September 9, 2004
Mail Stop 0409
Robert O. Carr
Chairman and Chief Executive Officer
Heartland Payment Systems, Inc.
47 Hulfish Street, Suite 400
Princeton, NJ 08542
Re: Heartland Payment Systems, Inc.
Form S-1 filed on August 10, 2004
File No. 333-118073
Dear Mr. Carr:
We have reviewed your filing and have the following comments. Where
indicated, we think you should revise your document in response to
these comments. If you disagree, we will consider your explanation
as to why our comment is inapplicable or a revision is unnecessary.
Please be as detailed as necessary in your explanation. In some of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not raise additional
comments.
Please understand that the purpose of our review process is to assist
you in your compliance with the applicable disclosure requirements
and to enhance the overall disclosure in your filing. We look
forward to working with you in these respects. We welcome any
questions you may have about our comments or any other aspect of our
review. Feel free to call us at the telephone numbers listed at the
end of this letter.
General
1. We note that your CEO, Robert Carr, was recently interviewed by
the Princeton Business Journal. See "From the heartland," dated June
29, 2004. We note that in this interview, Mr. Carr offered specific
projections, including expanding your coverage into 1,500 new
territories, increasing market share and growing from a base of $20
billion to more than $100 billion in annual processing volume "in the
next few years." Please supplementally tell us why you believe these
statements by your CEO would not inappropriately condition the market
for your initial public offering. Refer to SEC Release No. 5180.
2. Please tell us whether KeyBanc Capital Markets constitutes a
"Qualified Independent Underwriter" pursuant to Section 2720 of the
By-Laws of the NASD. Supplementally confirm that (1) the NASD has
been contacted regarding KeyBanc`s involvement, and (2) the NASD has
expressed no objection. Please provide us with all correspondence
between the NASD and KeyBanc as it relates to this offering.
3. We note your use of "NM" throughout the prospectus. Please revise
to include the relevant information.
4. Please fill in or provide supplementally all remaining uncompleted
information in the next amendment, other than pricing information
that you have omitted pursuant to Rule 430A. We may have further
comments based on the revised materials. For example, we note the
blanks on page 14 and 15.
5. Please remove the reference to "sole book runner" from the back
page and page 83 of your prospectus. The information is not material
to investors.
6. Please limit your use of the term "partner" to companies with
which you have an agreement in place to share profits and losses.
See, e.g., page 55.
7. Supplementally, please provide us with any gatefold information
such as pictures, graphics or artwork that will be used in the
prospectus.
Table of Contents, page i
8. Please revise to delete the disclaimer language in the last
sentence in the first paragraph.
Summary, page 1
9. We note that in the introductory paragraph you state that the
summary highlights "selected information." Please revise to clarify
that the summary includes material information.
10. The Summary should provide investors with a clear, concise and
coherent "snapshot" description of the most significant aspects of
the offering. We note that much of the information in the Summary,
including your discussion of competitive strengths and strategy, is
repeated in the body of the prospectus, particularly within your
Business section. Please revise the prospectus to delete repetitive
disclosure and to provide a brief overview of only the most salient
aspects of the transaction. Please see Item 503(a) of Regulation S-
K.
11. As appropriate, please apply comments to your summary to other
parts of your prospectus, especially the overview of your MD&A and
the first parts of your business section.
Our Business, page 1
12. We note your reliance, here and elsewhere, on information
contained in The Nilson Report. Supplementally, please provide us
with a copy of this report and tell us whether the report was
prepared for or sponsored by you. Please highlight the portions of
the report that you cite or refer to in the prospectus.
13. Where you refer to yourself as a "leading" provider of bank card
payment processing services, please revise to clarify how you are
measuring yourself. If your statement is based on information
contained in The Nilson Report, please revise to state this. If it
is based on some other source, please revise to disclose the source
and provide us with supporting materials on a supplemental basis.
14. We note that you disclose estimated 2004 processing volume and
actual 2003 transactions processed. To avoid confusion and to
enhance comparability, please do not mix figures from different time
periods. In addition, please revise to quantify your historical net
losses, as disclosed on page 14.
15. Please use a term other than "organic" to refer to your internal
growth. Refer to Rule 421(d) of Reg. C.
16. We note that you maintain "high" standards of creditworthiness
for your merchants. Please explain briefly what makes your standards
"high."
17. Please revise to quantify the multi-year contracts and minimum
volume commitments.
18. Please revise to identify the third parties on whom you rely.
Our Competitive Strengths, page 3
19. In order to present a fair and balanced picture of your business,
please include a section addressing your competitive weaknesses.
This section should address the key risks you face and your
competitive challenges and should be at least as detailed as the
discussion of your strengths.
20. Please revise your use of industry jargon or vague terms
including "systems," "distributed application architecture," and
"business procedures."
History, page 5
21. Please revise this section to include your merger with Uhle and
Associates, LLC. See Exhibit 2.2. Also, please disclose when you
acquired your interests in Heartland Payroll Company and Credit Card
Software Systems, Inc., and revise your disclosure to clarify whether
CCSS is a newly formed entity or acquired from a third party. Refer
to Item 101(a) of Reg. S-K.
Risk Factors
22. Please eliminate all cross references from your risk factors.
See, e.g., pages 15-16. Instead, include all material information in
the risk factors.
23. Where appropriate, please discuss the following risks or explain
supplementally why they are not material:
* risk related to merchant attrition. See page 22;
* risk related to your reliance on an expanding market for electronic
payments and your own need to expand your share of this market;
* risk related to continued consolidation in the banking industry;
* risk related to collection of your monthly receivables. If true,
please explain why they are higher than those of your competitors and
discuss any risk of collection due to system disruption;
* risk related to the geographic concentation of your merchants, as
disclosed on page 52; and
* risk related to future buyouts and your use of atypical accounting
estimates, including signup bonuses and accrued commission liability.
See pages 23-24.
Risks Relating to Our Business, page 9
The payment processing industry is highly competitive..., page 9
24. Please disclose the total purchase volume of all card acquirers.
25. Please revise to identify your major competitors.
We are subject to the business cycles and credit risk of our
merchants..., page 9
26. Please describe briefly your fixed and semi-fixed costs. Please
discuss risk related to your reliance on any particular merchants or
classes of merchants. We note, in this regard, that restaurants have
historically high failure rates. Also, please revise to include a
direct reference to the risk related to a decrease in consumer
spending.
We have faced, and will in the future face, merchant fraud, which
could have an adverse effect on our operating results and financial
condition, page 10
27. Please describe your past experiences with merchant fraud. For
example, we note your exposure to transactions originating from the
Internet, including, but not limited to, websites offering adult
entertainment. For example, see "Porn in the USA," River Front
Times, dated November 29, 2000.
We rely on a bank sponsor..., page 10
28. Please describe briefly the key "requirements" imposed on you by
the bank card associations and disclose what might cause you or your
sponsor to fail to comply with them.
Current or future bank card..., page 11
29. Please describe in more detail how you compete with banks and
issuers who could influence your association status.
Our systems and our third party providers` systems..., page 11
30. Please disclose whether your merchants have the right to
terminate their agreements with you in the event of system
disruptions.
We rely on other payment processors..., page 11
31. Please describe in more detail how you compete with your service
providers.
If we lose key personnel..., page 12
32. Please identify your key personnel.
If we are unable to attract and retain qualified sales people...,
page 12
33. We note that you intend to "significantly" increase the size of
your commission-based sales force. Please discuss, if applicable,
the risk of market saturation and any impact on your ability to
attract and retain qualified salespeople. Also, discuss any other
reasons you might find it difficult to attract and retain qualified
salespeople. For instance, is there a high demand for qualified
workers in your industry?
If we cannot pass increases in bank card association interchange
fees..., page 12
34. Please quantify increases in interchange and association fees
since you started your business.
We face uncertainty about additional financing..., page 14
35. Please explain briefly what portfolio equity purchases are and
what you mean by "competitive pressures."
Risks Relating to This Offering, page 14
36. Please revise to discuss the risk that your bank sponsor Key Bank
is affiliated with one of your underwriters.
Our executive officers, directors and principal stockholders..., page
14
37. Please revise the heading to state the conflict of interest and
describe the conflict in the risk factor.
Provisions in our charter..., page 15
38. Pease give examples of the kinds of rights preferred shares may
have that would impede a change in control, such as dividend or
supervoting rights.
Use of Proceeds, page 17
39. We note that you intend to use a portion of the proceeds to repay
debt. Please identify the debt holder and revise to include the
information required by Instruction 4 to Item 504 of Regulation S-K.
Selected Historical Conslidated Financial Information and Other Data,
page 20
40. We note from page 21 your inclusion of non-financial data
regarding number of active merchants and associated processing volume
for each period. If the merchant number includes owned and managed
merchants, please clarify. Also, please consider breaking out
information on merchants more than one year old to support your
calculation of "same store sales" on page 22. Refer to Instruction 2
to Item 301 of Reg. S-K. In the alternative, you may expand
discussion in your MD&A to include this information for each relevant
period.
Management`s Discussion and Analysis, page 22
Overview, page 22
41. Please describe the costs associated with opening new merchants
accounts (including the percentage of first-year gross margin that
goes to your salespeople in signup bonuses and commissions) and
disclose how long it takes you on average to recoup the cost of
opening a new account.
42. Please clarify what part of your merchant portfolio is "owned"
and "active" and discuss the key differences between owned-active
relationships, inactive relationships and those you manage for third
parties. Also, please make it clear throughout your MD&A whether you
are referring to all merchants, just "active" ones, or "owned active"
ones.
43. We note that you intend to increase the size and productivity of
your salesforce. Where relevant, please discuss how many salespeople
you intend to hire and in what time period. Also, please discuss how
you measure productivity and, for each period, actual productivity
under these measures.
44. Please disclose to whom you sold your merchant contracts in 1999,
2000, 2001 and 2002 and whether you were affiliated with the
buyer(s). Also, please revise to explain how the investment by
Greenhill Capital Partners, LP ("Greenhill"), allowed you to
"stabilize" your business.
45. Please revise to explain how your sales management structure
changed in 2002 and how these changes lead to accelerating growth of
your sales force. Please also revise to clarify whether your sales
force works exclusively for you.
46. We note that you state that you provide "end-to-end electronic
payment processing services," but on page 34, you state that you are
developing a back-end processing system. Please revise to reconcile
this discrepancy.
Critical Accounting Policies, page 23
47. It appears that accounting for stock-based compensation should be
considered a critical accounting policy. Therefore, please disclose
you accounting policy as it relates to accounting for stock options.
In addition, please provide the following disclosures in relation to
your valuation of prior stock option grants:
a. A discussion of the significant factors, assumptions, and
methodologies used in determining the fair value.
b. A discussion of each significant factor contributing to the
difference between the fair value as of the date of each grant and
each subsequent valuation for all stock options issued within the
past twelve months.
c. The valuation alternative you selected and why you chose not to
obtain contemporaneous valuations by valuation specialists at the
grant dates.
Revenue, page 23
48. Please supplementally provide us with a more detailed analysis
than what is provided in the notes and in MD&A supporting your
conclusion that revenues should be accounted for on a gross basis.
Note that credit risk is only one criterion in EITF 99-19 and carries
less weight than many other criteria. Specifically, tell us how you
analyzed paragraphs 7 through 13 of EITF 99-19 and how your
arrangements differ from your competitors to support different
accounting. Please cite terms of your merchant agreements and other
agreements, as appropriate.
Capitalized Signing Bonuses, page 23
49. Please disclose the amount of capitalized signing bonus
outstanding at the end of each period that still may be subject to
adjustment within the first year of the contract. In addition,
please quantify what historical adjustments have been in prior
periods. Finally, disclose the amount of impairment losses
recognized in each period and identify where those amounts are
classified in the statements of operations.
Accrued Commission and Buyout Liability, page 24
50. Please describe the fixed buyout multiple under your 2001
commission structure. Also, please revise to explain how long
commissions may be earned and how the buyout option works.
51. Please provide readers with a quantitative analysis to
demonstrate the sensitivity your estimate may have to changes in
assumptions similar to the analysis you have provided in the notes to
the financial statements.
52. Notwithstanding the Office of the Chief Accountant`s review of
your submission dated August 10, 2004 and the restatement discussed
in the letter, we have the following comments regarding the
measurement of your accrued commission and buyout liability and
related disclosures:
a. Please supplementally provide us with a rollforward of the
liability account for each period included in the filing quantifying
payments against the liability, charges for new merchant agreements,
and any adjustments to the liability. In addition, include
disclosure to provide readers with an indication of how much your
estimate and the underlying assumptions have changed in historical
periods.
b. Please supplementally provide us with your basis for assuming a
20% buyout rate. It appears from your disclosure on page F-15 that
buyouts in 2003 were significantly less than 20% of the 2002 balance.
c. Please supplementally provide us your basis for assuming a 10-year
measurement period in calculating you liability. We note in your
submission to the Office of the Chief Accountant you believe the
average merchant relationship is five years.
d. Please explain your basis for discounting the liability. Tell us
why you believe both the timing and amount of future cash flows are
fixed or reliably determinable. If the liability is a loss
contingency, it appears you should apply paragraph 8 of SFAS 5 and
paragraph 3 of FIN 14, which do not contemplate applying discounts.
Cite relevant literature as appropriate. In addition, please explain
why you chose the double-A corporate bond for your interest rate.
Income Taxes, page 25
53. Please disclose the factors and assumptions you considered in
concluding that a valuation allowance on your deferred tax assets is
not necessary. In addition, please revise to explain whether future
income will need to increase and at what rate in order for you to
utilize the NOL carryforwards. We note from page 31 that you believe
all net operating loss will be utilized within two years.
Components of Revenue and Expenses, page 25
Revenue, page 25
54. We note that you maintain cash deposits and require letters of
credit from "certain" merchants to guard against chargebacks. Please
revise to describe how you make this determination. Please also
revise to quantify the percentage and describe the types of merchants
who are subject to these measures. Further, please quantify these
deposits and letters.
55. We note from page 26 recent increases in interchange fees and
association dues. Please quantify these increases and discuss future
expectations. Please revise to describe any practical limits on your
"policy" of passing these fees along to your merchants.
Expenses, page 26
56. Please supplementally explain to us how residual commission
payments included in cost of services on the income statement differs
from your accrued commission and buyout liability expense presented
separately. It appears that they should be classified together on the
income statement.
Results of Operations, page 27
57. We note disclosure that your quarterly net revenue rose primarily
due to an expanded salesforce (resulting in a net increase in
merchant accounts and concomitant increases in the dollar volume of
transactions processed by you and gross processing revenue). You
offer a similar explanation of revenue increases from 2002 to 2003
and from 2001 to 2002. We have the following comments:
* Discussion of your quarterly results appears to focus only on
growth in your "owned active merchant accounts" while discussion of
your full year results focuses on growth in your "newly installed
merchants." Please provide both sets of information for each period.
Also, please discuss attrition rates for each period, to present a
more complete picture of changes in your merchant base.
* Please explain why you believe your expanded salesforce was able to
sign up more new merchants in the first quarter of 2004 and in fiscal
2003 (versus 2002 and 2001, where new signups were flat, at 19,700).
* It appears that productivity, measured as a percentage of net
revenue generated per agent, fell roughly 5.6% on a quarterly basis
from $154,271 in the first quarter of 2003 to $145,495 in the same
period this year. You appear to have experienced a more pronounced
decline on annual basis, where revenue per agent fell 16% from
$671,462 in 2002 to $562,593 in 2003. In light of your plan to
increase your salesforce "significantly" in the coming periods,
please discuss these results and explain how you expect to enhance
productivity-also one of your stated goals-as your salesforce grows.
* In your discussion of fiscal 2002 revenues, please disclose the
number of salespeople you had as of the end of 2001.
58. We note from page 25 that you experienced merchant losses related
in part to chargebacks and fraud in the amount of $310,969 for the
first quarter of 2004. This is more than half the amount of losses
you experienced in all of 2003. Please revise to describe whether
these losses constitute a trend.
59. Please describe briefly the nature of the legal settlement
referred to on page 29.
60. Please describe the "change in ownership" referred to on page 31.
61. We do not understand why a loss equal to 0.5% of revenues is not
meaningful but net income at the same percentage is meaningful.
Please include percentages for each caption or revise your disclosure
to clarify why indicated amounts are not meaningful. Please make
conforming changes throughout Management`s Discussion and Analysis.
Years Ended December 31, 2002 and 2003, page 29
Other, net, page 31
62. Please revise your disclosure to explain the nature of the
liability and circumstances resulting in the loss on its
extinguishment.
Liquidity and Capital Resources, page 34
63. Where appropriate, please discuss the cash flow implications of
your planned expansion into the non-traditional government and
business-to-business markets and the expansion of your existing
product line. See page 4.
64. Please discuss future buyouts and how these might impact cash
flow.
65. We note that net outflows from investing activities were due
largely to capital expenditures. Please describe these briefly and
discuss future expectations.
66. To the extent material, describe any impact or potential impact
on your liquidity or capital resources as a result of security
interests held by your lenders or covenants or similar restrictions
contained in your loan agreements. Please revise to disclose whether
you are currently in compliance with all covenants.
67. We note that the Key Bank loan agreement has been amended twice.
Please revise to describe why the loan agreement with Key Bank was
amended. Please revise to describe whether you have been in
compliance to date and whether you have received any waivers. Please
also revise to quantify the customary covenants and events of
default.
68. We note that you state that in 2002 you started investing a
portion of the cash balances held at your subsidiary in securities
classified as investments. Please revise to describe these
securities.
69. Please describe the terms of each debt instrument, even if repaid
during the last three years. We note that you state that in 2003, you
repaid $1.0 million of your debt. Please revise to describe the
terms of the debt, including, principal, interest rate, term and
maturity.
70. We note that on January 8, 2004, you redeemed half of the
warrants held by one warrant holder. Please revise to describe the
term of the outstanding warrants and whether the outstanding warrants
will be redeemed at market value.
Business, page 37
71. We note that on page 9 you state that your competitors that are
financial institutions or subsidiaries of financial institutions do
not incur the costs associated with being sponsored by a bank for
registration and can settle transactions more quickly for their
merchants than you can. Please revise to address whether you have
considered or are considering acquiring or merging with a financial
institution in order to be more competitive in the industry.
72. Please revise to delete repetitive disclosure. For example, we
note the repetition in the strategy and competitive strengths
discussions.
73. Please revise throughout the filing to eliminate the use of the
abbreviations such as "HPS," "POS," "PC," "ISO" and "VAR." If you
choose to use a shortened name, then please ensure that its meaning
is clear from the context.
74. Please provide disclosure about your intellectual property rights
in addition to the brief reference to your patent applications on
page 56. Refer to Item 101(c)(iv) of Reg. S-K. In discussing your
patent applications, please describe the nature of the applications
and disclose any challenges to them. If you seek a "business
process" or similar patent, please make that clear. Also, please
make clear whether you have an ongoing right to use the Heartland
name and attach any relevant agreement as an exhibit to your
registration statement.
75. To the extent material, provide disclosure of amounts spent on
R&D in the last three fiscal years. Refer to Item 101(c)(xi) of Reg.
S-K.
Overview, page 37
76. Please revise to include the cost of commissions in your flow
chart.
77. We note that 32% of your merchants are restaurants. Please
revise to include the percentage for each of other industries,
including retailers, lodging, automotive repair, convenience and
liquor, and professional service providers.
Growth in Bank Card Transactions, page 39
78. Please revise to cite independent support for your statements
about the sources of increased bank card payment volume. Please
supplementally provide us with highlighted copies of any study or
report on which you are relying for the statements. Please also
provide supplemental support for your assertions at the bottom of
page 40, regarding small- and medium-sized merchants, and the top of
page 41, regarding the range of services offered by your competitors.
Similarly, on page 46, please provide supplemental support for your
assertion regarding the profitability of your smaller competitors.
Strategy, page 44
79. Please revise to address estimated timelines and costs associated
with your strategies, where such information is available.
Services and Products, page 46
80. Please discuss on page 49 how many merchants you serve under your
agreement with third party card acquirers, when the contracts expire
and whether you expect to renew them.
Sales, page 49
81. Please revise to include an example illustrating how commissions
are calculated and quantifying the payments to sales persons. Please
explain what you mean by "processing method." Also, please disclose
the "minimum" and "maximum" gross margin objectives informing the
fees salespeople are permitted to charge.
Relationships with Sponsors and Processors
Sponsoring Bank, page 51
82. Please revise to include examples or describe the events that
constitute a material breach under the KeyBank agreement. Further,
please describe and quantify all fees payable to KeyBank, including
sponsorship fees, loan fees, and termination fees.
83. We note that the parties may terminate the agreement if there is
a change in the majority ownership of the other party. Please revise
to address whether this initial public offering will trigger Key
Bank`s right to terminate the agreement.
84. Please revise to describe the likelihood that you would be able
to secure another sponsor if Key Bank were to terminate the
sponsorhip agreement.
85. Please revise to describe why the contract with FleetBoston was
terminated, how you were able to locate Key Bank as a sponsor and
when you entered into the agreement with Key Bank.
Third-Party Processors, page 52
86. Please revise to describe and quantify all fees payable to third-
party processors, including termination fees. Please also describe
some examples of material breach under "certain sections of these
agreements."
Properties, page 58
87. Please disclose when your leases to these properties expire and
whether you have options to renew. Refer to Instruction 1 to Item
102 of Reg. S-K.
Legal Proceedings, page 58
88. Please confirm supplementally that you are no longer involved in
litigation related to your services on behalf of merchants selling
pornographic material via the Internet.
Management, page 59
89. Please revise to describe the position held by Mr. Baldwin at
Citicorp; we note that he was an "officer." Please describe the type
of consulting performed by Mr. Morris in 1999. Please quantify Mr.
Palmer`s equity stake in Vital Processing Services, if any.
90. Please revise to describe the type of business conducted by each
company, including First Data Merchant Services Service Center,
BuyPass, Financial Earnings Group, LeRoux, Pitts and Associates,
Greenhill & Co., Global Signal, EXCO Holdings, BMC Software, DocuCorp
International, Analytical Graphics and Emtec. Refer to Item
401(e)(1) of Regulation S-K.
91. We note from page 65 that holders seeking to exercise options may
issue to you a promissory note for the exercise price. Please
disclose the terms of any loans, the amount of outstanding loans to
officers, directors and employees, if any, and whether any amounts
have exceeded $60,000 in the last three fiscal years.
92. Please revise to describe on page 66 when stockholder approval
would be required for your board to amend the 2000 stock option plan.
Related Party Transactions, page 72
93. Please revise to describe the purpose of the loan to Mr. Carr and
describe the use of the $2 million loan from Mr. Baldwin.
94. We note the March 2003 sale of unregistered securities to
Greenhill and LLR Equity Partners, LP by an entity affiliated with
your CEO, Carr Holdings, LLC. Supplementally, please tell us the
exemption from registration and facts relied upon to make the
exemption available. Please also tell us more about this
transaction, including why you were "responsible" for paying expenses
in connection with this private sale and why you were party to an
agreement with Carr Holdings, Greenhill and LLR regarding the voting
of the shares sold. Because it appears to be a voting trust
agreement, please file the agreement with your next amendment. Refer
to Item 601(b)(9) of Regulation S-K.
95. We note the July 2003 issuance of an option to Robert Carr to
purchase up to 1 million shares of Series A Senior Convertible
Participating Preferred Stock from Greenhill and LLR any time before
July 31, 2006. Supplementally, please tell us the exemption from
registration and facts relied upon to make the exemption available.
Please describe the purpose of the transaction and tell us more about
this transaction, including what consideration Mr. Carr provided in
exchange for this option. Please provide us with copies of all
relevant agreements. Please file the Certificate of Designation for
the preferred stock.
96. Please revise to describe the services provided by Mr. Nichols or
the reasons for the payments made to him.
Principal Stockholders, page 74
97. Please revise to furnish information as of the most recent
practicable date. Refer to Item 403(a) of Regulation S-K.
Selling Stockholders, page 76
98. We note that your selling shareholders are non-natural persons.
Please identify all selling shareholders who are registered broker-
dealers or affiliates of broker-dealers. Additionally, tell us if
the broker-dealer received the securities as underwriting
compensation. Please note that a registration statement registering
the resale of shares being offered by broker-dealers must identify
the broker-dealers as underwriters if the shares were not issued as
underwriting compensation.
99. If any selling shareholders are affiliates of broker-dealers,
please provide an analysis supporting your position that the resale
of securities by affiliates of broker-dealers is not an indirect
primary offering. Your analysis should address the following points:
* how long the selling shareholders have held the securities,
* the circumstances under which the selling shareholders received the
securities,
* the selling shareholders` relationship to the issuer,
* the amount of securities involved,
* whether the sellers are in the business of underwriting securities,
and
* whether under all the circumstances it appears that the seller is
acting as a conduit for the issuer.
Assuming the resale of securities by affiliates of broker-dealers is
not an indirect primary offering, you must clearly state in your
prospectus:
* the seller purchased in the ordinary course of business and
* at the time of the purchase of the securities to be resold the
seller had no agreements or understandings, directly or indirectly,
with any person to distribute the securities.
Description of Capital Stock, page 77
100. On the top of page 80, please revise to describe the "certain"
information that is required to be in the notice.
101. Please revise to describe the voting rights agreement.
Underwriting, page 83
102. We note from page 85 that your underwriters have performed and
may in the future perform investment banking and advisory services
for you. Please identify which ones and describe those services.
See Item 508(a) of Reg. S-K. In addition, please describe your
material relationship with KeyBank, which appears to be affiliated
with KeyBanc Capital Markets.
103. We note that the underwriter has reserved shares for sale
directly to your directors, employees and other persons.
Supplementally, describe the mechanics of how and when these shares
are offered and sold to investors in this directed share program.
For example, tell us how you will determine the prospective
recipients and number of reserved shares. Tell us how and when you
and the underwriters notified the directed share investors, including
the types of communication used. Disclose whether the underwriters
or the company are using electronic communications or procedures,
such as e-mail. Provide us with any materials given to potential
purchasers.
Discuss the procedures these investors must follow in order to
purchase the offered securities, including how and when the
underwriter or the company receives communications or funds. In this
regard describe the process for confirmation and settlement of sales
to directed share purchasers. Are directed share purchasers required
to establish accounts before the effective time, and if so, what if
any funds are put in newly established brokerage accounts before the
effective date? What relationship, if any, do any funds deposited
into new accounts have to the expected price for the shares being
allocated to the directed share purchaser? How do the procedures for
the directed share program differ from the procedures for the general
offering to the public?
104. We note your discussion regarding marketing of this offering
online on page 85. Please identify any members of the underwriting
syndicate that will make copies of the preliminary prospectus
available over the internet or will engage in the electronic offer,
sale or distribution of the shares. Supplementally confirm that
their procedures for electronic postings or links to the prospectus
or for electronic distributions have been reviewed and cleared by the
Division`s Office of Chief Counsel, and that the procedures have not
changed since such clearance. If you become aware of any additional
members of the underwriting syndicate that may engage in electronic
offers, sales, or distributions after you respond to this comment,
please promptly supplement your response to identify those members.
We may have further comment.
105. Tell us whether you or the underwriters have any arrangements
with a third party to host or access your preliminary prospectus on
the Internet. If so, identify the party and the web site, describe
the material terms of your agreement and provide us with a copy of
any written agreement. Also, provide us with copies of all
information concerning your company or prospectus that has appeared
on their web site. If you subsequently enter into any such
arrangements, promptly supplement your response. We may have further
comment.
106. We note the discussion on page 84 regarding the United Kingdom
and The Netherlands. Please supplementally tell us whether this
public offering is part of a global offering and revise your
disclosure as appropriate.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm, page F-2
107. Please revise to indicate the city and state where the report
was issued as required by Rule 2-02(a) of Regulation S-X.
108. We note that the consent included at Exhibit 23.1 refers to an
auditors` report dated August 6, 2004. Please revise to clarify the
inconsistency between the two dates.
Consolidated Balance Sheets, page F-3
109. Please revise to present a classified balance sheet as required
by Rule 5-02 of Regulation S-X.
110. Please separately disclose amounts due for interchange fees
advanced by KeyBank on the face of the balance sheet as required by
Rule 5-02.19. In addition, please disclose the terms of the advances
and the weighted average interest rates in the notes.
111. Please revise to present a pro forma balance sheet giving effect
to the conversion of preferred stock prior to the IPO.
Consolidated Statements of Operations, page F-4
112. Please revise your presentation to clarify whether or not
depreciation and amortization are a component of cost of services.
Refer to SAB Topic 11.B. Please provide similar clarification as it
relates to accrued commission and buyout liability expense.
113. Please revise your presentation to present interest income and
interest expense separately as required by Rule 5-03 of Regulation S-
X.
Consolidated Statements of Changes in Stockholders` Deficit, page F-5
114. Please revise to present the components of comprehensive income
for each period as required by paragraph 22 of SFAS 130. Refer to
paragraph 23 and Appendix B of SFAS 130 for examples of alternative
in which you can display comprehensive income and its components.
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies, page F-8
Capitalized Signing Bonus, page F-8
115. Please revise your disclosure to clarify whether a portion of
the signing bonus is refundable to the Company if a merchant
terminates his contract within the three-year term. If so, please
justify your policy of amortizing the acquisition cost over the three
- - year contract period.
Stock Options, page F-10
116. We do not understand how you concluded that stock options
granted during 2002 and 2003 have a fair value of zero. Please
supplementally advise us how you applied the Black-Scholes model.
New Accounting Pronouncements, page F-10
117. In light of your disclosure on page F-14 that you have adopted
FIN 45 in accounting for guarantees, please clarify how you how
adopted the standard and why it did not impact your financial
statements.
Note 3 - Receivables, page F-11
118. Please separately disclose any allowance for uncollectible
accounts (other than loss reserves for chargebacks) on the face of
the balance sheet or in the notes as required by Rule 5-02.4 of
Regulation S-X.
Note 8 - Merchant Deposits and Loss Reserves, page F-14
119. Please supplementally advise us how you applied paragraph 9(b)
and 10 of FIN 45 in determining the fair value of your guarantees.
In addition, please advise us why you are including these amounts in
"cost of services" instead of netted against revenues. Refer to
paragraph 11(b) of FIN 45.
Note 10 - Convertible Preferred Stock and Warrants, page F-16
120. Please supplementally advise us and revise your disclosure to
clarify what terms of the Certificate of Designations for the
Convertible Preferred and Shareholders` Agreement have changed for
you to stop accreting the preferred stock to the redemption value.
Are the shares no longer redeemable under EITF D-98? If redemption
is no longer outside the control of the issuer, please tell us why
they are still classified in temporary equity.
121. Please explain to us why you have only adjusted the mandatory
redeemable warrants to fair value in 2003 instead of each period
since the issuance date. Based upon your disclosure on page F-19, we
note that the fair value of your stock has increased since 2001.
122. Considering that the mandatory redeemable warrants are
classified as a liability, please supplementally advise us why you
recorded the fair value adjustments directly to retained earnings and
APIC instead of current earnings. Refer to paragraphs 9 and 39 of
EITF 00-19.
Note 11 - Income Taxes, page F-17
123. Please supplementally advise us how you overcame the strong
negative evidence of cumulative losses in recent years in determining
that a valuation allowance was not necessary. Please identify all
negative and positive evidence you evaluated in your response. Refer
to paragraphs 21 through 25 of SFAS 109. If you are giving the most
weight to forecasted future taxable income, please supplementally
demonstrate your ability to accurately forecast taxable income in
prior years. Finally, please tell us if changes in your employment
agreement could generate uncertainties in forecasting future results.
124. Please revise to disclose the amounts and expiration dates of
any net operating loss carryforwards for both federal and state
taxes. Refer to paragraph 48 of SFAS 109.
Note 12 - Other Revenue, net, page F-18
125. Please provide your basis for accounting for service fees, net
of processing costs. Cite relevant accounting literature as
appropriate.
Note 13 - Stock Incentive Plan, page F-19
126. We note that all stock options were granted with an exercise
price equal to the fair market value of the stock on the grant date.
Please revise to disclose how you determined fair value for each
grant within the most recent twelve months. Please summarize the
methodology and assumptions used in your disclosure. We may have
further comments upon review of your response and once you have
disclosed the anticipated price range for your offering.
Note 19 - Welsch Asset Purchase, page F-22
127. Please revise your disclosure to provide a condensed balance
sheet disclosing the amount assigned to all assets and liabilities.
In addition, please disclose your methodology for allocating the
purchase price and identify any intangible assets acquired such as
customer contracts. Refer to paragraphs 51 and 52 of SFAS 141 for
required disclosures and paragraphs A14 through A28 for examples of
identifiable intangible assets.
128. Please supplementally explain to us why the fair value of your
Common Stock determined by the board of directors for the purposes of
this transaction is significantly less than the amounts disclosed on
page F-19 for the same periods.
129. Please disclose any non-cash items related to this transaction
in your supplemental disclosures of non-cash investing activities
required by paragraph 32 of SFAS 95.
Note 20 - Segments, page F-23
130. Please revise your disclosure to separately present all non-
attributable expenses and intersegment eliminations. Including them
in the Card segment prevents the reader of evaluating the performance
of that segment on a stand-alone basis. Refer to paragraph 21 of
SFAS 131.
Note 21 - Earnings Per Share, page F-25
131. Please revise your disclosure to calculate earnings per share
using the two-class method for all periods. For periods in which you
have a loss, please clarify if participating convertible preferred
stockholders have the obligation to share in the losses of the
entity. Refer to EITF 03-6.
132. Please supplementally advise us of any past experience or stated
policy to support excluding the 1,000,000 shares from the denominator
for purposes of calculating diluted earnings per share for each
period. If such support does not exist, please revise your
disclosure to include those shares in the denominator. Refer to
paragraph 29 of SFAS 128 and EITF D-72.
133. Please present on the face of the income statement pro forma
earnings per share data for the most recent year and subsequent
interim period to give effect to the number of shares in the offering
whose proceeds is necessary to redeem the warrants to purchase
1,000,000 shares of your common stock and the stock split that will
occur immediately prior to your offering.
Information Not Required in Prospectus
Recent Sales of Unregistered Securities, page II-2
134. Please add to your discussion issuances related to the Welsch
asset purchase described in Note 19 on page F-22.
135. For each sale listed, please identify the exemption upon which
you are relying and briefly describe the facts relied upon to make
the exemption available. Refer to Item 701(d) of Regulation S-K. We
note that you have listed the exemptions together in the last
paragraph. With respect to your issuance of stock options, please
describe the recipient classes, such as whether they are current or
former officers, directors, employees, consultants, advisors.
Exhibits and Financial Statement Schedules, page II-3
136. Please attach as an exhibit the June 2004 Credit Card Software
Systems merger agreement.
137. Supplementally provide the staff with a copy of the opinion
regarding the validity of the securities, or file the opinion in your
next amendment. We must review the opinion before the registration
statement is declared effective and we may have additional comments
on the opinion. Furthermore, please file as an exhibit to your next
amendment the non-compete and confidentiality agreement you entered
into with certain of your senior managers.
Other
As appropriate, please amend your registration statement in response
to our comments. You may wish to provide us with marked copies of
the amendment to expedite our review. Please furnish a cover letter
with your amendments that keys your responses to our comments and
provides any requested supplemental information. Detailed cover
letters greatly facilitate our review. Please understand that we may
have additional comments after reviewing your amendment and responses
to our comments.
No further review of the registration statement has been or will
be made. We urge all persons who are responsible for the accuracy
and adequacy of the disclosure in the filings to be certain that they
have provided all information investors require for an informed
decision. Since the company and its management are in possession of
all facts relating to a company`s disclosure, they are responsible
for the accuracy and adequacy of the disclosures they have made.
Notwithstanding our comments, in the event the company requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy and
accuracy of the disclosure in the filing; and
* the company may not assert this action as defense in any proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
In addition, please be advised that the Division of Enforcement has
access to all information you provide to the staff of the Division of
Corporation Finance in connection with our review of your filing or
in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of the
fact that those requesting acceleration are aware of their respective
responsibilities under the Securities Act of 1933 and the Securities
Exchange Act of 1934 as they relate to the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding requesting
acceleration of a registration statement. Please allow adequate time
after the filing of any amendments for further review before
submitting a request for acceleration. Please provide this request
at least two business days in advance of the requested effective
date.
You may contact Steven Jacobs at 202-942-5222 or Cicely Luckey at
202-942-1975 if you have questions regarding comments on the
financial statements and related matters. Please contact Geoffrey
Ossias at 202-824-5331 or the undersigned at 202-942-2987 with any
other questions.
Sincerely,
Peggy Kim
Senior Counsel
cc: Nancy I. Prado, Esq. (via facsimile)
DORSEY & WHITNEY LLP
Heartland Payment Systems, Inc.
Registration Statement on Form S-1
September 9, 2004
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