May 5, 2005
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.
Amendment No. 1 to Form S-1 filed on March 29, 2005
File No. 333-118073
Dear Mr. Carr:
The following comments were inadvertently omitted from our
comment letter dated April 22, 2005. Please consider them in
addition to the comments contained in that letter. 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.
Form S-1
Critical Accounting Policies, pages 23 - 26
Capitalized Customer Acquisition Costs, page 23
1. Please supplementally explain your basis for evaluating your
capitalized customer acquisition costs for impairment on a "pooled
basis by vintage month of origination." In your response, please
explain the cash flow interdependencies within each pool that
result
in grouping at such a level. Refer to paragraph 10 of SFAS No.
144.
Revenue, page 23
2. Please revise to clarify how your bank sponsor advances the
interchange fees to your merchants. For instance, it is unclear
why
these are considered advances from your bank sponsor to the
merchant
since you and not the merchant are liable to repay the advance and
the amount advanced is used to satisfy your obligation for
interchange fees.
Stock Options, page 25
3. We read your revised disclosure on page 25. Please also expand
your disclosure to provide the following:
a. Why you chose not to obtain contemporaneous valuations by
valuation specialists at each of the grant dates. Please note
that
equity transactions between related parties such as those in the
third quarter of 2004 are not representative of fair value.
b. A discussion of the private company discount referred to on
page
F-17, including but not limited to the amount of such discount and
your basis for recording a discount from the initial public
offering
price.
4. You disclose that your internal valuation yielded results which
were all at least 15% below the $10 and $12.50 per share exercise
price for options granted during 2002 and 2003. This suggests
that
the internal valuation ranged from $8.50 to $10.625 per share.
However, on page F-21 you indicate that the board of directors
estimated the fair value at $4.72 and $7.49 per share for
issuances
in 2002 and 2003, respectively, representing a discount between
40%
and 53%. Please explain the differences in your disclosure on
page
25 and F-21.
5. Please disclose and advise us of the purpose of the valuation
performed by valuation specialists in March 2003 and the fair
value
determined under such valuation.
Financing Arrangement, page 26
6. An imputed interest rate of 2.53% appears to be unusually low
for
a 10-year financing arrangement. In your response, please explain
why you have assumed an attrition rate of 15.0 percent for these
merchant contracts when your historical attrition rate has been
closer to 10 percent in prior periods. In addition, please revise
your disclosure to qualitatively and quantitatively discuss how a
change in assumptions could impact your financial statements.
Income Taxes, page 26
7. We read your response to comment 53. Evaluating realization of
deferred tax assets is subject to significant estimates and
judgment
on the part of management. As such, please revise your disclose
to
discuss the factors and assumptions you considered and the change
in
circumstances that caused you to reduce your valuation allowance
during 2003 and assisted you in concluding that a valuation
allowance
on your deferred tax assets is not necessary at December 31, 2004
and
2003.
Components of Revenue and Expenses
Revenue, page 26
8. Please explain to us how you evaluated the sale of merchant
contracts to National Processing Company under EITF 88-18 and how
the
facts and circumstances differ from the transaction with Certergy,
Inc.
Expenses, page 27
9. We have reviewed your response to prior comment 56 and it
appears
you are making a distinction in classification based upon whether
the
charges result from cash outflows. We still do not understand why
one represents a cost of providing services under Rule 5-03 of
Regulation S-X and the other does not. Please revise your income
statement to classify both as costs of services.
Liquidity and Capital Resources, page 33
10. Please revise your disclosure to provide a discussion and
analysis of operating cash flows for each period including
explanations for material changes in the underlying drivers for
each
period. Refer to the Interpretive Guidance in SEC Release 33-
8350.
Consolidated Balance Sheets, page F-3
11. We read your response to comment 109. The examples you
provided
of others in the industry that present unclassified balance
sheets,
with the exception of Wright Express Corporation, appear to be
more
closely aligned with financial institutions. Given the nature of
your business operations, which appears to result in the
generation
of a large volume of short-term receivables and payables, it
appears
that information regarding maturity and classification (i.e.,
short-
term vs. long-term) would be relevant and useful to users of the
financial statements. Accordingly, please revise to include
classified balance sheets for all periods presented or advise us
why
Article 5 of Regulation S-X is not applicable to your Company.
Consolidated Statements of Operations, page F-4
12. We read your response and reissue our prior comment 112 to
revise
your income statement or advise us why Article 5 of Regulation S-X
is
not applicable to your Company.
Note 2, Summary of Significant Accounting Policies, pages F-7 - F-
10
Stock Options, page F-10
13. Please supplementally provide your basis for a applying a 0%
volatility factor when calculating the fair value of stock options
granted after August 10, 2004, the date on which you filed
initially
filed a Form S-1. Refer to the definition of a "public entity" in
paragraph 395 of SFAS No. 123.
Note 8, Merchant Deposits and Loss Reserves, page F-13
14. We read your response to comments 117 and 119. Please
supplementally advise us how you concluded that the fair value is
immaterial. We wish to remind you that the probability that
payments
will be required under the guarantee does not prohibit you from
initially recognizing a liability.
Note 10, Convertible Preferred Stock and Warrants, page F-15
15. We read your response to comment 121 and reissue our prior
comment. Please explain to us why you have only adjusted the
mandatory redeemable warrants to fair value in 2003 and 2004
instead
of each prior period since the issuance date.
Note 18, Segments, page F-22
16. Please separately identify and describe the nature of
unallocated
amounts presented in your segment table. Refer to paragraphs 31
and
32 of SFAS 131.
Note 19, Earnings Per Share, page F-21
17. We read your response to comment 131. As discussed in Issue
2(a)
of EITF 03-6, securities that entitle the holder to obtain common
stock are participating securities if they meet the definition of
a
participating security prior to exercise. Please revise your
disclosure to calculate earnings per share using the two-class
method
for all periods since you appear to have securities that meet the
definition of participating securities as described in Issue 2 of
EITF 03-6. 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.
Note 20, Financial Statement Restatement, page F-23
18. Please explain to us why other income, net decreased from
amounts
previously reported in light of your response to prior comment
125.
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.
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 amendment 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 Josh Forgione at 202-551-3431 or Steve
Jacobs
at 202-551-3403 if you have questions regarding comments on the
financial statements and related matters. Please contact Geoffrey
Ossias at 202-551-3404 or the undersigned at 202-551-3411 with any
other questions.
Sincerely,
Peggy Y. Kim
Senior Counsel
cc: Kevin T. Collins, Esq. (via facsimile)
DORSEY & WHITNEY LLP
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Heartland Payment Systems, Inc.
May 5, 2005
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