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Form 8-K/A HEARTLAND PAYMENT SYSTEM For: Sep 04

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November 14, 2014 2:38 PM EST


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
����������Date of Report
(Date of earliest event reported)����
September 4, 2014
____________________
HEARTLAND PAYMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
����
Delaware
�
001-32594
�
22-3755714
(State or other jurisdiction
�
(Commission File No)
�
��(I.R.S. Employer
�of incorporation or organization)
�
File No)
�
��Identification Number)
�������� ���� ����
90 Nassau Street, Princeton, New Jersey 08542
(Address of principal executive offices) (Zip Code)
(609) 683-3831
(Registrants telephone number, including area code)


(Former name or former address, if changed since last report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
�
o����Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o����Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
o����Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))





This Current Report on Form 8-K/A is filed as an amendment to the Current Report on Form 8-K dated September 4, 2014, filed by Heartland Payment Systems, Inc. (the Company) with the Securities and Exchange Commission on September 8, 2014, announcing the completion of its acquisition of TouchNet Information Systems, Inc. (TouchNet). The information previously reported in the September 4, 2014 Form 8-K is hereby incorporated by reference into this Current Report on Form 8-K/A. This Current Report on Form 8-K/A amends Item�9.01 Financial Statements and Exhibits reported in the September 4, 2014 Form 8-K to provide the audited financial statements as of and for the years ended December�31, 2013 and 2012, and the interim financial statements as of and for the six months ended June 30, 2014 of TouchNet and the required unaudited pro forma combined financial information.

Item�9.01 ����Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired

"
Unaudited financial statements of TouchNet Information Systems, Inc. as of and for the interim periods ended June 30, 2014 and 2013 are filed in Exhibit 99.1 to this Form 8-K/A and incorporated herein by reference.
"
Audited financial statements of TouchNet Information Systems, Inc. as of and for the years ended December�31, 2013 and 2012, are filed in Exhibit 99.1 to this Form 8-K/A and incorporated herein by reference.

(b) Pro Forma Financial Information

"
Unaudited pro forma condensed combined financial statements as of and for the interim period ended June 30, 2014 and for the year ended December�31, 2013 are filed in Exhibit 99.2 to this Form 8-K/A and incorporated herein by reference.
(c) Not applicable
(d) Exhibits
The following exhibits are furnished as part of this Form 8-K/A
�
�
�
Exhibit Number
Description
23.1
Consent of Accord Cox & Company relating to TouchNet Information Systems, Inc.'s financial statements.
99.1
Unaudited financial statements of TouchNet Information Systems, Inc. as of and for the interim periods ended June 30, 2014 and 2013 and audited financial statements of TouchNet Information Systems, Inc. as of and for the years ended December 31, 2013 and 2012.
99.2
Unaudited pro forma condensed combined financial statements as of and for the interim period ended June 30, 2014 and for the year ended December 31, 2013.






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

�
Heartland Payment Systems, Inc.
�
(Registrant)
�
Dated: November 14, 2014
By:
/s/ Samir M. Zabaneh
�
�
Samir M. Zabaneh
�
�
Chief Financial Officer
�
�
(Principal Financial and Accounting Officer)




EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No 333-175533) of Heartland Payment Systems, Inc.�of our report dated November 14, 2014 relating to the financial statements of�TouchNet Information Systems, Inc., appearing in the Amendment No. 1 to the Current Report on Form 8-K of�Heartland Payment Systems, Inc. dated November 14, 2014.

/s/ ACORD COX & COMPANY
Lenexa, KS
November 14, 2014





EXHIBIT 99.1


TOUCHNET INFORMATION SYSTEMS, INC.

Index to Financial Statements


Financial Statements
Page
Unaudited Balance Sheets as of June 30, 2014 and December 31, 2013
F-2
Unaudited Statements of Income for the six months ended June 30, 2014 and 2013
F-3
Unaudited Statements of Cash Flows for the six months ended June 30, 2014 and 2013
F-4
Unaudited Notes to Financial Statements
F-5
�
�
Independent Auditors' Report
F-6
Balance Sheets as of December 31, 2013 and 2012
F-8
Statements of Income for the years ended December 31, 2013 and 2012
F-9
Statements of Stockholders' Equity for the years ended December 31, 2013 and 2012
F-10
Statements of Cash Flows for the years ended December 31, 2013 and 2012
F-11
Notes to Financial Statements
F-12






TOUCHNET INFORMATION SYSTEMS, INC.
BALANCE SHEETS
June 30, 2014 and December 31, 2013
(in thousands, except share data)
(unaudited)

�
June 30,
2014
�
December 31,
2013
Assets
�
�
�
Current assets:
�
�
�
Cash and cash equivalents
$
27,867

�
$
18,625

Accounts receivable, net of allowance for doubtful accounts of $450 and $450, respectively
19,786

�
10,764

Inventory
82

�
127

Prepaid expenses and other assets
540

�
600

Current portion of investments


�
2,015

Total current assets
48,275

�
32,131

Property and equipment, net
2,997

�
2,590

Investments, less current portion


�
3,849

Intangible assets, net
5,614

�
5,256

Total assets
$
56,886

�
$
43,826

�
�
�
�
Liabilities and Stockholders' Equity
�
�
�
Current liabilities:
�
�
�
Accounts payable
$
2,039

�
$
368

PayPath payable
647

�
1,858

Accrued expenses and other
1,310

�
2,362

Current portion of unearned revenue
34,364

�
29,445

Total current liabilities
38,360

�
34,033

Unearned revenue, less current portion
2,234

�
2,398

Total liabilities
40,594

�
36,431

Commitments and contingencies


�


�
�
�
�
Stockholders' Equity
�
�
�
Voting common stock, $0.001 stated value.
Authorized 10,000,000 shares; 6,383,385 shares issued at June 30, 2014 and December 31, 2013
6

�
6

Nonvoting common stock, $0.001 stated value.
Authorized 90,000,000 shares; 57,450,465 shares issued at June 30, 2014 and December 31, 2013
57

�
57

Additional paid-in capital
7,817

�
7,817

Retained earnings
10,465

�
1,568

Voting common stock held in treasury, at cost (726,941 shares at June 30, 2014 and December 31, 2013)
(213
)
�
(213
)
Nonvoting common stock held in treasury, at cost (6,542,469 at June 30, 2014 and December 31, 2013)
(1,840
)
�
(1,840
)
Total stockholders' equity
16,292

�
7,395

Total liabilities and stockholders' equity
$
56,886

�
$
43,826








See notes to unaudited financial statements.
F-2





TOUCHNET INFORMATION SYSTEMS, INC.
STATEMENTS OF INCOME
Six Months Ended June 30, 2014 and 2013
(in thousands)
(unaudited)
�
Six Months Ended
June 30,
�
2014
�
2013
Revenues
$
34,721

�
$
29,238

Costs and expenses
�
�
�
Cost of sales
8,089

�
6,075

Selling, general and administrative
10,516

�
10,017

Legal and professional fees
1,429

�
1,283

Depreciation and amortization
1,257

�
1,219

Total costs and expenses
21,291

�
18,594

Income from operations
13,430

�
10,644

Other income (expense):
�
�
�
Investment income
19

�
24

Other, net
(31
)
�
4

Total other income (expense)
(12
)
�
28

Net income
$
13,418

�
$
10,672

































See notes to unaudited financial statements.

F-3






TOUCHNET INFORMATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2014 and 2013
(in thousands)
(unaudited)
�
Six Months Ended June 30,
�
2014
�
2013
Cash flows from operating activities
�
�
�
Net income
$
13,418

�
$
10,672

Adjustments to reconcile net income to net cash provided by operating activities:
�
�
�
Depreciation and amortization
1,257

�
1,219

Changes in operating assets and liabilities:
�
�
�
Increase in accounts receivable
(8,964
)
�
(10,147
)
Decrease in inventory
45

�
37

Decrease (increase) in prepaid expenses and other assets
1

�
(111
)
(Decrease) increase in accounts payable
(9
)
�
220

Decrease in Paypath payable
(1,221
)
�
(1,363
)
Increase (decrease) in accrued expenses and other
639

�
(134
)
Increase in unearned revenue
4,756

�
5,676

Net cash provided by operating activities
9,922

�
6,069

Cash flows from investing activities
�
�
�
Purchase of leasehold improvements, furniture and equipment
(699
)
�
(275
)
Change in investment securities
5,864

�
(52
)
Capitalized development costs and other intangible assets
(1,323
)
�
(984
)
Net cash provided by (used in) investing activities
3,842

�
(1,311
)
Cash flows from financing activities
�
�
�
Distributions to shareholders
(4,522
)
�
(8,543
)
Net cash used in financing activities
(4,522
)
�
(8,543
)
�
�
�
�
Net increase (decrease) in cash
9,242

�
(3,785
)
Cash and cash equivalents at beginning of year
18,625

�
18,969

Cash and cash equivalents at end of period
$
27,867

�
$
15,184






















See notes to unaudited financial statements.

F-4






TOUCHNET INFORMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2014 and 2013
(unaudited)

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Financial Statement Presentation The accompanying financial statements include TouchNet Information Systems. Inc. ("TouchNet" or the "Company"). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The accompanying financial statements are unaudited. In the opinion of TouchNets management, the unaudited financial statements include all normal recurring adjustments necessary for a fair presentation of TouchNets financial position at June 30, 2014, its results of operations and cash flows for the six months ended June 30, 2014 and 2013. Results of operations reported for interim periods are not necessarily indicative of the results to be expected for the year ended December�31, 2014. These unaudited financial statements should be read in conjunction with the audited financial statements for the years ended December�31, 2013 and 2012 included elsewhere in this document.
On July 29, 2014, Heartland Payment Systems, Inc. (the "Purchaser") and TouchNet Information Systems, Inc. ("TouchNet" or the "Seller"), entered into an Agreement and Plan of Merger (the "Agreement"), under which the Purchaser would acquire all of the shares of common stock of TouchNet (the "Acquisition") for a cash payment of $375.0 million plus or minus the net working capital of TouchNet on the closing date. The Acquisition closed as of September 4, 2014.
Description of the Business TouchNet was incorporated under the laws of the state of Kansas on May 19, 1989. The Company develops, markets, and supports advanced e-commerce solutions to automate the delivery of business critical transactions primarily for colleges and universities.

















F-5






INDEPENDENT AUDITORS' REPORT



Board of Directors
Touchnet Information Systems, Inc.
Lenexa, Kansas


We have audited the accompanying balance sheets (restated) of Touchnet Information Systems, Inc. (the Company) as of December 31, 2013 and 2012, and the related statements of income (restated), stockholders equity (restated) and cash flows (restated) for the years then ended, and the related notes (restated) to the financial statements.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements (restated) in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements (restated) based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements (restated) are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the organizations preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the organizations internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements (restated) referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.








F-6





Emphasis of Matter - Restatement

The financial statements of the Company as of December 31, 2013 and 2012, were audited by us and our report dated May 10, 2014, expressed an unmodified opinion on those statements. As discussed in Note 9 to the financial statements, the Company has adjusted its 2013 and 2012 financial statements to retrospectively apply the change in the application of revenue recognition principles for certain revenue arrangements that include software elements. Our opinion is not modified with respect to that matter.

Other Matter - Subsequent Event

As discussed in Note 9 to the financial statements, on July 29, 2014, the Company entered into an Agreement and Plan of Merger with Heartland Payment Systems, Inc. (the Purchaser), under which the Purchaser would acquire all of the shares of common stock of the Company (the Acquisition). The Acquisition closed as of September 4, 2014. Our opinion is not modified with respect to that matter.



/s/ Acord Cox & Company
Lenexa, Kansas
November 14, 2014������������


































F-7





TOUCHNET INFORMATION SYSTEMS, INC.
BALANCE SHEETS
December 31, 2013 and 2012
(in thousands, except share data)

�
2013
�
2012
Assets
�
�
�
Current assets:
�
�
�
Cash and cash equivalents
$
18,625

�
$
18,969

Accounts receivable, net of allowance for doubtful accounts of $450 and $450, respectively
10,764

�
9,173

Inventory
127

�
76

Prepaid expenses and other current assets
600

�
603

Current portion of investments
2,015

�
1,604

Total current assets
32,131

�
30,425

Property and equipment, net
2,590

�
2,323

Investments, less current portion
3,849

�
5,284

Intangible assets, net
5,256

�
4,776

Total assets
$
43,826

�
$
42,808

�
�
�
�
Liabilities and Stockholders' Equity
�
�
�
Current liabilities:
�
�
�
Accounts payable
$
368

�
$
270

PayPath payable
1,858

�
2,015

Accrued expenses and other
2,362

�
3,146

Current portion of unearned revenue
29,445

�
27,558

Total current liabilities
34,033

�
32,989

Unearned revenue, less current portion
2,398

�
2,956

Total liabilities
36,431

�
35,945

Commitments and contingencies


�


�
�
�
�
Stockholders' Equity
�
�
�
Voting common stock, $0.001 stated value.
Authorized 10,000,000 shares; 6,383,385 shares issued at June 30, 2014 and December 31, 2013
6

�
6

Nonvoting common stock, $0.001 stated value.
Authorized 90,000,000 shares; 57,450,465 shares issued at June 30, 2014 and December 31, 2013
57

�
57

Additional paid-in capital
7,817

�
7,817

Retained earnings
1,568

�
575

Accumulated other comprehensive income - unrealized gain on available-for-sale equity securities


�
461

Voting common stock held in treasury, at cost (726,941 shares at December 31, 2013 and 2012)
(213
)
�
(213
)
Nonvoting common stock held in treasury, at cost (6,542,469 at December 31, 2013 and 2012)
(1,840
)
�
(1,840
)
Total stockholders' equity
7,395

�
6,863

Total liabilities and stockholders' equity
$
43,826

�
$
42,808









See notes to financial statements

F-8






TOUCHNET INFORMATION SYSTEMS, INC.
STATEMENTS OF INCOME
Years Ended December 31, 2013 and 2012
(in thousands)
�
2013
�
2012
Revenues
$
64,480

�
$
57,453

Costs and expenses
�
�
�
Cost of sales
15,260

�
12,748

Selling, general and administrative
19,510

�
17,551

Legal and professional fees
2,362

�
1,516

Depreciation and amortization
2,437

�
2,388

Total costs and expenses
39,569

�
34,203

Income from operations
24,911

�
23,250

Other income:
�
�
�
Investment income
909

�
469

Other, net
6

�
7

Total other income
915

�
476

Net income
$
25,826

�
$
23,726
























See notes to financial statements

F-9




TOUCHNET INFORMATION SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2013 and 2012
(in thousands)


�
Common Stock
�
Additional
Paid-In
Capital
�

Retained
Earnings
�
Accumulated
Other
Comprehensive
Income (Loss)
�
Common Stock Held in Treasury
�
Notes Receivable From Officers
�
Comprehensive Income
�
Total Stockholders'
Equity
�
Voting
�
Nonvoting
�
Voting
�
Nonvoting
�
Shares
�
Amount
�
Shares
�
Amount
�
Shares
�
Amount
�
Shares
�
Amount
Balances, January 1, 2012
6,383

�
$
6

�
57,450

�
$
57

�
$
7,829

�
$
8,301

�
$
307

�
742

�
$
(217
)
�
6,677

�
$
(1,878
)
�
$
(64
)
�
�
�
$
14,341

Comprehensive Income:
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
Net income


�


�


�


�


�
23,726

�


�


�


�


�


�


�
$
23,726

�
$
23,726

Unrealized gain on investments


�


�


�


�


�


�
154

�


�


�


�


�


�
154

�
$
154

Comprehensive income
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
$
23,880

�

�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
Sales of treasury stock


�


�


�


�
(12
)
�


�


�
(15
)
�
4

�
(135
)
�
38

�


�
�
�
$
30

Stockholder distributions


�


�


�


�


�
(31,452
)
�


�


�


�


�


�


�
�
�
$
(31,452
)
Notes receivable from officers


�


�


�


�


�


�


�


�


�


�


�
64

�
�
�
$
64

Balances, December 31, 2012
6,383

�
$
6

�
57,450

�
$
57

�
$
7,817

�
$
575

�
$
461

�
727

�
$
(213
)
�
6,542

�
$
(1,840
)
�
$


�


�
$
6,863

Comprehensive Income:
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
Net income


�


�


�


�


�
25,826

�


�


�


�


�


�


�
$
25,826

�
$
25,826

Unrealized gain on investments


�


�


�


�


�


�
(461
)
�


�


�


�


�


�
(461
)
�
$
(461
)
Comprehensive income
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
$
25,365

�

�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
Stockholder distributions


�


�


�


�


�
(24,833
)
�


�


�


�


�


�


�
�
�
$
(24,833
)
Balances, December 31, 2013
6,383

�
$
6

�
57,450

�
$
57

�
$
7,817

�
$
1,568

�
$


�
727

�
$
(213
)
�
6,542

�
$
(1,840
)
�
$


�
�
�
$
7,395







See notes to financial statements

F-10




TOUCHNET INFORMATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2013 and 2012
(in thousands)
�
2013
�
2012
Cash flows from operating activities
�
�
�
Net income
$
25,826

�
$
23,726

Adjustments to reconcile net income to net cash provided by operating activities:
�
�
�
Depreciation and amortization
2,437

�
2,388

Changes in operating assets and liabilities:
�
�
�
(Increase) decrease in accounts receivable
(1,590
)
�
742

(Increase) decrease in inventory
(51
)
�
66

Decrease (increase) in prepaid expenses and other assets
4

�
(41
)
Increase in accounts payable
98

�
47

(Decrease) increase in PayPath payable
(157
)
�
131

(Decrease) increase in accrued expenses and other
(784
)
�
641

Increase in unearned revenue
1,328

�
1,057

Net cash provided by operating activities
27,111

�
28,757

Cash flows from investing activities
�
�
�
Purchase of leasehold improvements, furniture and equipment
(904
)
�
(359
)
Change in investment securities
563

�
4,563

Capitalized development costs and other intangible assets
(2,281
)
�
(2,035
)
Change in officer's notes receivable


�
64

Net cash (used in) provided by investing activities
(2,622
)
�
2,233

Cash flows from financing activities
�
�
�
Distributions to shareholders
(24,833
)
�
(31,452
)
Sale of treasury shares


�
30

Net cash used in financing activities
(24,833
)
�
(31,422
)
�
�
�
�
Net decrease in cash
(344
)
�
(432
)
Cash and cash equivalents at beginning of year
18,969

�
19,401

Cash and cash equivalents at end of year
$
18,625

�
$
18,969


















See notes to financial statements

F-11





TOUCHNET INFORMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2013 and 2012


1.����ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.
Organization and Nature of Operations - Touchnet Information Systems, Inc. (the Company), was incorporated under the laws of the state of Kansas on May 19, 1989. The Company develops, markets, and supports advanced e-commerce solutions to automate the delivery of business critical transactions primarily for colleges and universities.

On July 29, 2014, Heartland Payment Systems, Inc. (the Purchaser) and the Company entered into an Agreement and Plan of Merger (the Agreement), under which the Purchaser would acquire all of the shares of common stock of the Company (the Acquisition) for a cash payment of $375.0 million plus or minus the Companys net working capital on the closing date. The Acquisition closed as of September 4, 2014. See Note 9 Subsequent Events/Restatement Adjustments.

b.
Use of Estimates - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to, estimates of the useful lives of property and equipment and estimates of allowance for doubtful accounts. Actual results could differ from those estimates.

c.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposit accounts, and certificates of deposit with original maturities of less than 90 days.

d.
Allowance for Doubtful Accounts - The allowance for doubtful accounts is the Companys best estimate of the amount of probable losses in the Companys existing accounts receivable. The Company determines the allowance based on historical write-off experience and specific customer information.

e.
Inventory - Inventory consists of computer hardware and other materials utilized in the maintenance and support of the Companys products, and are valued at the lower of cost (first-in, first-out method) or market.

f.
Leasehold Improvements, Furniture, and Equipment - Leasehold improvements, furniture, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, ranging from five to fifteen years.

g.
Investments - The Company classifies its purchase of specific debt securities as held to maturity and records them at amortized cost as the Company has the positive intent and ability to hold these securities until maturity. Bond premiums and discounts are amortized using the effective-interest method.

The financial statements reflect the adoption of FASB Accounting Standards Codification (ASC 820), Fair Value Measurements and Disclosures. FASB ASC 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. FASB ASC 820 establishes a single authoritative definition of fair value, sets a framework for measuring the fair value, and requires additional disclosures about fair value measurement.

In accordance with FASB ASC 820, the Company classifies its investments into Level 1, which refers to valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2, valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 which refers to valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As required by FASB ASC 820, at December 31, 2013 and 2012, the Companys portfolio investments were classified as follows, based on fair values.




F-12




�
2013
�
2012
�
(in thousands)
Level 1
$


�
$
1,334

Level 2


�
99

Level 3


�


�
$


�
$
1,433



h.
Intangible Assets - Product development software costs incurred internally are expensed until technological feasibility has been established upon completion of a program design. Thereafter, development costs are capitalized and subsequently reported at the lower of amortized costs or estimated net realizable value. Capitalized costs are amortized based on current and future revenue for each product with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the product. The Company is amortizing capitalized development costs on a straight-line basis over five years.

Patents and trademark costs are amortized by the straight-line method over their estimated economic lives, ranging from 5 to 17 years

i.
Revenue Recognition - Revenues are derived primarily from the sale and subscription of e-commerce solutions and integration to host computer systems under perpetual license and Application Subscription Program contracts. In addition, revenue is generated from support and maintenance contracts and custom applications development as well as transaction processing through a convenience fee service.

The Company recognizes license contract related revenue in accordance with the provisions of ASC 985-605, Software - Revenue Recognition and subscription contract related revenue in accordance with ASC 605-25, Revenue Recognition-Multiple Element Arrangements. ASC 985-605 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The Company allocates revenue to each element in a multiple element arrangement based on its respective stand alone fair value, as determined by the price charged when that element is sold separately. If evidence of the stand alone fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.

The Company provides implementation services related to its sales of licenses or subscriptions of e-commerce solution software. These implementation services do not possess stand-alone value, accordingly, implementation service fees and related license revenues are recognized over the software implementation period for license sales, and for subscription contracts, implementation service fees are recognized over the subscription contract term.

Revenue from the sale of software, when sold as the sole element in an arrangement, hardware, and other equipment, are recognized upon shipment. Fair value is determined based on prices when these elements are sold. Revenue from ongoing software support and maintenance is recognized ratably over the contracted maintenance term. Revenue on custom programming is recognized upon completion of the program. Revenue for subscription contracts are recognized ratably over the term of the contract.

Unearned revenue represents contractual obligations of the Company to provide software, services and support to customers in the future.

The Company also has a convenience fee service known as PayPath. PayPath enables campus customers to outsource credit card payments to the Company and not incur the costs of directly accepting credit card payments. A convenience fee is charged to the payer for using the service and this charge is used by the Company to cover various costs such as bank/processing fees, software and technology, operations, security and customer service. The Company recognizes revenue as the amount of the convenience fee paid by the end user on each transaction. Payment card processing and bank fees incurred by the Company are recorded as Cost of Sales.




F-13





j.
Recently Adopted Accounting Pronouncements - In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2009-13 - Multiple Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 requires a vendor to allocate revenue to each unit of accounting in many arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when more objective evidence of selling price is not available. We adopted the amendment provisions of ASU 2009-13 on January 2, 2011; the adoption of this standard did not result in a material change in the timing of revenue recognition.

In October 2009, the FASB issued ASU 2009-14 - Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). Under ASU 2009-14, tangible products containing software components and non-software components that function together to deliver the tangible products essential functionality are no longer within the scope of the software revenue guidance in ASC 985-605. We adopted the amendment provisions of ASU 2009-14 on January 2, 2011; the adoption of this standard did not result in a material change in the timing of revenue recognition.
��
k.
Income Taxes - The Company elected to become a subchapter S-Corporation January 1, 2007. Therefore, all earnings of the Company are recognized ratably by the individual shareholders of the Company. Uncertain tax provisions, if any, are recorded in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes, which require the recognition of a liability for tax positions taken that do not meet the more-likely-than-not standard that the position will be sustained upon examination by the taxing authorities. There is no liability for uncertain tax positions recorded at December 31, 2013 or 2012. The Company's income tax filings are subject to examination by various taxing authorities. The Company's open examination periods are 2010 and forward.

l.
Research and Development - Research and development costs are expensed in the period incurred.

m.
Subsequent Events - Subsequent events have been evaluated through the date of the Independent Auditors Report, the date which the financial statements were available for issue.

2.����INVESTMENTS

A summary of investments at December 31, 2013 and 2012 is as follows:

�
2013
�
2012
�
(in thousands)
Securities available-for-sale
$


�
$
1,433

Debt securities held-to-maturity
5,864

�
5,455

�
5,864

�
6,888

Less current portion of investment
(2,015
)
�
(1,604
)
�
$
3,849

�
$
5,284


A summary of marketable securities relating to quoted market values and unrealized holding gains (losses) at December 31, 2013 and 2012 is as follows (in thousands):

�
Amortized cost
�
Unrealized gains
�
Unrealized losses
�
Fair value
2013
�
�
�
�
�
�
�
Available-for-sale equity securities
$


�
$


�
$


�
$


2012
�
�
�
�
�
�
�
Available-for-sale equity securities
$
972

�
$
461

�

�
$
1,433


The carrying value and fair value of debt securities held-to-maturity (HTM) at December 31, 2013 and 2012 were as follows:

F-14




�
Amortized cost
�
Unrealized gains
�
Unrealized losses
�
Fair value
2013
�
�
�
�
�
�
�
Municipal bonds
$
5,864

�
$
8

�
$


�
$
5,872

2012
�
�
�
�
�
�
�
Municipal bonds
$
5,455

�
$
12

�
$


�
$
5,467


3.����LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT

A summary of leasehold improvements, furniture and equipment at December 31, 2013 and 2012, respectively, is as follows:

�
2013
�
2012
�
(in thousands)
Leasehold improvements
$
2,503

�
$
2,498

Furniture and equipment
1,177

�
1,112

Developmental assets and models
196

�
196

Construction in process
619

�
19

Computer equipment
4,360

�
4,127

���Total leasehold improvements, furniture and equipment
8,855

�
7,952

Less accumulated depreciation
6,265

�
5,629

���Net leasehold improvements, furniture and equipment
$
2,590

�
$
2,323


Depreciation expense for 2013 and 2012 was approximately $636,000 and $708,000, respectively.

4.����INTANGIBLE ASSETS

A summary of intangible assets at December 31, 2013 and 2012, respectively, is as follows:

�
2013
�
2012
�
(in thousands)
Product development costs
$
19,076

�
$
16,867

Trademarks and patents
990

�
918

���Total intangible assets
20,066

�
17,785

Less accumulated amortization
14,810

�
13,009

���Net intangible assets
$
5,256

�
$
4,776


Amortization expense for 2013 and 2012 was approximately $1,801,000 and $1,679,000, respectively. Estimated amortization expense for each of the next five years is $1,692,000, $1,362,000, $1,031,000, $667,000 and $257,000, respectively.


5.����DEFERRED COMPENSATION ����

Effective January 1, 2008, the Companys Board of Directors adopted the TouchNet Information Systems, Inc. Deferred Compensation Stock Plan (the Plan), which permits the Board, in its sole discretion, to grant Stock Equivalent Units to any employee of the Company. In this paragraph, and in the next two paragraphs, capitalized terms in quotes have the meanings set forth in the Plan.

A Stock Equivalent Unit means the right to receive an amount, determined as of the applicable Valuation Date, equal to the combined fair market value of nine (9) shares of nonvoting common stock and one (1) share of voting common stock of the Company. Each Stock Equivalent Unit granted with respect to a Plan Year vests at a rate of 20% for each Year of Service from the first day of the Plan Year, or immediately upon a Change in Control.

F-15




Vested amounts are payable to a Participant upon the Participants Separation from Service or upon a Change in Control. Generally, in the case of a Separation from Service, vested amounts are payable in three (3) equal, annual installments, with interest, if the Separation from Service is due to Retirement, Death or Disability, or in five (5) equal, annual installments, with interest, if the Separation from Service is due to any other reason. In the event of a Change in Control, vested amounts are payable in a lump sum within ninety (90) days after the Change in Control. See Note 9 Subsequent Events/Restatement Adjustments.

During the year ended December 31, 2013, the Board granted 18,000 Stock Equivalent Units. Previous Stock Equivalent Units of 17,622 were granted in 2008, 5,000 in 2010, 4,500 in 2011, 6,000 in 2012 with a total Stock Equivalent Units outstanding as of December 31, 2013 of 51,122.


6.����LEASES

The Company leases office facilities under an operating lease from a related party. On January 1, 2014, the Company renewed that operating lease agreement and extended the lease term to December of 2025. In connection with the Acquisition, the Company and the Purchaser renegotiated this lease shortening the lease term to December 31, 2020. In addition, the Company leases CRM Cloud Services under an operating lease that expires in 2015. Rent expense associated with all operating leases for 2013 and 2012 was approximately $507,993 and $460,269.

Future rental payments required under operating leases with non-cancellable lease terms in excess of one year are as follows:

�
December 31,
�
(in thousands)
2014
$
474

2015
439

2016
308

2017
308

2018
308

2019-2023
1,730

2024-2025
769

�
$
4,336


7.����EMPLOYEE BENEFIT PLANS

401(k) Profit Sharing Plan - The Company has a defined contribution plan (the 401(k) Plan) for all employees attaining 21 years of age. This plan matches employee contributions 50% up to 7% of an employees salary. In addition, the Employer may choose to make a year-end Profit Sharing contribution to all eligible employees. Employer Profit Sharing contributions under this plan are discretionary. The Company expensed matching contributions to the 401(k) Plan for 2013 and 2012 of approximately $349,388 and $192,245. The Company expensed Profit Sharing contributions under the 401(k) plan for 2013 and 2012 of approximately $449,736 and $413,489.


8.
PENDING LITIGATION

On February 27, 2009, Higher One, Inc., a Delaware corporation, filed a lawsuit against the Company in the U.S. District Court in Connecticut, alleging that the Company is infringing one or more claims of U.S. Patent No. 7,496,536 issued to Higher One, Inc. by the U.S. Patent & Trademark Office on February 24, 2009. The Patent relates to systems and methods to be used by educational institutions for the making of refunds.

On September 8, 2010, Higher One, Inc. filed a second lawsuit against the Company in the U.S. District Court in Connecticut, alleging that the Company is infringing one or more claims of U.S. Patent No. 7,792,744 issued to Higher One, Inc. by the U.S. Patent & Trademark Office on September 7, 2010, involving systems and methods to facilitate a distribution of bank accounts by an educational institution.

F-16




In each case, Higher One, Inc. is seeking damages, costs, interest on damages, a preliminary and permanent injunction, and such other relief as the court deems just and proper. Management believes the suits are without merit and intends to vigorously defend its position.

The outcome in these cases cannot be predicted and therefore, no accrual for an estimated settlement has been recorded to the December 31, 2013 or 2012 financial statements. Future results of operations for any particular annual period could be affected by changes in the Companys underlying assumptions related to these proceedings.

9.
SUBSEQUENT EVENTS/RESTATEMENT ADJUSTMENTS

On July 29, 2014, Heartland Payment Systems, Inc. (the Purchaser) and the Company entered into an Agreement and Plan of Merger (the Agreement), under which the Purchaser would acquire all of the shares of common stock of the Company (the Acquisition) for a cash payment of $375.0 million plus or minus the Companys net working capital on the closing date. The Acquisition closed as of September 4, 2014. In connection with the Acquisition, certain originally reported amounts have been restated.

The Companys financial statements as of and for the years ended December 31, 2013 and 2012 as originally reported included amounts as long-term contracts receivable and long-term unearned revenue that related to unbilled receivables for services not rendered as of the balance sheet dates. These services represented contractual obligations of the Company to provide software, services and support to customers in the future. As a result of considering guidance preferable for publicly traded companies, long-term contracts receivable and the related amount of long-term unearned revenue have been removed from the Companys balance sheets.

Additionally, the Company reviewed its methodology for establishing stand alone fair value on support and maintenance, hosting and implementation services and concluded that in some situations sufficient evidence did not exist to support the revenue recognition methods originally applied. As a result, amounts related to unearned revenue on the balance sheet and revenues in the income statement have been restated.

The result of the restatement decreased retained earnings and total equity by approximately $5,905,000 at January 1, 2012.

The tables below provide a summary of the significant effects of restatements to the Companys financial statements:

�
As of December 31,
�
2013
�
2012
�
(in thousands)
�
As Originally Reported
�
As Restated
�
As Originally Reported
�
As Restated
Contracts receivable, less current portion
$
52,683

�
$


�
$
46,465

�
$


Total assets
96,509

�
43,826

�
89,273

�
42,808

Current portion of unearned revenues
28,061

�
29,445

�
25,510

�
27,558

Unearned revenues, less current portion
52,683

�
2,398

�
46,465

�
2,956

Total liabilities
85,331

�
36,431

�
77,406

�
35,945

Retained earnings
5,349

�
1,568

�
5,578

�
575

Total stockholder's equity
11,178

�
7,395

�
11,867

�
6,863











F-17





�
For the Year Ended December 31,
�
2013
�
2012
�
As Originally Reported
�
As Restated
�
As Originally Reported
�
As Restated
Revenues
$
63,258

�
$
64,480

�
$
56,551

�
$
57,453

Income from operations
23,689

�
24,911

�
22,348

�
23,250

Net income
24,604

�
25,826

�
22,824

�
23,726

Comprehensive income
24,143

�
25,365

�
22,978

�
23,880

Increase in unearned revenue
2,551

�
1,328

�
1,959

�
1,057















































F-18




EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On July 29, 2014, Heartland Payment Systems, Inc. (the "Company or the "Purchaser) and TouchNet Information Systems, Inc. (TouchNet or the "Seller), entered into an Agreement and Plan of Merger (the Agreement), under which the Purchaser would acquire all of the shares of common stock of TouchNet (the "Acquisition) for a cash payment of $375.0 million minus the net working capital of TouchNet on the closing date. The Acquisition closed as of September 4, 2014.
TouchNet was incorporated under the laws of the state of Kansas on May 19, 1989. The Company develops, markets, and supports advanced e-commerce solutions to automate the delivery of business critical transactions primarily for colleges and universities.
The following unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheet of the Company and the historical balance sheet of TouchNet as of June 30, 2014, giving effect to the Acquisition as if it had been consummated on June 30, 2014. The following unaudited pro forma condensed combined statements of income and comprehensive income for the six-month period ended June 30, 2014 and the twelve-month period ended December�31, 2013 combine the condensed consolidated statement of income and comprehensive income of the Company and the statement of income and comprehensive income of TouchNet for the six-month period ended June 30, 2014 and the twelve-month period ended December�31, 2013, giving effect to the Acquisition as if it had occurred at January�1, 2013. The unaudited pro forma condensed combined financial statements do not include the realization of potential cost savings from operating efficiencies, synergies or other restructurings that may result from the acquisition.
The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the Companys historical financial statements, related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations as filed in the Companys Annual Report on Form 10-K for the year ended December�31, 2013 and quarterly report filed on Form 10-Q for the six months ended June 30, 2014, and the TouchNet audited and unaudited financial statements and related notes, and other financial information included elsewhere in this Current Report on Form 8-K/A. The unaudited pro forma condensed combined financial statements should be read in conjunction with the notes thereto.
The historical financial information has been adjusted to give pro forma effect to events that are directly attributable to the Acquisition, are factually supportable with respect to the income statement and are expected to have a continuing impact on the combined income statement. The pro forma adjustments are based upon information and assumptions available at the time of the filing of this document. The Company and TouchNet did not maintain direct historical relationships prior to the acquisition. Accordingly, no pro forma adjustments were required to eliminate activities among the Company and the TouchNet.
The acquisition will be accounted for under the purchase method of accounting. Under this method, the fair values of TouchNets assets acquired and the liabilities assumed are estimated at the Acquisition consummation date. The historical amounts of TouchNets assets and liabilities are then adjusted to such fair values and these fair values are added to the Companys balance sheet. The pro forma fair value adjustments 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. Accordingly, the final fair value adjustments may be materially different from those presented in this document.
The unaudited pro forma condensed combined financial information is for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Acquisition had been consummated as of the dates indicated, nor is it necessarily indicative of future operating results or financial position.






F-1





�

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 2014
(in thousands)
Assets
Heartland
�
TouchNet
�
Pro Forma Adjustments (See Note 2)
�
Pro Forma Combined
Current assets:
�
�
�
�
�
�
�
Cash and cash equivalents
$
53,839

�
$
27,867

�
$
(372,251
)
(a)
$
84,455

�
�
375,000

(e)
Funds held for customers
131,448

�
�
�
�
�
131,448

Receivables, net
212,559

�
19,786

�
�
�
232,345

Investments
4,112

�
�
�
�
�
4,112

Inventory
10,351

�
82

�
�
�
10,433

Prepaid expenses
17,898

�
540

�
�
�
18,438

Current tax assets
17,789

�
�
�
�
�
17,789

Current deferred tax assets, net
7,715

�
�
�
�
�
7,715

Total current assets
455,711

�
48,275

�
2,749

�
506,735

Capitalized customer acquisition costs, net
66,433

�
�
�
�
�
66,433

Property and equipment, net
155,770

�
2,997

�
396

(b)
159,163

Goodwill
204,737

�
�
�
207,665

(b)
412,402

Intangible assets, net
50,103

�
5,614

�
(5,614
)
(c)
194,503

�
�
144,400

(b)
Deposits and other assets, net
1,206

�
�
�
�
�
1,206

Total assets
$
933,960

�
$
56,886

�
$
349,596

�
$
1,340,442

�
�
�
�
�
�
�
�
Liabilities and Equity
�
�
�
�
�
�
�
Current liabilities:
�
�
�
�
�
�
�
Due to sponsor banks
$
58,774

�
$
�
$
�
$
58,774

Accounts payable
70,767

�
2,686

�
�
�
73,453

Customer fund deposits
131,448

�
�
�
�
�
131,448

Processing liabilities
107,108

�
�
�
�
�
107,108

Current portion of accrued buyout liability
12,901

�
�
�
�
�
12,901

Current portion of borrowings
�
�
�
�
18,750

(d)
18,750

Accrued expenses and other liabilities
23,758

�
1,310

�
�
�
25,068

Current portion of unearned revenue
5,183

�
34,364

�
(8,232
)
(b)
31,315

Total current liabilities
409,939

�
38,360

�
10,518

�
458,817

Deferred tax liabilities, net
43,910

�
�
�
�
�
43,910

Reserve for unrecognized tax benefits
6,739

�
�
�
�
�
6,739

Long-term borrowings
200,000

�
�
�
356,250

(d)
556,250

Long-term portion of unearned revenue
�
�
2,234

�
(880
)
(b)
1,354

Long-term portion of accrued buyout liability
28,367

�
�
�
�
�
28,367

Total liabilities
688,955

�
40,594

�
365,888

�
1,095,437

Commitments and contingencies


�
�
�
�
�
�
�
�
�
�
�
�
�
�
Equity
�
�
�
�
�
�
�
Common stock
36

�
63

�
(63
)
(f)
36

Additional paid-in capital
240,209

�
7,817

�
(7,817
)
(f)
240,209

Accumulated other comprehensive loss
(143
)
�
�
�
�
�
(143
)
Retained earnings
424

�
10,465

�
(10,465
)
(f)
424

Treasury stock


�
(2,053
)
�
2,053

(f)


Total stockholders equity
240,526

�
16,292

�
(16,292
)
�
240,526

Noncontrolling interests
4,479

�
�
�
�
�
4,479

Total equity
245,005

�
16,292

�
(16,292
)
�
245,005

Total liabilities and equity
$
933,960

�
$
56,886

�
$
349,596

�
$
1,340,442

See notes to unaudited pro forma condensed combined financial statements
F-2





UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Six Months Ended June 30, 2014
(in thousands, except per share data)
�
Heartland
�
TouchNet
�
Pro Forma Adjustments (See Note 3)
�
Pro Forma Combined
Total revenues
$
1,106,142

�
$
34,721

�
$
(208
)
(g)
$
1,140,655

Costs of services:
�
�
�
�
�
�
�
Interchange
685,869

�
�
�
�
�
685,869

Dues, assessments and fees
105,354

�
�
�
�
�
105,354

Processing and servicing
135,657

�
8,089

�
�
�
143,746

Customer acquisition costs
22,618

�
�
�
�
�
22,618

Depreciation and amortization
12,491

�
1,257

�
4,363

(a)
17,170

�
�
24

(b)
�
�
(965
)
(c)
Total costs of services
961,989

�
9,346

�
3,422

�
974,757

General and administrative
87,860

�
11,945

�
�
�
99,805

Total expenses
1,049,849

�
21,291

�
3,422

�
1,074,562

Income from operations
56,293

�
13,430

�
(3,630
)
�
66,093

Other income (expense):
�
�
�
�
�
�
�
Interest income
62

�
19

�
�
�
81

Interest expense
(2,308
)
�
�
�
(4,393
)
(d)
(6,701
)
Other, net
288

�
(31
)
�
�
�
257

Total other expense
(1,958
)
�
(12
)
�
(4,393
)
�
(6,363
)
Income from continuing operations before income taxes
54,335

�
13,418

�
(8,023
)
�
59,730

Provision for income taxes
22,852

�
�
�
(3,374
)
(e)
25,122

�
�
5,644

(f)
Net income
31,483

�
13,418

�
(10,293
)
�
34,608

Less: Net loss attributable to noncontrolling interests
�
�
�
�
�
�
�
���������Continuing operations
(1,709
)
�
�
�
�
�
(1,709
)
Net income attributable to Heartland
$
33,192

�
$
13,418

�
$
(10,293
)
�
$
36,317

�
�
�
�
�
�
�
�
Earnings per share:
�
�
�
�
�
�
�
������Basic earnings per share
$
0.91

�


�


�
$
1.00

������Diluted earnings per share
$
0.89

�


�


�
$
0.97

�
�
�
�
�
�
�
�
Weighted average number of common shares outstanding:
�
�
�
�
�
�
�
Basic
36,350

�
�
�
�
�
36,350

Diluted
37,250

�
�
�
�
�
37,250















See notes to unaudited pro forma condensed combined financial statements

F-3





UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME
Six Months Ended June 30, 2014
(in thousands)

�
Heartland
�
TouchNet
�
Pro Forma Adjustments
�
Pro Forma Combined
Net income
$
31,483

�
$
13,418

�
$
(10,293
)
�
$
34,608

Other comprehensive income (loss):
�
�
�
�
�
�
�
Reclassification of gains on investments, net of income tax
(164
)
�
�
�
�
�
(164
)
Unrealized gains on investments, net of tax of income tax
14

�
�
�
�
�
14

Unrealized gains on derivative financial instruments, net of
income tax
95

�
�
�
�
�
95

Comprehensive income
31,428

�
13,418

�
(10,293
)
�
34,553

Less: Comprehensive loss attributable to noncontrolling interests
(1,709
)
�
�
�
�
�
(1,709
)
Comprehensive income attributable to Heartland
$
33,137

�
$
13,418

�
$
(10,293
)
�
$
36,262







































See notes to unaudited pro forma condensed combined financial statements

F-4





UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year Ended December 31, 2013
(in thousands, except per share data)
�
Heartland
�
TouchNet
�
Pro Forma Adjustments (See Note 3)
�
Pro Forma Combined
Total revenues
$
2,135,372

�
$
64,480

�
$
(7,553
)
(g)
$
2,192,299

Costs of services:
�
�
�
�
�
�
�
Interchange
1,335,487

�
�
�
�
�
1,335,487

Dues, assessments and fees
200,903

�
�
�
�
�
200,903

Processing and servicing
237,232

�
15,260

�
�
�
252,492

Customer acquisition costs
42,109

�
�
�
�
�
42,109

Depreciation and amortization
19,975

�
2,437

�
8,725

(a)
29,384

�
�
48

(b)
�
�
(1,801
)
(c)
Total costs of services
1,835,706

�
17,697

�
6,972

�
1,860,375

General and administrative
173,568

�
21,872

�
�
�
195,440

Total expenses
2,009,274

�
39,569

�
6,972

�
2,055,815

Income from operations
126,098

�
24,911

�
(14,525
)
�
136,484

Other income (expense):
�
�
�
�
�
�
�
Interest income
124

�
52

�
�
�
176

Interest expense
(5,429
)
�
�
�
(9,207
)
(d)
(14,636
)
Other, net
(241
)
�
863

�
�
�
622

Total other income (expense)
(5,546
)
�
915

�
(9,207
)
�
(13,838
)
Income from continuing operations before income taxes
120,552

�
25,826

�
(23,732
)
�
122,646

Provision for income taxes
46,450

�
�
�
(9,153
)
�
47,258

�
�
9,961

�
Net income from continuing operations
74,102

�
25,826

�
(24,540
)
�
75,388

Income from discontinued operations, net of income tax
3,970

�


�


�
3,970

Net income
78,072

�
25,826

�
(24,540
)
�
79,358

Less: Net (loss) income attributable to noncontrolling interests
�
�
�
�
�
�
�
���������Continuing operations
(610
)
�
�
�
�
�
(610
)
���������Discontinued operations
56

�
�
�
�
�
56

Net income attributable to Heartland
$
78,626

�
$
25,826

�
$
(24,540
)
�
$
79,912

�
�
�
�
�
�
�
�
Amounts attributable to Heartland:
�
�
�
�
�
�
�
Net income from continuing operations, net of noncontrolling
interests
$
74,712

�
$
25,826

�
$
(24,540
)
�
$
75,998

Income from discontinued operations, net of income tax
and noncontrolling interests
3,914

�


�


�
3,914

Net income attributable to Heartland
$
78,626

�
$
25,826

�
$
(24,540
)
�
$
79,912

�
�
�
�
�
�
�
�
Basic earnings per share:
�
�
�
�
�
�
�
������Income from continuing operations
$
2.03

�


�


�
$
2.07

������Income from discontinued operations
0.11

�


�


�
0.11

������Basic earnings per share
$
2.14

�


�


�
$
2.18

Diluted earnings per share:
�
�
�
�
�
�
�
������Income from continuing operations
$
1.96

�


�


�
$
2.00

������Income from discontinued operations
0.10

�


�


�
0.10

������Diluted earnings per share
$
2.06

�


�


�
$
2.10

Weighted average number of common shares outstanding:
�
�
�
�
�
�
�
Basic
36,791

�
�
�
�
�
36,791

Diluted
38,053

�
�
�
�
�
38,053

See notes to unaudited pro forma condensed combined financial statements

F-5





UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31, 2013
(in thousands)

�
Heartland
�
TouchNet
�
Pro Forma Adjustments
�
Pro Forma Combined
Net income
$
78,072

�
$
25,826

�
$
(24,540
)
�
$
79,358

Other comprehensive income (loss):
�
�
�
�
�
�
�
Reclassification of gains on investments, net of income tax


�
(857
)
�
�
�
(857
)
Unrealized gains on investments, net of tax of income tax
12

�
396

�
�
�
408

Unrealized gains on derivative financial instruments, net of
income tax
254

�
�
�
�
�
254

Foreign currency translation adjustment
(54
)
�
�
�
�
�
(54
)
Comprehensive income
78,284

�
25,365

�
(24,540
)
�
79,109

Less: Comprehensive loss attributable to noncontrolling interests
(570
)
�
�
�
�
�
(570
)
Comprehensive income attributable to Heartland
$
78,854

�
$
25,365

�
$
(24,540
)
�
$
79,679






































See notes to unaudited pro forma condensed combined financial statements

F-6





NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. GENERAL
The Company has accounted for the acquisition of TouchNet as a purchase business combination under the provisions of FASB Accounting Standards Codification Topic 850, Business Combinations. The accompanying unaudited pro forma condensed combined balance sheet reflects the acquisition price of TouchNet as outlined in Note 2(a)�below.�The purchase price allocation as outlined in Note 2(b)�has not been finalized and is subject to change upon completion of appraisals of tangible and intangible assets.�The purchase price allocation will be finalized when all necessary information is obtained which is expected to occur within one year of the consummation of the transaction.
2. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
The accompanying unaudited pro forma condensed combined balance sheet has been prepared as if the Acquisition was consummated on June 30, 2014 with respect to the unaudited pro forma condensed combined balance sheet. The following pro forma adjustments were made:
(a)�To record cash consideration paid in the Acquisition (in thousands):
Cash - payment for base purchase price
$
375,000

Cash - received for estimated net working capital deficit
2,749

�����TouchNet acquisition consideration
$
372,251

(b)�To reflect the allocation of the total acquisition consideration to the acquired assets and liabilities of TouchNet Information Systems, Inc. as of June 30, 2014 (in thousands):
�
Allocation of Purchase Price
�
Carrying Value
�
Adjustments
Net fair value of assets acquired and liabilities assumed:
�
�
�
�
�
Cash
$
27,867

�
$
27,867

�
$
Receivables, net
19,786

�
19,786

�
�
Inventory
82

�
82

�
�
Prepaid expenses
540

�
540

�
�
Property and equipment, net
3,393

�
2,997

�
396

Intangible assets, net - pre-acquisition


�
5,614

�
(5,614
)
Accounts payable
(2,686
)
�
(2,686
)
�
�
Accrued expenses and other liabilities
(1,310
)
�
(1,310
)
�
�
Current unearned revenue
(26,132
)
�
(34,364
)
�
8,232

Long-term unearned revenue
(1,354
)
�
(2,234
)
�
880

Total net tangible assets acquired
20,186

�
�
�
�
Intangible assets acquired:
�
�
�
�
�
Customer relationships
101,300

�
�
�
�
Trademarks
5,000

�
�
�
�
Software
37,200

�
�
�
�
Non-competition agreement
900

�
�
�
�
Total intangible assets
144,400

�
�
�
�
Goodwill
207,665

�
�
�
�
Total acquisition consideration
$
372,251

�

�
�

The preliminary allocation of the purchase price was based upon a preliminary valuation and the Companys estimates and assumptions which are subject to change upon the finalization of the valuation.
F-7




Of the total estimated purchase price, a preliminary estimate of approximately $20.2 million was allocated to net tangible assets acquired. Net assets were generally valued at their respective carrying amounts, which management believes approximate fair value, except for adjustments to receivables, property and equipment, accrued expenses, unearned revenue, and pre-acquisition intangible assets.
Approximately $144.4�million was allocated to acquired identifiable intangible assets. The value of identifiable intangible assets was derived from the present value of estimated future benefits from the various intangible assets acquired.
Of the total estimated purchase price, approximately $207.7�million was allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired, including intangible assets. Goodwill amounts are not amortized, but rather are tested for impairment at least annually. In the future, if the Company determines that the value of the goodwill has become impaired, an accounting charge for the amount of the impairment would be recorded in the quarter in which such determination is made.
(c) To eliminate TouchNet pre-acquisition intangible assets.
(d) To reflect borrowings incurred by the Company to finance the purchase price (in thousands):
Current portion of borrowings
$
18,750

Long-term portion of borrowings
356,250

�
$
375,000

(e) To reflect cash inflow from proceeds of borrowings incurred by the Company to finance the purchase price.
(f) To eliminate TouchNet pre-acquisition net book value.
3. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The accompanying unaudited pro forma condensed combined statements of income and comprehensive income have been prepared as if the Acquisition was consummated as January�1, 2013 with respect to the unaudited pro forma condensed combined statements of income and comprehensive income.�Pro forma adjustments were made to reflect:
(a)�Amortization of acquired intangible assets based on the straight-line method of amortization and using the amortization periods as follows (in thousands):
�
�
�
�
�
Pro Forma Amortization Adjustment
�
Intangible Asset Amount
�
Amortization Period (in months)
�
Six Months Ended June 30, 2014
�
Year Ended December 31, 2013
Customer relationships
$
101,300

�
240
�
$
2,533

�
$
5,065

Trademarks
5,000

�
60
�
500

�
1,000

Software
37,200

�
180
�
1,240

�
2,480

Non-competition agreement
900

�
60
�
90

�
180

Total intangible assets
$
144,400

�

�
$
4,363

�
$
8,725

In accordance with the provisions of ASC Topic 850, goodwill resulting from the Acquisition is not amortized.
(b)�Adjustment to depreciation resulting from a net increase in the basis of property and equipment acquired based on estimated useful lives of 24 to 60 months.
(c) To eliminate TouchNet's historical amortization recorded on its pre-acquisition capitalized software development costs and patent and trademark intangible assets. These assets have been revalued and included in acquired intangible assets.


F-8




(d) This adjustment reflects an increase in interest expense resulting from financing the total estimated cash consideration of $375.0 million paid in the Acquisition, prior to reduction for a net working capital deficit. The $375.0 million was financed under an amortizing term credit facility. The interest expense adjustment assumes 50% of the term credit borrowing is borrowed at the average one-month LIBOR interest rate plus 200 basis points credit margin, and the remaining 50% of the term credit borrowing is borrowed at a five-year interest rate swap rate plus 200 basis points credit margin.
(e) To adjust income tax expense for pro forma income statement adjustments at the Companys effective tax rate for the period.
(f) Adjustment to tax effect TouchNet's historical pretax income at the Company's effective tax rate for the period. Post acquisition, TouchNet becomes a C Corporation and member of the Company's consolidated tax group. TouchNet's historical tax provision reflects its pre-acquisition status as a Sub Chapter S Corporation.
(g) Adjustment to TouchNet's historical revenue to reflect the impact of the preliminary estimated fair value adjustment of $9.1 million to the carrying value of TouchNet's unearned revenue.
























F-9



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