10-Q 1 hpy0930201410q.htm 10-Q HPY 09.30.2014 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 September 30, 2014

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

For the transition period from              to             

Commission File No. 001-32594
______________________________________________ 
HEARTLAND PAYMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3755714
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
90 Nassau Street, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-3831
(Registrant’s telephone number, including area code)
____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
As of November 3, 2014, there were 36,220,616 shares of the registrant’s Common Stock, $0.001 par value, outstanding.
 



INDEX
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
       ended September 30, 2014 and 2013 (unaudited)
 
       ended September 30, 2014 and 2013 (unaudited)
 
       ended September 30, 2014 and 2013 (unaudited)
 
       ended September 30, 2014 and 2013 (unaudited)
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6.



PART I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements
Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,577

 
$
71,932

Funds held for customers
122,311

 
127,375

Receivables, net
220,936

 
200,040

Investments
4,110

 
4,101

Inventory
11,445

 
11,087

Prepaid expenses
19,451

 
15,284

Current tax assets
5,139

 
10,426

Current deferred tax assets, net
7,725

 
9,548

Total current assets
485,694

 
449,793

Capitalized customer acquisition costs, net
68,967

 
61,027

Property and equipment, net
162,707

 
147,388

Goodwill
424,270

 
190,978

Intangible assets, net
193,790

 
49,857

Deposits and other assets, net
1,336

 
1,262

Total assets
$
1,336,764

 
$
900,305

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Due to sponsor banks
$
41,183

 
$
19,109

Accounts payable
60,729

 
70,814

Customer fund deposits
122,311

 
127,375

Processing liabilities
104,856

 
130,871

Current portion of accrued buyout liability
14,457

 
13,943

Current portion of borrowings
18,750

 

Current portion of unearned revenue
40,551

 
18,172

Accrued expenses and other liabilities
25,928

 
31,689

Total current liabilities
428,765

 
411,973

Deferred tax liabilities, net
45,039

 
40,600

Reserve for unrecognized tax benefits
6,769

 
5,633

Long-term borrowings
553,750

 
150,000

Long-term portion of accrued buyout liability
30,500

 
25,436

Long-term portion of unearned revenue
2,104

 

Total liabilities
1,066,927

 
633,642

Commitments and contingencies (Note 11)


 


 
 
 
 
Equity
 
 
 
Common stock, $0.001 par value, 100,000,000 shares authorized, 36,179,147 and 37,485,486 shares issued at September 30, 2014 and December 31, 2013; 36,179,147 and 36,950,886 outstanding at September 30, 2014 and December 31, 2013
36

 
37

Additional paid-in capital
252,127

 
245,055

Accumulated other comprehensive loss
(112
)
 
(88
)
Retained earnings
17,786

 
35,960

Treasury stock, at cost (534,600 shares at December 31, 2013)

 
(20,489
)
Total stockholders’ equity
269,837

 
260,475

Noncontrolling interests

 
6,188

Total equity
269,837

 
266,663

Total liabilities and equity
$
1,336,764

 
$
900,305

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
September 30,
 
Nine Months Ended
September 30
 
2014
 
2013
 
2014
 
2013
Total revenues
$
600,626

 
$
557,129

 
$
1,706,768

 
$
1,604,992

Costs of services:
 
 
 
 
 
 
 
Interchange
373,372

 
350,734

 
1,059,241

 
1,003,039

Dues, assessments and fees
57,864

 
53,165

 
163,218

 
152,146

Processing and servicing
69,328

 
60,195

 
204,985

 
177,968

Customer acquisition costs
12,289

 
10,838

 
34,907

 
31,554

Depreciation and amortization
7,981

 
5,454

 
20,472

 
14,066

Total costs of services
520,834

 
480,386

 
1,482,823

 
1,378,773

General and administrative
49,381

 
41,871

 
137,241

 
131,242

Total expenses
570,215

 
522,257

 
1,620,064

 
1,510,015

Income from operations
30,411

 
34,872

 
86,704

 
94,977

Other income (expense):
 
 
 
 
 
 
 
Interest income
33

 
29

 
95

 
95

Interest expense
(2,142
)
 
(1,243
)
 
(4,450
)
 
(3,746
)
Other, net
3,581

 
90

 
3,869

 
(70
)
Total other income (expense)
1,472

 
(1,124
)
 
(486
)
 
(3,721
)
Income from continuing operations before income taxes
31,883

 
33,748

 
86,218

 
91,256

Provision for income taxes
11,727

 
11,857

 
34,579

 
34,039

Net income from continuing operations
20,156

 
21,891

 
51,639

 
57,217

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

 

 

 
3,970

Net income
20,156

 
21,891

 
51,639

 
61,187

Less: Net (loss) income attributable to noncontrolling interests
 
 
 
 
 
 
 
      Continuing operations
(302
)
 
(90
)
 
(2,011
)
 
(90
)
      Discontinued operations

 

 

 
56

Net income attributable to Heartland
$
20,458

 
$
21,981

 
$
53,650

 
$
61,221

 
 
 
 
 
 
 
 
Amounts attributable to Heartland:
 
 
 
 
 
 
 
Net income from continuing operations
20,458

 
21,981

 
53,650

 
57,307

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

 

 

 
3,914

Net income attributable to Heartland
20,458

 
21,981

 
53,650

 
61,221

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
      Income from continuing operations
$
0.57

 
$
0.60

 
$
1.47

 
$
1.56

      Income from discontinued operations

 

 

 
0.11

      Basic earnings per share
$
0.57

 
$
0.60

 
$
1.47

 
$
1.67

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
      Income from continuing operations
$
0.56

 
$
0.58

 
$
1.44

 
$
1.50

      Income from discontinued operations

 

 

 
0.10

      Diluted earnings per share
$
0.56

 
$
0.58

 
$
1.44

 
$
1.60

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
36,069

 
36,857

 
36,388

 
36,752

Diluted
36,850

 
38,020

 
37,249

 
38,079

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.085

 
$
0.07

 
$
0.255

 
$
0.21


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
September 30,
 
Nine Months Ended
September 30
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
20,156

 
$
21,891

 
$
51,639

 
$
61,187

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Reclassification of gains on investments, net of income tax of
$5, $—, $108 and $—
(6
)
 

 
(170
)
 

Unrealized (losses) gains on investments, net of income
tax of $5, $—, $5 and $4
(8
)
 

 
6

 
4

Unrealized gains on derivative financial instruments, net of income tax
of $28, $25, $83 and $121
45

 
152

 
140

 
315

Foreign currency translation adjustment

 

 

 
(54
)
Comprehensive income
20,187

 
22,043

 
51,615

 
61,452

Less: Comprehensive loss attributable to noncontrolling interests
(302
)
 
(90
)
 
(2,011
)
 
(50
)
Comprehensive income attributable to Heartland
$
20,489

 
$
22,133

 
$
53,626

 
$
61,502







































See accompanying notes to condensed consolidated financial statements.

3


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

Retained
Earnings
 
Treasury Stock
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Nine Months Ended September 30, 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
982

 
1

 
10,724

 

 

 

 

 
10,725

Issuance of common stock –
RSU’s vested
265

 

 
(4,866
)
 

 

 

 

 
(4,866
)
Excess tax benefit on employee
share-based compensation

 

 
8,382

 

 

 

 

 
8,382

Repurchase of common stock
(1,250
)
 

 

 

 

 
(40,221
)
 

 
(40,221
)
Retirement of treasury stock

 
(2
)
 
(10,024
)
 

 
(39,974
)
 
50,000

 

 

Share-based compensation

 

 
9,763

 

 

 

 

 
9,763

Changes in equity from sale of
discontinued operation

 

 

 
83

 

 

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

 

 

 
281

 

 

 
(16
)
 
265

Noncontrolling interest in
subsidiary acquired

 

 

 

 

 

 
6,798

 
6,798

Dividends on common stock

 

 

 

 
(7,735
)
 

 

 
(7,735
)
Net income (loss) for the period

 

 

 

 
61,221

 

 
(34
)
 
61,187

Balance, September 30, 2013
36,853

 
$
37

 
$
236,684

 
$
(35
)
 
$
21,141

 
$
(10,408
)
 
$
6,708

 
$
254,127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
36,951

 
$
37

 
$
245,055

 
$
(88
)
 
$
35,960

 
$
(20,489
)
 
$
6,188

 
$
266,663

Issuance of common stock–
options exercised
346

 

 
4,482

 

 

 

 

 
4,482

Issuance of common stock –
RSU’s vested
230

 

 
(5,225
)
 

 

 

 

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

 

 
5,670

 

 

 

 

 
5,670

Repurchase of common stock
(1,348
)
 

 

 

 

 
(54,455
)
 

 
(54,455
)
Retirement of treasury stock

 
(1
)
 
(12,368
)
 

 
(62,575
)
 
74,944

 

 

Share-based compensation

 

 
10,936

 

 

 

 

 
10,936

Acquisition of noncontrolling
interest

 

 
3,577

 

 

 

 
(4,177
)
 
(600
)
Other comprehensive loss

 

 

 
(24
)
 

 

 

 
(24
)
Dividends on common stock

 

 

 

 
(9,249
)
 

 

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


 

 

 

 
53,650

 

 
(2,011
)
 
51,639

Balance, September 30, 2014
36,179

 
$
36

 
$
252,127

 
$
(112
)
 
$
17,786

 
$

 
$

 
$
269,837












See accompanying notes to condensed consolidated financial statements.

4


Heartland Payment Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) 
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
51,639

 
$
61,187

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of capitalized customer acquisition costs
38,056

 
33,936

Other depreciation and amortization
33,516

 
26,070

Addition to loss reserves
3,000

 
2,510

Provision (recoveries) for doubtful receivables
3,010

 
(1
)
Deferred taxes
8,361

 
5,632

Share-based compensation
10,936

 
9,763

Gain on sale of assets
(258
)
 
(3,786
)
Write off of fixed assets and other
(3,057
)
 
386

Changes in operating assets and liabilities:
 
 
 
Increase in receivables
(11,339
)
 
(15,135
)
Increase in inventory
(287
)
 
(524
)
Payment of signing bonuses, net
(27,647
)
 
(19,546
)
Increase in capitalized customer acquisition costs
(18,349
)
 
(15,676
)
Decrease (increase) in prepaid expenses
132

 
(2,361
)
Increase in current tax assets
(2,957
)
 
(1,515
)
Increase in deposits and other assets
(103
)
 
(296
)
Excess tax benefits on employee share-based compensation
(5,670
)
 
(8,382
)
Increase in reserve for unrecognized tax benefits
1,136

 
1,198

Increase in due to sponsor banks
22,074

 
5,048

Decrease in accounts payable
(12,509
)
 
(1,830
)
(Decrease) increase in unearned revenue
(2,414
)
 
3,820

Decrease in accrued expenses and other liabilities
(12,304
)
 
(4,856
)
(Decrease) increase in processing liabilities
(29,016
)
 
10,310

Payouts of accrued buyout liability
(9,621
)
 
(11,842
)
Increase in accrued buyout liability
15,199

 
13,294

Net cash provided by operating activities
51,528

 
87,404

Cash flows from investing activities
 
 
 
Purchase of investments
(31,017
)
 
(5,241
)
Sales of investments
17,215

 

Maturities of investments

 
1,430

Decrease in funds held for customers
18,849

 
19,519

Decrease in customer fund deposits
(5,064
)
 
(19,510
)
Proceeds from sale of business

 
19,343

Acquisitions of businesses, net of cash acquired
(355,066
)
 
(15,182
)
Capital expenditures
(39,140
)
 
(36,929
)
Net cash used in investing activities
(394,223
)
 
(36,570
)
Cash flows from financing activities
 
 
 
Proceeds from borrowings, net
436,392

 
9,000

Principal payments on borrowings
(17,500
)
 
(15,000
)
Proceeds from exercise of stock options
4,482

 
10,725

Excess tax benefits on employee share-based compensation
5,670

 
8,382

Repurchases of common stock
(54,455
)
 
(39,632
)
Dividends paid on common stock
(9,249
)
 
(7,735
)
Net cash provided by (used in) financing activities
365,340

 
(34,260
)
 
 
 
 
Net increase in cash
22,645

 
16,574

Effect of exchange rates on cash

 
1

Cash at beginning of year
71,932

 
50,581

Cash at end of period
$
94,577

 
$
67,156

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,559

 
$
3,173

Income taxes
28,038

 
28,917

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 Ovation Payroll, Inc. (“Ovation”), Heartland Payment Solutions, Heartland Acquisition LLC (“Network Services”), TouchNet Information Systems, Inc. (“TouchNet”) as of September 4, 2014, Leaf Acquisition, LLC ("Leaf") as of September 11, 2013, and until January 31, 2013, its previously 70% owned subsidiary Collective POS Solutions Ltd. (“CPOS”).

The Company entered into an agreement during the fourth quarter of 2012 to sell CPOS. The transaction was settled on January 31, 2013 and the Company recorded a gain on the sale in the first quarter of 2013. The Company presents CPOS as a discontinued operation in the accompanying condensed consolidated financial statements. See Note 15, Discontinued Operations for more detail.

On August 6, 2014, the Company entered into a Stock Purchase Agreement with the noncontrolling shareholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. Prior to August 6, 2014, the Company owned 66.67% of the outstanding capital stock of Leaf. As a result of this transaction, Leaf became a wholly-owned subsidiary of the Company. Also as a result of this transaction, the Company was released from any liabilities to the noncontrolling shareholders including a contingent earn-out liability that was provided to those noncontrolling shareholders under the original partial acquisition. See Note 2, Summary of Significant Accounting Policies, Other Income (Expense) for more detail.
 
On July 29, 2014, the Company and TouchNet, entered into an Agreement and Plan of Merger (the “Agreement”), under which the Company would acquire all of the shares of common stock of TouchNet (the "Acquisition”) for a cash payment of $375 million plus or minus the net working capital of TouchNet on the closing date. The Acquisition closed as of September 4, 2014. TouchNet is an integrated commerce solutions provider to higher-education institutions. TouchNet became a part of the Company's Campus Solutions business segment. See Note 3, Acquisitions for further detail on this acquisition.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions with the Company's subsidiaries have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of the Company's management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position at September 30, 2014, and its results of operations, changes in equity and cash flows for the nine months ended September 30, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2014. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013. The December 31, 2013 Condensed Consolidated Balance Sheet was derived from the audited 2013 consolidated financial statements.

Out of Period Adjustments—In the second quarter of 2014, the Company recorded out-of-period adjustments decreasing its revenue and increasing bad debt expense (included in Processing and Servicing in its Condensed Consolidated Statements of Income) by $1.4 million and $0.9 million, respectively. These adjustments related to immaterial errors that originated in the prior year in our Heartland School Solutions business. These adjustments included revenue which was incorrectly recorded in prior periods and a reassessment of the collectability of certain customer accounts receivable. These out-of-period adjustments reduced earnings before income taxes and net income in the nine months ended September 30, 2014 by $2.3 million and $1.4 million, respectively, and reduced diluted earnings per share by $0.04. The Company considered existing guidance in evaluating whether a restatement of prior financial statements was required as a result of these misstatements. The guidance requires corrections of errors to be recorded by restatement of prior periods, if material. The Company has quantitatively and qualitatively assessed the materiality of the errors and concluded that the errors were not material to its earnings for the year ended December 31, 2013 and to its forecast of earnings for the year ending December 31, 2014, and accordingly, no restatement of prior period financial statements was warranted.


6

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

Business Description—The Company’s primary business is to provide card payment processing services to merchants throughout the United States, and until January 31, 2013 in Canada (See Note 15, Discontinued Operations for more detail). This involves providing end-to-end electronic payment processing services to merchants by facilitating the exchange of information and funds between them and cardholders' financial institutions. To accomplish this, the Company undertakes merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management. Card payment processing services also includes selling and renting point-of-sale devices. The Company also provides additional services, including those provided through subsidiaries, such as:
School nutrition, point-of-sale solutions, and associated payment solutions, including online prepayment solutions to kindergarten through 12th grade ("K to 12") schools throughout the United States provided by Heartland School Solutions,
Full-service payroll processing and related tax filing services throughout the United States provided by Heartland Ovation Payroll,
Payment processing, integrated commerce solutions, higher education loan services and open- and closed-loop payment solutions to colleges and universities throughout the United States and Canada provided by Campus Solutions, and
Prepaid Card and Other including stored-value card solutions throughout the United States and Canada provided by Micropayments, and marketing solutions including loyalty and gift cards throughout the United States, provided through Heartland Marketing Solutions.

Over 74% of the Company's revenue is derived from processing and settling bankcard transactions, primarily related to the Visa and MasterCard networks, for its merchant customers. Because the Company is not a ''member bank'' as defined by Visa and MasterCard, in order to process and settle these bankcard transactions for its merchants, the Company has entered into sponsorship agreements with member banks. Visa and MasterCard rules restrict the Company from performing funds settlement or accessing merchant settlement funds and require that these funds be in the possession of the member bank until the merchant is funded. A sponsorship agreement with a member bank permits the Company to route Visa and MasterCard bankcard transactions under the member bank's control and identification numbers to clear credit and signature debit bankcard transactions through Visa and MasterCard. A sponsorship agreement also enables the Company to settle funds between cardholders and merchants by delivering funding files to the member bank, which in turn transfers settlement funds to the merchants' bank accounts. These restrictions place the settlement assets and obligations under the control of the member bank.
The sponsorship agreements with the member banks require, among other things, that the Company abide by the bylaws and regulations of the Visa and MasterCard networks, and certain sponsor banks require a cash balance in a deposit account. If the Company were to breach a sponsorship agreement and under certain other circumstances, the sponsor banks may terminate the agreement and, under the terms of the agreement, the Company would have 180 days to identify an alternative sponsor bank. The Company is generally dependent on its sponsor banks, Visa and MasterCard for notification of any compliance breaches. As of September 30, 2014, the Company has not been notified of any such issues by its sponsor banks, Visa or MasterCard.

At September 30, 2014, the Company is party to three bank sponsorship agreements.

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

In November 2009, the Company entered into a sponsorship agreement with The Bancorp Bank ("TBB") to sponsor processing for the Company's Network Services merchants. The agreement with TBB expires in February 2015 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party. As of September 30, 2014, neither party has provided written notice of non-renewal of the sponsorship agreement.

On October 1, 2013, the Company transferred sponsorship and processing for a portfolio of SME merchants from Heartland Bank to TBB. The Company was party to a prior sponsorship agreement with Heartland Bank,

7

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

an unrelated third party, to sponsor SME merchant processing. In March 2013, the Company notified Heartland Bank of its intention to terminate the sponsorship agreement and made arrangements for continuing sponsorship with TBB under the terms of the November 2009 sponsorship agreement.

On March 24, 2011, the Company entered into a sponsorship agreement with Barclays Bank Delaware to sponsor processing for certain of the Company's large national merchants. The agreement with Barclays Bank Delaware expires in March 2016 and will automatically renew for successive one-year periods unless either party provides six months written notice of non-renewal to the other party.

The following is a breakout of the Company’s total Visa and MasterCard settled card processing volume for the month ending September 30, 2014 by percentage processed under its individual bank sponsorship agreements:
Sponsor Bank
% of September 2014
Bankcard Processing
Volume
Wells Fargo Bank, N.A.
64%
The Bancorp Bank
24%
Barclays Bank Delaware
12%

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

Under a prior sales and servicing program agreement with American Express Travel Related Services Company, Inc.
("American Express") the Company: (a) provided solicitation services by signing new-to-American Express merchants directly
with American Express; (b) provided transactional support services on behalf of American Express to the Company's American
Express accepting merchants; and (c) provided processing, settlement, customer support and reporting to merchants, similar to
the services provided for the merchants' Visa, MasterCard and Discover transactions. In May 2014, the Company began offering a new American Express Card Acceptance Program (referred to as "OptBlue") to new merchants and existing merchants who previously were not American Express accepting merchants. The Company converted a majority of its existing merchants who were processing under the prior sales and servicing agreement with American Express to OptBlue during the third quarter of 2014.  As a participant in OptBlue the Company will acquire, contract, and establish pricing, as well as provide customer service to merchants, similar to the transaction processing services the Company provides through Discover, Visa and MasterCard.

2. Summary of Significant Accounting Policies
Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, among other things, the accrued buyout liability, capitalized customer acquisition costs, goodwill, loss reserves, certain accounts payable and accrued expenses and certain tax assets and liabilities as well as the related valuation allowances, if any. Actual results could differ from those estimates.
Cash and Cash Equivalents— At September 30, 2014, cash included approximately $16.3 million of processing-related cash in transit and collateral, compared to approximately $32.1 million of processing-related cash in transit and collateral at December 31, 2013. Processing-related cash in transit and collateral includes funds in transit associated with timing differences arising between the amounts the Company's sponsor banks receive from the bankcard networks and the amounts funded by the Company’s merchants. Processing-related cash in transit and collateral also includes merchant deposits, collateral deposits, and funds in transit relating to timing differences for the Company's non-card payment processing businesses.
Receivables— The Company's primary receivables are from its bankcard processing merchants. In addition to receivables for transaction fees the Company charges its merchants for processing transactions, these receivables include amounts resulting from the Company's practice of advancing interchange fees to most of its SME merchants during the month

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

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.
The timing for presentment of transaction funding files to the bankcard networks results in the Company's sponsor banks receiving settlement cash one day before payment is made to merchants, thereby increasing funding obligations to its SME merchants, which are carried in processing liabilities. The Company funds interchange advances/receivables to SME merchants first from this settlement cash received from bankcard networks, then from the Company's available cash or by incurring a liability to its sponsor banks. The Company did not fund any merchant advances from available cash at September 30, 2014 and December 31, 2013. The amount due to sponsor banks for funding merchant advances was $36.8 million at September 30, 2014 and $17.8 million at December 31, 2013. The Company pays its sponsor banks the prime rate on these payables. The liability 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 Discover and American Express for merchant bankcard transactions. These amounts are recovered the next business day following the date of processing the transaction.

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

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

Investments and Funds Held for Customers— Investments, including those carried on the Condensed Consolidated Balance Sheets as Funds held for customers, consist primarily of equity investments, bond funds, tax-exempt bonds and certificates of deposit. Funds held for customers also include overnight bank deposits. The majority of investments carried in Funds held for customers are available-for-sale and recorded at fair value based on quoted market prices. Certificates of deposit are classified as held to maturity and recorded at cost. In the event of a sale, cost is determined on a specific identification basis. At September 30, 2014, funds held for customers included cash and cash equivalents of $100.9 million and investments available for sale of $21.4 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, which are referred to as "salespersons") for the establishment of new merchant relationships, and (2) a deferred acquisition cost representing the estimated cost of buying out the residual commissions of vested salespersons. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The capitalized customer acquisition costs are amortized using a method which approximates a proportional revenue approach over the initial three-year term of the merchant contract.

The up-front signing bonus paid for new SME bankcard, payroll and loyalty marketing accounts is based on the estimated gross margin for the first year of the merchant contract. The signing bonus, amount capitalized, and related amortization are adjusted after the first year to reflect the actual gross margin generated by the merchant contract during that year. The deferred customer acquisition cost asset is accrued over the first year of SME bankcard, payroll and loyalty marketing merchant processing, consistent with the build-up in the accrued buyout liability, as described below.

Management evaluates the capitalized customer acquisition costs for impairment on an annual basis by comparing, on a pooled basis by vintage month of origination, the expected future net cash flows from underlying merchant relationships to the carrying amount of the capitalized customer acquisition costs. If the estimated future net cash flows are lower than the

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

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 September 30, 2014.
    
Unearned revenue— Unearned revenue of $42.7 million and $18.2 million at September 30, 2014 and December 31, 2013, respectively, is primarily related to the Company's Heartland School Solutions and Campus Solutions businesses for both periods, and its Payroll business for December 31, 2013. Included in the Campus Solutions business is unearned revenue from TouchNet, which the Company acquired on September 4, 2014. The Company added $26.1 million of unearned revenue as part of that acquisition. Unearned revenue is derived primarily from the sale and subscription of e-commerce solutions and integration to host computer systems as well as from support and maintenance contracts and professional services. Unearned revenue represents contractual obligations of the Company to provide software, services and support to customers in the future.
    
Accrued Expenses and Other Liabilities— Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets include the allocation of purchase price to an unfavorable contract of $2.0 million and $3.4 million at September 30, 2014 and December 31, 2013, respectively, associated with the September 30, 2011 acquisition of School-Link Technologies, Inc in the Company's Heartland School Solutions business. During the nine months ended September 30, 2014 and 2013, the Company amortized $1.4 million and $1.5 million, respectively, of this accrued liability against the cash processing costs paid under that contract. During the nine months ended September 30, 2013, the Company recorded an adjustment to the carrying value of this unfavorable processing contract of $1.6 million to adjust the liability to reflect the latest estimate of the expected cash processing costs to be paid over the remainder of the contract. The amortization for the nine months ended September 30, 2014 and 2013 and adjustment to the carrying value were included in cost of services in our Condensed Consolidated Statements of Income.    

Processing Liabilities— Processing liabilities result primarily from the Company's card processing activities. Processing liabilities primarily reflect funds in transit associated with differences arising between the amounts the Company's sponsor banks receive from the bankcard networks and the amounts funded to the Company's merchants. Such differences arise from timing differences, interchange expense, merchant advances, merchant reserves and chargeback processing. These differences result in payables or receivables. If the settlement received from the bankcard networks precedes the funding obligation to the merchant, the Company records a processing liability. Conversely, if funding to the merchant precedes the settlement from the bankcard networks, the Company records a receivable from the bankcard network. The amounts are generally collected or paid the following business day.

Chargebacks arise due to disputes between a cardholder and a merchant resulting from the cardholder's dissatisfaction with merchandise quality or the merchant's service, and the disputes may not always be resolved in the merchant's favor. In some of these cases, the transaction is ''charged back'' to the merchant and the purchase price is refunded to the cardholder by the credit card-issuing institution. If the merchant is unable to fund the refund, the Company is liable for the full amount of the transaction. The Company's obligation to stand ready to perform is minimal. The Company maintains a deposit or the pledge of a letter of credit from certain merchants as an offset to potential contingent liabilities that are the responsibility of such merchants. The Company evaluates its ultimate risk and records an estimate of potential loss for chargebacks based upon an assessment of actual historical loss rates compared to recent bankcard processing volume levels. The Company believes that the liability recorded as loss reserves approximates fair value.

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 or contraction and changes in gross margin are included in the same income statement caption as customer acquisition costs expense.

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


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

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

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

Revenue— The Company classifies its revenues into five categories: (i) Card Payment Processing, (ii) Heartland School Solutions, (iii) Heartland Ovation Payroll, (iv) Campus Solutions and (v) Prepaid Card and Other. The Company recognizes revenue when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. The Company also evaluates its contractual arrangements for indications that multiple element arrangements may exist including instances where more-than-incidental software deliverables are included. The following revenue recognition policies define the manner in which the Company accounts for sales transactions by revenue category.
Card Payment Processing revenue primarily consists of discount, per-transaction and periodic (primarily monthly) fees from the processing of Visa, MasterCard, American Express and Discover transactions for SME merchants and per-transaction fees for the authorization and settlement of transactions for Network Services merchants. Also included in this category are American Express servicing fees, merchant service fees, fees for processing chargebacks, termination fees on terminated contracts and fees from selling, renting and deploying point-of-sale devices. Interchange fees, which are the Company’s most significant expense, are set by the card networks and paid to the card issuing banks. For the majority of SME card processing revenue, the Company does not offset processing revenues and interchange fees because its business practice is to advance the interchange fees to most SME merchants when settling their daily transactions (thus paying the full amount of the transaction to the merchant), and then to collect the full discount fees from merchants on the first business day of the next month. The Company has merchant portability, credit risk, and the ultimate responsibility to the merchant and, as such, revenue is reported at the time of settlement on a gross basis. Payment processing services are transaction based and priced either as a fixed fee per transaction or as a percentage of the transaction value. The fees are charged for the processing services provided and do not include the gross sales price paid by the ultimate buyer to the merchant. For SME merchants to whom the Company does not advance interchange, it records card processing revenues net of interchange fees. As Network Services does not advance interchange fees to its merchants, the Company records its card processing revenues net of interchange fees. The company records Card Payment Processing revenue at the time services are provided and at the time of shipment as it relates to deployment of point-of-sale devices.
Heartland Ovation Payroll revenue includes fees charged for payroll processing services, including check printing, direct deposit, related federal, state and local tax deposits and providing accounting documentation and interest income earned on funds held for customers. Revenues are recorded at the time service is provided.
Heartland School Solutions’ revenues include fees from sales and maintenance of cafeteria point-of-sale solutions and associated payment solutions, including online prepayment solutions, back office management and hardware and technical support.
Campus Solutions revenue includes fees associated with providing integrated commerce solutions to support administrative services for higher education, as well as, student loan payment processing, delinquency and default services, refund management, tuition payment plans, electronic billing and payment, tax document services and business outsourcing. Campus Solutions revenue also includes fees from the sale and maintenance of open- and closed-loop payment hardware and software solutions for college or university campuses to process small value electronic transactions.

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

Both Campus Solutions and Heartland School Solutions have arrangements that contain multiple elements, such as hardware, software products, including perpetual licenses and Software-as-a-Service (“SaaS”) services, maintenance, and professional installation and training services. The Company allocates revenue to each element based on the selling price hierarchy. The selling price for a deliverable is based on vendor specific objective evidence (“VSOE”) of selling price, if available, or estimated selling price (“ESP”) if VSOE of selling price is not available. The Company establishes ESP, based on management judgment, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. In arrangements with multiple elements, the Company determines allocation of the transaction price at inception of the arrangement based on the relative selling price of each unit of accounting.
In multiple element arrangements where more-than-incidental software deliverables are included, the Company has applied the residual method to determine the amount of software license revenues to be recognized pursuant to ASC 985-605. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized upon delivery of the software license or services arrangement. The Company allocates the fair value of each element of a software related multiple-element arrangement based upon its fair value as determined by VSOE, with any remaining amount allocated to the software license. If evidence of the fair value cannot be established for the undelivered elements of a software arrangement then the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established. The Company recognizes software revenue over the subscription or contract term and maintenance revenue over the maintenance period.
Prepaid Card and Other revenues include Micropayments’ fees from selling hardware and software for unattended online wireless credit card based payment systems, and unattended value top up systems for off-line closed-loop smart (chip) card based payment systems. Also included in this category are Heartland Marketing Solutions fees from selling mobile and card-based marketing services, gift cards and rewards services. Revenues are recorded at the time of shipment or at the time services are provided.
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 the Company's borrowings, the gains or losses on the disposal of assets and other non-operating income or expense items.

As a result of the Stock Purchase Agreement that the Company entered into on August 6, 2014 with the noncontrolling shareholders of Leaf, the Company was released from a contingent earn-out liability to those noncontrolling shareholders and recognized a pre- and after-tax gain of $3.6 million in the three and nine months ended September 30, 2014. The non-cash impact of the gain associated with the release of the contingent earn-out liability is recorded in "Other, net" in the condensed consolidated statements of income and "Write-off of fixed assets and other" in the condensed consolidated statement of cash flows.

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

Income Taxes—The Company accounts for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates.
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the Company's estimated tax rate changes, it makes a cumulative adjustment in that period.


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

The provision for income taxes for the three and nine months ended September 30, 2014 and 2013 and the resulting effective tax rates were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Provision for income taxes
$
11,727

 
$
11,857

 
$
34,579

 
$
34,039

Effective tax rate
36.8
%
 
35.1
%
 
40.1
%
 
37.3
%

The effective tax rate for the three months ended September 30, 2013 benefited from the recognition of research and development credits. On January 2, 2013, the American Taxpayer Relief Act of 2012 ("ATR Act") was enacted which included an extension of the federal research and development credit retroactively to 2012 and prospectively through 2013. The Company recognized the effects of the research and development credits in the three months ended September 30, 2013 in conjunction with filing our 2012 tax return.

The increase in the Company's effective tax rate for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, reflects the impact of providing a valuation allowance against deferred tax assets resulting from operating losses recorded by Leaf during our 66.67% ownership period from January 1 to August 5, 2014. On August 6, 2014, the Company acquired all shares of Leaf common stock held by noncontrolling shareholders. As a result of this acquisition, the Company will utilize the losses generated by Leaf against consolidated taxable income for periods after August 5, 2014. See “Note 3, Acquisitions" for further details on our investments in Leaf. Additionally, the effective tax rate for the nine months ended September 30, 2014 benefited from the permanent non-taxable status of the gain recognized on the release of a contingent earn-out liability to the former noncontrolling shareholders of Leaf.
    
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 September 30, 2014, the reserve for unrecognized tax benefits related to uncertain tax positions was $6.8 million, of which $4.4 million would, if recognized, impact the effective tax rate. At December 31, 2013, the reserve for unrecognized tax benefits related to uncertain tax positions was $5.6 million, of which $3.8 million would, if recognized, impact the effective tax rate.

Share–Based Compensation— In the fourth quarters of 2012 and 2013, the Company's Board of Directors approved grants of performance-based Restricted Share Units with grant-specific vesting and performance target terms as shown in the following table:
 
 
 
Performance Awards by Grant Date
 
 
 
 
 
 
 
4th Quarter 2012
 
4th Quarter 2013
 
 
 
 
 
RSU's Granted
 
60,507
 
115,223
 
 
 
 
 
Vesting during 2014
 
 
 
 
 
 
 
Vesting during 2015
 
50%
 
 
 
 
 
 
Vesting during 2016
 
50%
 
 
 
 
 
 
Vesting during 2017
 
 
50%
 
 
 
 
 
Vesting during 2018
 
 
50%
 
 
 
 
 
Grant Performance Target
 
(a)
 
(b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(a)
These Restricted Share Units would vest only if the Company achieves a Pro Forma diluted earnings per share compound annual growth rate ("CAGR") of fifteen percent (15%) for the two-year period ending December 31, 2014. For each 1% that the CAGR actually achieved for the two year period ending on December 31, 2014 is above the 15% target, the number of shares underlying the Restricted Share Units awarded would be increased by 2.08%; provided, however, that the maximum increase in the number of shares that may be awarded is 125%. Likewise, for each 1% that the CAGR actually achieved for the two-year period ending on December 31, 2014 is below the 15% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.31%. If the target CAGR is

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

missed by 67% or more, then the number of shares awarded is zero. The Company records expense on these Restricted Share Units based on achieving the 15% target.
(b)
These Restricted Share Units will vest only if the Company achieves a pro forma diluted earnings per share growth rate of forty percent (40%) over the three-year period ending December 31, 2016. For each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is above the 40% target, the number of shares underlying the Restricted Share Units awarded would be increased by 1.20%; provided, however, that the maximum increase in the number of shares that may be awarded is 150%. Likewise, for each 1% that the growth rate actually achieved for the three-year period ending on December 31, 2016 is below the 40% target, the number of shares underlying the Restricted Share Units awarded would be decreased by 1.50%. If the target growth rate is missed by 50% or more, then the number of shares awarded is zero. The Company has recorded expense on these Restricted Share Units based on achieving the 40% target.

Pro Forma diluted earnings per share for (a) and (b) performance targets will be calculated excluding non-operating gains and losses, if any, and excluding the after-tax impact of share-based compensation expense. The closing price of the Company's common stock on the grant date equals the grant date fair value of these nonvested Restricted Share Units awards and will be recognized as compensation expense over their vesting periods.

In the fourth quarter of 2012, the Company's Board of Directors approved target grants of 60,793 Relative Total Shareholder Return Restricted Share Units (referred to as “TSRs”). These TSRs are nonvested share awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return of our common stock as compared to the total shareholder return of 86 peers. The payout schedule can produce vesting percentages ranging from 0% to 225%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 9, 2015, divided by the closing price on December 10, 2012. The target number of units is based on achieving a total shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these TSRs.
    
In the fourth quarter of 2013, the Company's Compensation Committee approved target grants of 57,598 Relative TSRs. These Relative TSRs are nonvested share awards for which vesting percentages and ultimate number of units vesting will be calculated based on the total shareholder return of the Company's common stock as compared to the total shareholder return of 91 peer companies. The payout schedule can produce vesting percentages ranging from 0% to 200%. Total shareholder return will be calculated based upon the average closing price for the 30 calendar day period ending December 6, 2016, divided by the closing price on December 6, 2013. The target number of units is based on achieving a total shareholder return equal to the 65th percentile of the peer group. The Company recorded expense on these TSRs based on achieving the target. A lattice valuation model was applied to measure the grant date fair value of these Relative TSRs.

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

Earnings per Share— Basic earnings per share was computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share was computed based on the weighted average outstanding common shares plus equivalent shares assuming exercise of stock options and vesting of Restricted Share Units, where dilutive.

Common Stock Repurchases— On November 2, 2012, the Company's Board of Directors authorized the repurchase of up to $50 million of the Company's outstanding common stock. These repurchases were completed during the second quarter of 2013. On May 8, 2013, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. These repurchases were completed during the second quarter of 2014. On May 8, 2014, the Company's Board of Directors authorized the repurchase of up to $75 million of the Company's outstanding common stock. As of September 30, 2014, the Company has not repurchased any shares under the May 8, 2014 authorization.

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

Repurchases under these programs were made through the open market in accordance with applicable laws and regulations. The Company intends to fund any repurchases with cash flow from operations, existing cash on the balance sheet, and other sources including the Company's 2014 Revolving Credit Facility (as defined in Note 10 herein). The manner, timing and amount of repurchases, if any, will be determined by management and will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions and other corporation liquidity requirements. The repurchase program may be modified or discontinued at any time.
 
 
 
 
 
 
 
 
 
November 2012
 
May 2013
 
May 2014
 
Total
Activity For the Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Shares repurchased
 

 
1,347,817

 

 
1,347,817

 
Cost of shares repurchased (in thousands)
 

 
$54,455
 

 
$54,455
 
Average cost per share
 

 
$40.40
 

 
$40.40
 
Remaining authorization (in thousands)
 

 

 
$75,000
 
$75,000
 
 
 
 
 
 
 
 
 
 
 
Activity For the Nine months Ended September 30, 2013
 
 
 
 
 
 
 
 
Shares repurchased
 
952,183

 
297,900

 

 
1,250,083
 
Cost of shares repurchased (in thousands)
 
$29,813
 
$10,407
 

 
$40,220
 
Average cost per share
 
$31.31
 
$34.93
 

 
$32.17
 
 
 
 
 
 
 
 
 
 
 
Activity For the Year Ended December 31, 2013
 
 
 
 
 
 
 
 
 
Shares repurchased
 
952,183
 
534,600
 

 
1,486,783
 
Cost of shares repurchased (in thousands)
 
$29,813
 
$20,488
 

 
$50,301
 
Average cost per share
 
$31.31
 
$38.32
 

 
$33.83
 
    
The Company's Board of Directors previously resolved to retire all common shares repurchased and include the retired shares in the authorized and unissued shares of the Company. At the time of share retirement, the excess of the purchase price of the treasury stock over the stated value is allocated between additional paid-in-capital and retained earnings. It is expected that future retirements of common shares repurchased will be recorded as repurchase authorizations are completed.

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

 
 
September 30, 2014
 
December 31, 2013
 
 
(In thousands)
Notional value
 
$
17,500

 
$
25,000

Fair value (a)
 
(187
)
 
(411
)
Deferred tax benefit
 
76

 
153

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

Noncontrolling Interests— Noncontrolling interests represent noncontrolling shareholders' share of the equity and after-tax net loss of Leaf until the Company's August 6, 2014 acquisition of Leaf noncontrolling interests, and the after-tax net income of CPOS until it was sold in a transaction settled on January 31, 2013. See Note 15, Discontinued Operations for more detail on CPOS.
Noncontrolling shareholders' share of after-tax net loss of Leaf is included in Net income (loss) attributable to noncontrolling interests from continuing operations in the Condensed Consolidated Statements of Income for the three and nine

15

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

months ended September 30, 2014. On August 6, 2014, the Company entered into a Stock Purchase Agreement with the noncontrolling shareholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. Prior to August 6, 2014, the Company owned 66.67% of the outstanding capital stock of Leaf. As a result of this transaction, Leaf became a wholly-owned subsidiary of the Company and there is no noncontrolling interest on the Consolidated Balance Sheet as of September 30, 2014. The minority stockholders’ interests included in noncontrolling interests in the December 31, 2013 Consolidated Balance Sheet was $6.2 million. This amount reflected the original investments by these minority stockholders' in Leaf, along with their proportionate share of Leaf's losses. Noncontrolling shareholders' share of after-tax net income of CPOS is included in Net income (loss) attributable to noncontrolling interests from discontinued operations in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2013.
Subsequent Events—The Company evaluated subsequent events with respect to the condensed consolidated financial statements as of and for the nine months ended September 30, 2014.
On October 31, 2014, the Company acquired the net assets of Xpient Solutions, LLC (“Xpient”) for a cash payment of $30.0 million plus net working capital. The purchase price was funded from a combination of operating cash and financing under the 2014 Revolving Credit Facility. Xpient provides Point-of-Sale software solutions to customers primarily in the food service industry.

New Accounting Pronouncements— From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standards setting bodies that are adopted by us as of the specified effective date.

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

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

In April 2014, the FASB issued updated guidance on reporting discontinued operations. Under this updated guidance, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The guidance raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The guidance expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The updated guidance is effective prospectively for interim and annual reporting periods beginning on or after December 15, 2014, with early application permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated and will depend on the nature of future disposal transactions, if any.
In May 2014, the FASB issued guidance on revenue from contracts with customers, which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. With respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after

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

December 15, 2016 and early adoption is not permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated.
In August 2014, the FASB issued guidance on presentation of going concern financial statements which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this guidance are expected to reduce diversity in the timing and content of footnote disclosures. The amendments in this guidance are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The effect on the Company’s condensed consolidated financial statements is still being evaluated.

3. Acquisitions

2014 Acquisitions:

TouchNet Information Systems, Inc.
On September 4, 2014, the Company completed the acquisition of TouchNet, for a cash payment of $375 million, less a net working capital deficit, for all outstanding common shares. The purchase was funded primarily through a new five-year $375 million term loan. See Note 10, Credit Facilities for further details.

The transaction was accounted for under the purchase method of accounting. Beginning September 4, 2014, TouchNet's results of operations are included in the Company's results of operations. The fair values of the TouchNet assets acquired and liabilities assumed were estimated as of their acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $222.1 million, was recorded as goodwill, which is expected to be deductible for income tax reporting. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition, including the finalization of valuations.  During the nine months ended September 30, 2014, acquisition-related costs of approximately $2.0 million for advisory, legal and regulatory costs incurred in connection with the TouchNet acquisition have been expensed in general and administrative expenses. For the quarter ended September 30, 2014 the Company recognized $4.3 million of revenue related to TouchNet operations since the September 4, 2014 acquisition.

The following table summarizes the preliminary purchase price allocation (in thousands):
 
Cash and cash equivalents
$
38,342

 
 
Receivables, net
12,243

 
 
Inventory
66

 
 
Prepaid expenses
601

 
 
Property and equipment, net
3,360

 
 
Intangible assets, net
144,400

 
 
Goodwill
222,076

 
 
    Total assets acquired
421,088

 
 
Accounts payable
6,002

 
 
Accrued expenses and other liabilities
2,871

 
 
Current portion of unearned revenue
24,014

 
 
Current tax liability
13,914

 
 
Long-term portion of unearned revenue
2,037

 
 
    Net assets acquired
$
372,250

 

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to acquisition of TouchNet are as follows:
 
Weighted average amortization life
 
 
 
 
(In years)
 
 
 
Customer relationships
20.0
 
 
 
Trademark
5.0
 
 
 
Software
15.0
 
 
 
Non-compete agreements
5.0
 
 
 
Overall
18.1
 
 

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


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

 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Total revenues
$
619,861

 
$
574,540

 
$
1,760,516

 
$
1,646,605

Net income attributable to Heartland
19,205

 
21,754

 
55,538

 
59,524

Basic earnings per share
$
0.53

 
$
0.59

 
$
1.53

 
$
1.62

Diluted earnings per share
$
0.52

 
$
0.57

 
$
1.49

 
$
1.56


MCS Software
On April 1, 2014, the Company purchased the net assets of MCS Software for a $17.3 million cash payment. The cash purchase price was financed under the Company's Credit Facility and from operating cash flows. The acquisition further expands the Company's Heartland School Solutions business.

The transaction was accounted for under the purchase method of accounting. Beginning April 1, 2014, MCS Software's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $11.1 million to goodwill, $6.4 million to intangible assets and $0.2 million to net tangible liabilities. The fair values of the MCS Software's assets acquired and liabilities assumed were estimated as of their acquisition date. The fair values are preliminary, based on estimates, and may be adjusted as the Company analyzes what was known and knowable at the acquisition, including the finalization of valuations. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to acquisition of MCS Software are as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
14.0
 
 
Software
4.6
 
 
Non-compete agreements
5.0
 
 
Overall
10.9
 

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

The transaction was accounted for under the purchase method of accounting. Beginning on February 15, 2014, Liquor POS results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $2.2 million to goodwill, $1.2 million to intangible assets, and $0.1 million to net tangible liabilities. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is expected to be deductible for income tax reporting.


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

The weighted average amortization life for the 2014 acquired finite lived intangible assets related to the acquisition of Liquor POS are as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Customer relationships
10.0
 
 
Software
7.0
 
 
Non-compete agreements
5.0
 
 
Patents
5.0
 
 
Overall
8.9
 
    
2013 Acquisition:

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

The transaction was accounted for under the purchase method of accounting. Beginning on September 11, 2013, Leaf's results of operations are included in the Company's results of operations. The allocation of the total purchase price was as follows: $18.5 million to goodwill, $6.9 million to intangible assets, $4.1 million to net tangible liabilities and $6.8 million to noncontrolling interest. Pro forma results of operations have not been presented because the effect of this acquisition was not material. Goodwill is not expected to be deductible for income tax reporting.

On August 6, 2014, the Company entered into a Stock Purchase Agreement with the noncontrolling shareholders of Leaf under which it acquired all shares of Leaf common stock held by the noncontrolling shareholders. As a result of this transaction, Leaf became a wholly-owned subsidiary of the Company. The Company accounted for this transaction as additional paid-in capital on the Condensed Consolidated Balance Sheet as of September 30, 2014.
The weighted average amortization life for the 2013 acquired finite lived intangible assets related to the acquisition of Leaf is as follows:
 
Weighted average amortization life
 
 
 
(In years)
 
 
Software
7.0
 
 
Patents
5.0
 
 
Overall
6.9
 

4. Receivables
A summary of receivables by major class was as follows at September 30, 2014 and December 31, 2013:
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
Accounts receivable from merchants and customers
$
191,798

 
$
172,147

Accounts receivable from bankcard networks
27,570

 
26,842

Accounts receivable from others
3,121

 
2,083

 
222,489

 
201,072

Less allowance for doubtful accounts
(1,553
)
 
(1,032
)
Total receivables, net
$
220,936

 
$
200,040

Included in accounts receivable from others are amounts due from employees (predominantly salespersons) which were $1.8 million and $1.1 million at September 30, 2014 and December 31, 2013, respectively. Accounts receivable related to bankcard networks are primarily amounts due from Discover and American Express for merchant bankcard transactions.

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

A summary of the activity in the allowance for doubtful accounts for the three and nine months ended September 30, 2014 and 2013 was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,780

 
$
915

 
$
1,032

 
$
1,438

Out-of-Period adjustment (a)

 

 
875

 

Additions (reductions) to allowance
1,007

 
186

 
2,135

 
(16
)
Charges against allowance
(1,234
)
 
(134
)
 
(2,489
)
 
(455
)
Ending balance
$
1,553

 
$
967

 
$
1,553

 
$
967

(a) See Note 1, Organization and Operations for a discussion of an Out-of-Period Adjustment.

5. Funds Held for Customers and Investments
A summary of funds held for customers and investments, including the amortized 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 September 30, 2014 and December 31, 2013:
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
September 30, 2014
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
13,012

 
$

 
$
(3
)
 
$
13,009

Fixed income bonds - available for sale
8,442

 
1

 

 
8,443

Cash held for payroll customers
58,358

 

 

 
58,358

Cash held for Campus Solutions customers
42,501

 

 

 
42,501

Total funds held for customers
$
122,313

 
$
1

 
$
(3
)

$
122,311

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

 
$

 
$

 
$
33

Total investments
$
33

 
$

 
$

 
$
33

(a) Certificate of deposit has a remaining term of 23 months.
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
December 31, 2013
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Conservative income bond fund - available for sale
$
12,000

 
$
10

 
$

 
$
12,010

Fixed income bond fund - available for sale
968

 
254

 

 
1,222

Cash held for payroll customers
88,376

 

 

 
88,376

Cash held for Campus Solutions customers
25,767

 

 

 
25,767

Total funds held for customers
$
127,111

 
$
264

 
$

 
$
127,375

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

 
$

 
$

 
$
33

Total investments
$
33

 
$

 
$

 
$
33


Expected maturities of the Fixed income bond at September 30, 2014 are as follows:

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

 
Total
 
Less Than 1 Year
 
1 To 5 Years
 
5 To 10 Years
 
(In thousands)
September 30, 2014
 
 
 
 
 
 
 
Funds Held for Customers
 
 
 
 
 
 
 
Fixed income bond - available for sale cost
$
8,442

 
$
936

 
$
5,352

 
$
2,154

Fixed income bond - available for sale estimated fair value
$
8,443

 
$
936

 
$
5,351

 
$
2,156

Also included in Investments on the Consolidated Balance Sheet are other investments, at cost. As of September 30, 2014 and December 31, 2013, other investments, at cost, include a $4.0 million investment in the equity of ATX Innovation, Inc. ("Tabbedout").

During the nine months ended September 30, 2014 and during the twelve months ended December 31, 2013, the Company did not experience any other-than-temporary losses on its investments.

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

6. Capitalized Customer Acquisition Costs, Net
A summary of net capitalized customer acquisition costs as of September 30, 2014 and December 31, 2013 was as follows:
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
Capitalized signing bonuses
$
94,971

 
$
86,886

Less accumulated amortization
(46,569
)
 
(43,775
)
 
48,402

 
43,111

Capitalized customer deferred acquisition costs
52,321

 
45,241

Less accumulated amortization
(31,756
)
 
(27,325
)
 
20,565

 
17,916

Capitalized customer acquisition costs, net
$
68,967

 
$
61,027

A summary of the activity in capitalized customer acquisition costs, net for the three and nine month periods ended September 30, 2014 and 2013 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Balance at beginning of period
$
66,433

 
$
56,148

 
$
61,027

 
$
56,425

Plus additions to:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
9,468

 
7,466

 
27,647

 
19,546

Capitalized customer deferred acquisition costs
6,192

 
5,555

 
18,349

 
15,676

 
15,660

 
13,021

 
45,996

 
35,222

Less amortization expense on:
 
 
 
 
 
 
 
Capitalized signing bonuses, net
(7,703
)
 
(6,852
)
 
(22,357
)
 
(20,747
)
Capitalized customer deferred acquisition costs
(5,423
)
 
(4,606
)
 
(15,699
)
 
(13,189
)
 
(13,126
)
 
(11,458
)
 
(38,056
)
 
(33,936
)
Balance at end of period
$
68,967

 
$
57,711

 
$
68,967

 
$
57,711

Net signing bonus adjustments from estimated amounts to actual were $(0.7) million and $(1.0) million, respectively, for the three months ended September 30, 2014 and 2013, and $(2.8) million and $(2.9) million, respectively, for the nine months ended September 30, 2014 and 2013. Net signing bonus adjustments are netted against additions in the table above.

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

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 $6.4 million were written off during the three month periods ended September 30, 2014 and 2013, respectively, and $19.4 million and $19.1 million respectively, were written off during the nine month periods ended September 30, 2014 and 2013. In addition, fully amortized customer deferred acquisition costs of $3.9 million and $3.3 million, respectively, were written off during the three months ended September 30, 2014 and 2013, and $11.3 million and $9.9 million, respectively, were written off during the nine months ended September 30, 2014 and 2013.

The Company believes that no impairment of capitalized customer acquisition costs has occurred as of September 30, 2014 and December 31, 2013.

7. Intangible Assets and Goodwill
Intangible Assets — Intangible assets consisted of the following as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
Amortization Life and Method
 
Gross
Assets
 
Accumulated
Amortization
 
Net Assets
 
 
(In thousands)
 
 
Finite Lived Assets:
 
 
 
 
 
 
 
Customer relationships
$
155,925

 
$
19,041

 
$
136,884

 
6 to 20 years—proportional cash flow
Merchant portfolio
4,214

 
3,053

 
1,161

 
7 years—proportional cash flow
Software
60,376

 
13,087

 
47,289

 
1 to 15 years—straight line
Non-compete agreements
5,806

 
2,558

 
3,248

 
5 years—straight line
Other
5,401

 
193

 
5,208

 
5 to 7 years—straight line
 
$
231,722

 
$
37,932

 
$
193,790

 
 

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

 
$
14,107

 
$
35,707

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

 
2,703

 
1,392

 
7 years—proportional cash flow
Software
20,750

 
10,934

 
9,816

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

 
1,880

 
2,609

 
3 to 5 years—straight line
Other
385

 
52

 
333

 
2 to 9 years—straight line
 
$
79,533

 
$
29,676

 
$
49,857

 
 
Amortization expense related to the intangible assets was $3.4 million and $2.2 million, respectively, for the three months ended September 30, 2014 and 2013 and $8.3 million and $6.7 million for the nine months ended September 30, 2014 and 2013, respectively. The estimated remaining amortization expense related to intangible assets in twelve month increments is as follows:
For the Twelve Months Ending September 30,
 
(In thousands)
2015
$
18,498

2016
17,218

2017
15,949

2018
13,875

2019
12,790

Thereafter
115,460

 
$
193,790


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

Goodwill — The changes in the carrying amount of g