2012
 
(In thousands)
Beginning balance
$
1,438

 
$
1,407

(Reductions) Additions to allowance
(306
)
 
50

Charges against allowance
(188
)
 
(36
)
Ending balance
$
944

 
$
1,421


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 were as follows at March 31, 2013 and December 31, 2012:

16

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

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
March 31, 2013
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Fixed income bond fund - available for sale
$
968

 
$
252

 
$

 
$
1,220

Cash held for payroll customers
127,066

 

 

 
127,066

Cash held for Campus Solutions customers
13,725

 

 

 
13,725

Total funds held for customers
$
141,759

 
$
252

 
$

 
$
142,011

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit (a)
$
1,199

 
$

 
$

 
$
1,199

Investments - available for sale
100

 

 

 
100

Total Investments
$
1,299

 
$

 
$

 
$
1,299

(a) Certificates of deposit have remaining terms ranging from 2 months to 17 months.
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2012
 
 
 
 
 
 
 
Funds held for customers
 
 
 
 
 
 
 
Fixed income bond fund - available for sale
$
968

 
$
244

 
$

 
$
1,212

Cash held for payroll customers
110,334

 

 

 
110,334

Cash held for Campus Solutions customers
19,859

 

 

 
19,859

Total funds held for customers
$
131,161

 
$
244

 
$

 
$
131,405

 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Investments held to maturity - Certificates of deposit
$
1,199

 
$

 
$

 
$
1,199

Total Investments
$
1,199

 
$

 
$

 
$
1,199

 
 
 
 
 
 
 
 
During the three months ended March 31, 2013 and during the twelve months ended December 31, 2012, the Company did not experience any other-than-temporary losses on its investments. The maturity schedule of all available-for-sale debt securities and held to maturity investments along with amortized cost and estimated fair value as of March 31, 2013 is as follows:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
2,234

 
$
2,486

Due after one year through five years
33

 
33

 
$
2,267

 
$
2,519


6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of March 31, 2013 and December 31, 2012 was as follows:
 
March 31,
2013
 
December 31,
2012
 
(In thousands)
Capitalized signing bonuses
$
84,379

 
$
84,728

Less accumulated amortization
(43,913
)
 
(42,941
)
 
40,466

 
41,787

Capitalized customer deferred acquisition costs
39,345

 
37,736

Less accumulated amortization
(24,064
)
 
(23,098
)
 
15,281

 
14,638

Capitalized customer acquisition costs, net
$
55,747

 
$
56,425



17

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

A summary of the activity in capitalized customer acquisition costs, net for the three month periods ended March 31, 2013 and 2012 was as follows:
 
Three Months Ended
March 31,
 
2013
 
2012
 
(In thousands)
Balance at beginning of period
$
56,425

 
$
55,014

Plus additions to:
 
 
 
Capitalized signing bonuses, net
5,780

 
7,554

Capitalized customer deferred acquisition costs
4,798

 
3,968

 
10,578

 
11,522

Less amortization expense on:
 
 
 
Capitalized signing bonuses, net
(7,101
)
 
(7,321
)
Capitalized customer deferred acquisition costs
(4,155
)
 
(3,876
)
 
(11,256
)
 
(11,197
)
Balance at end of period
$
55,747

 
$
55,339

 
 
 
 
Net signing bonus adjustments from estimated amounts to actual were $(0.8) million and $(0.6) million, respectively, for the three months ended March 31, 2013 and 2012. 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 $6.9 million and $8.0 million, respectively, were written off during the three month periods ended March 31, 2013 and 2012. In addition, fully amortized customer deferred acquisition costs of $3.2 million and $3.9 million, respectively, were written off during the three months ended March 31, 2013 and 2012.
The Company believes that no impairment of capitalized customer acquisition costs has occurred as of March 31, 2013.

7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of March 31, 2013 and December 31, 2012:
 
March 31, 2013
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
49,814

 
$
9,798

 
$
40,016

 
3 to 18 years—proportional cash flow
Merchant portfolio
3,345

 
2,422

 
923

 
7 years—proportional cash flow
Software
14,150

 
9,481

 
4,669

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

 
1,253

 
3,236

 
3 to 5 years—straight line
Other
85

 
24

 
61

 
2 to 9 years—straight line
 
$
71,883

 
$
22,978

 
$
48,905

 
 
 
December 31, 2012
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Asset
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
52,125

 
$
8,318

 
$
43,807

 
3 to 18 years—proportional cash flow
Merchant Portfolio
3,345

 
2,316

 
1,029

 
7 years—proportional cash flow
Software
14,150

 
9,016

 
5,134

 
2 to 5 years—straight line
Non-compete agreements
4,590

 
1,030

 
3,560

 
3 to 5 years—straight line
Other
85

 
21

 
64

 
2 to 9 years—straight line
 
$
74,295

 
$
20,701

 
$
53,594

 
 

18

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

Amortization expense related to the intangible assets was $2.3 million and $1.1 million, respectively, for the three months ended March 31, 2013 and 2012. The estimated remaining amortization expense related to intangible assets in twelve month increments is as follows:
For the Twelve Months Ended March 31,
 
(In thousands)
2014
$
8,351

2015
7,097

2016
6,562

2017
5,486

2018
4,080

Thereafter
17,329

 
$
48,905


Goodwill — The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2013
and 2012 were as follows:
Card
 
Payroll
 
Heartland School Solutions
 
Campus Solutions
 
Other
 
Total
Balance at January 1, 2012
$
43,701

 
$

 
$
40,732

 
$
3,321

 
$
6,501

 
$
94,255

 
Goodwill acquired during the period

 

 

 

 

 

 
Other

 

 

 

 

 

Balance at March 31, 2012

43,701

 

 
40,732

 
3,321

 
6,501

 
94,255

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
43,701

 
30,831

 
53,350

 
33,679

 
6,501

 
168,062

 
Goodwill acquired during the period

 

 

 

 

 

 
Other (a)

 
420

 

 
1,967

 

 
2,387

Balance at March 31, 2013
$
43,701

 
$
31,251

 
$
53,350

 
$
35,646

 
$
6,501

 
$
170,449

(a) Reflects adjustments to allocations of purchase price.
Percentage of total reportable segments' assets that was goodwill as of March 31, 2013 and 2012 is as follows:

 
Percent of Goodwill to Reportable Segments' Total Assets
 
 
 
March 31, 2013
 
March 31, 2012
 
 
Card
8.6%
 
6.9%
 
 
Payroll
17.1%
 
 
 
Heartland School Solutions
77.2%
 
79.4%
 
 
Campus Solutions
51.2%
 
48.1%
 
 
Other
41.6%
 
35.7%
 
 
 
 
 
 
 

8. Processing Liabilities and Loss Reserves
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, 2013 and December 31, 2012:
 
March 31, 2013
 
December 31, 2012
 
(In thousands)
Merchant bankcard processing
$
151,731

 
$
86,882

Merchant deposits
7,242

 
6,436

Loss reserves
1,955

 
1,955

 
$
160,928

 
$
95,273

 
 
 
 
In addition to the merchant deposits listed above, the Company held letters of credit related to merchant bankcard processing totaling $100,000 at March 31, 2013 and December 31, 2012.

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

19

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

for the reversed charges. The Company has determined that the fair value of its obligation to stand ready to perform is minimal. The Company requires personal guarantees and merchant deposits from certain merchants to minimize its obligation.

The card brand networks generally allow chargebacks up to four months after the later of the date the transaction is processed or 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 $23.4 billion and $23.5 billion for the four months ended March 31, 2013 and December 31, 2012, respectively. However, for the four months ended March 31, 2013 and December 31, 2012, the Company was presented with $10.8 million and $11.8 million, respectively, in chargebacks by issuing banks. In the three months ended March 31, 2013 and 2012, the Company incurred merchant credit losses of $0.7 million and $0.2 million, respectively, on total SME bankcard dollar volumes processed of $17.3 billion and $16.7 billion, respectively. These credit losses are included in processing and servicing costs in the Company's Condensed Consolidated Statements of Income.

The loss recorded by the Company for chargebacks associated with any individual merchant is typically small, due both to the relatively small size and the processing profile of the Company's SME merchants. However, from time to time the Company will encounter instances of merchant fraud, and the resulting chargeback losses may be considerably more significant to the Company. The Company has established a contingent reserve for estimated currently existing credit and fraud losses on its Condensed Consolidated Balance Sheets, amounting to $2.0 million on March 31, 2013 and at December 31, 2012. This reserve is determined by performing an analysis of the Company's historical loss experience applied to current processing volume and exposures.

A summary of the activity in the loss reserve for the three month periods ended March 31, 2013 and 2012 was as follows:
 
Three Months Ended
March 31,
 
2013
 
2012
 
(In thousands)
Beginning balance
$
1,955

 
$
1,957

Additions to reserve
753

 
173

Charges against reserve (a)
(753
)
 
(173
)
Ending balance
$
1,955

 
$
1,957

(a)
Included in these amounts are payroll segment losses of $57,000 and $12,000, respectively, for the three months ended March 31, 2013 and 2012.
9. Accrued Buyout Liability
A summary of the accrued buyout liability was as follows as of March 31, 2013 and December 31, 2012:
 
March 31,
2013
 
December 31,
2012
 
(In thousands)
Vested Relationship Managers and sales managers
$
35,711

 
$
33,926

Unvested Relationship Managers and sales managers
1,045

 
1,484

 
36,756

 
35,410

Less current portion
(11,468
)
 
(10,478
)
Long-term portion of accrued buyout liability
$
25,288

 
$
24,932

 
 
 
 
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 $0.1 million at March 31, 2013 and December 31, 2012.
A summary of the activity in the accrued buyout liability for the three months ended March 31, 2013 and 2012 was as follows:

20

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

     
 
Three Months Ended
March 31,
 
2013
 
2012
 
(In thousands)
Beginning balance
$
35,410

 
$
31,658

Increase in settlement obligation, net
4,275

 
4,207

Buyouts
(2,929
)
 
(2,297
)
Ending balance
$
36,756

 
$
33,568


10. Credit Facilities

On November 24, 2010, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and certain lenders who are a party to the Credit Agreement. Credit extended under the Credit Agreement is guaranteed by the Company's subsidiaries and is secured by substantially all of its assets and the assets of its subsidiaries.

The Credit Agreement provides for a revolving credit facility, as subsequently amended and increased, in the aggregate amount of up to $140 million (the “Revolving Credit Facility”), of which up to $10 million may be used for the issuance of letters of credit and up to $5 million is available for swing line loans. As originally structured on November 24, 2010, the Revolving Credit Facility provided for $50 million plus, upon the prior approval of the administrative agent, the Company may increase the total revolving commitments of $50 million for a total commitment under the Revolving Credit Facility of $100 million. On July 20, 2012, the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement. The Amendment amended the Credit Agreement by, among other things, allowing the Company to increase the total Revolving Credit Facility commitments from $100 million to $150 million upon the prior approval of the administrative agent. On December 12, 2012, the Company entered into the Revolving Credit Commitment Increase Agreement (the “Increase Agreement”) with the lenders under the Credit Agreement to increase the total available commitment under the facilities revolving credit facility by $90 million. The Revolving Credit Facility is available to the Company on a revolving basis until November 24, 2015. All principal and interest not previously paid on the Revolving Credit Facility will mature and be due and payable on November 24, 2015.

The Credit Agreement also provided a term credit facility in the aggregate amount of $100 million (the “Term Credit Facility”). The Term Credit Facility required amortization payments in the amount of $3.75 million for each fiscal quarter during the fiscal years ended December 31, 2011 and 2012, and requires $5.0 million for each fiscal quarter during the fiscal years ended December 31, 2013 and 2014, and $7.5 million for each fiscal quarter during the period commencing on January 1, 2015 through the maturity date on November 24, 2015. All principal and interest not previously paid on the Term Credit Facility will mature and be due and payable on November 24, 2015. Amounts borrowed and repaid under the Term Credit Facility may not be re-borrowed. Principal payments due under the Term Credit Facility as of March 31, 2013 were as follows:
For the Twelve Months Ended March 31,
(In thousands)
2014
$
20,000

 
2015
22,500

 
2016
22,500

 
 
$
65,000

 
 
 
 
The Credit Agreement contains covenants which include: the Company's maintenance of certain leverage and fixed charge coverage ratios; limitations on its indebtedness; liens on its properties and assets, its investments in, and loans to other business units; its ability to enter into business combinations and asset sales; and certain other financial and non-financial covenants. These covenants also apply to certain of the Company's subsidiaries. The Company was in compliance with these covenants as of March 31, 2013 and expects it will remain in compliance with these covenants for at least the next twelve months.

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 its current leverage ratio. The weighted average interest rate at March 31, 2013 was 2.6%. Total fees and direct costs paid for the Credit Agreement through March 31, 2013 were $2.2 million. These costs are being amortized to interest expense over the life of the Credit Agreement.


21

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

During the fourth quarter of 2012, the Company borrowed $82.0 million under the Revolving Credit Facility to fund the acquisitions of ECSI and Ovation. At March 31, 2013, there was $65.0 million outstanding under the Term Credit Facility and $82.0 million borrowings outstanding under the Revolving Credit Facility. At December 31, 2012, the Company had $82.0 million outstanding balance under the Revolving Credit Facility and $70.0 million outstanding under the Term Credit Facility.

11. Commitments and Contingencies
LitigationThe Company is involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. The Company has considered all such ordinary course legal proceedings in formulating its disclosures and assessments. In the opinion of the Company, based on consultations with outside counsel, material losses in addition to amounts previously accrued are not considered reasonably possible in connection with these ordinary course legal proceedings.
The Company has also been subject to lawsuits, claims, and investigations which resulted from 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. See Note 1 for a description of the Processing System Intrusion.
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, 2013 were as follows:
For the Twelve Months Ended March 31,
Operating Leases (a)
 
(In thousands)
2014
$9,456
2015
7,045
2016
4,596
2017
3,103
2018
2,944
Thereafter
9,706
Total future minimum lease payments
$36,850
(a) There were no material capital leases at March 31, 2013.

Rent expense for leased facilities and equipment was $2.3 million and $2.0 million, respectively, for the three months ended March 31, 2013 and 2012.
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 six months, 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. There were no payouts under these agreements in the three months ended March 31, 2013.
The following table reflects the Company’s other significant contractual obligations, including leases from above, as of March 31, 2013:

22

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

 
 
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)
 
$
15,738

 
$
6,731

 
$
9,007

 
$

 
$

Telecommunications providers
 
18,459

 
5,662

 
7,803

 
4,994

 

Facility and equipment leases
 
36,850

 
9,456

 
11,641

 
6,047

 
9,706

Term Credit Facility (b)
 
65,000

 
20,000

 
45,000

 

 

 
 
$
136,047

 
$
41,849

 
$
73,451

 
$
11,041

 
$
9,706

 
(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. Our agreements with third-party processors require the Company 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)
Interest rates on the Term Credit Facility are variable in nature; however, in January 2011 we entered into fixed-pay amortizing interest rate swaps having a remaining amount of $32.5 million. If interest rates were to remain at the March 31, 2013 level, we would make interest payments of $1.9 million in the next 1 year and $1.5 million in the next 1 to 3 years or a total of $3.4 million including net settlements on the fixed-pay amortizing interest rate swaps. In addition, we had $82.0 million outstanding under our Revolving Credit Facility at March 31, 2013. The Revolving Credit Facility is available on a revolving basis until November 24, 2015.

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 five reportable segments, as follows: (1) Card, which provides bankcard payment processing and related services to our SME and Network Services merchants (2) Payroll, which provides payroll processing and related tax filing services, (3) Heartland School Solutions, which provides school nutrition and point-of-sale solutions, (4) Campus Solutions, which provides open- and closed-loop payment solutions and with the December 2012 acquisition of ECSI, provides higher education loan services, and (5) Other. The 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 Other segment do not meet the defined thresholds for being an individually reportable segment.
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 methods to provide services.
During the fourth quarter of 2012, the Company revised the presentation of reportable segments as a result of the acquisitions of Nutrikids, Ovation and ECSI. This change resulted in five reportable segments as of March 31, 2013. Additionally, the presentation of the Card segment was revised to classify CPOS as a discontinued operation. The prior period segments were revised to conform to the current period presentation.

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, 2013 and 2012, 70% and 81% of the Payroll segment's total assets were funds that the Company holds as a fiduciary in its Payroll services activities for payment to taxing authorities. At March 31, 2013, 20% 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 are 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.

23

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

A summary of the Company’s segments for the three months ended March 31, 2013 and 2012 was as follows:
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Revenues
 
(In thousands)
    Card
 
$
459,025

 
$
443,147

    Payroll
 
12,812

 
6,343

    Heartland School Solutions
 
12,095

 
9,544

    Campus Solutions
 
11,519

 
1,569

    Other
 
5,791

 
7,037

    Reconciling Items
 
(3
)
 
(64
)
         Total revenues
 
$
501,239

 
$
467,576

Depreciation and amortization
 
 
    Card
 
$
6,491

 
$
5,911

    Payroll
 
833

 
260

    Heartland School Solutions
 
453

 
593

    Campus Solutions
 
505

 
83

    Other
 
404

 
396

    Unallocated Corporate Administration Amounts
 
(1,507
)
 
56

         Total depreciation and amortization
 
$
7,179

 
$
7,299

Interest Income
 
 
    Card
 
$
34

 
$
104

         Total interest income
 
$
34

 
$
104

Interest Expense
 
 
    Card
 
$
1,236

 
$
912

    Campus Solutions
 

 
2

    Other
 
1

 

    Reconciling
 
(3
)
 
(64
)
         Total interest expense
 
$
1,234

 
$
850

Net income from continuing operations
 
 
    Card
 
$
15,031

 
$
16,115

    Payroll
 
1,450

 
776

    Heartland School Solutions
&#