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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission file number 000-50280
 
 iPayment, Inc.
 (Exact name of registrant as specified in its charter)
 www.ipaymentinc.com
 DELAWARE
    
    62-1847043(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)40 Burton Hills Boulevard, Suite 415Nashville, Tennessee
    
    37215(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (615) 665-1858
 þ o
  o o þ
 o þ
  Title of each class
    
    Shares Outstanding at March 31, 2007(Common stock, $0.01 par value)
    
    100




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1Financial StatementsConsolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    13Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    22Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3Defaults Upon Senior Securities
    
    
    22Item 4Submission of Matters to a Vote of Security Holders
    
    
    22Item 5Other Information
    
    
    22Item 6Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23EXHIBITS
    
    
    24Ex-10.1 Sponsorship AgreementEx-10.2 Sixth Amendment to Service AgreementEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification
  2




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##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    82
    
    
    $
    96Accounts receivable, net of allowance for doubtful accounts of $341 and $275 at
March 31, 2007 and December 31, 2006, respectively
    
    
    21,644
    
    
    
    23,050Prepaid expenses and other current assets
    
    
    3,338
    
    
    
    2,685Total current assets
    
    
    25,064
    
    
    
    25,831Restricted cash
    
    
    1,045
    
    
    
    1,036Property and equipment, net
    
    
    4,051
    
    
    
    3,925Intangible assets and other, net of accumulated amortization of $33,758 and $24,769
at March 31, 2007 and December 31, 2006, respectively.
    
    
    218,132
    
    
    
    226,776Goodwill
    
    
    509,578
    
    
    
    506,078Other assets, net
    
    
    19,196
    
    
    
    19,780Total assets
    
    $
    777,066
    
    
    $
    783,426LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,585
    
    
    $
    5,933Income taxes payable
    
    
    
    
    
    
    508Accrued liabilities and other
    
    
    24,211
    
    
    
    24,968Current portion of long-term debt
    
    
    5,242
    
    
    
    5,241Total current liabilities
    
    
    32,038
    
    
    
    36,650Minority interest in equity of consolidated subsidiaries
    
    
    
    
    
    
    155Deferred tax liabilities
    
    
    12,527
    
    
    
    14,331Long-term debt
    
    
    711,238
    
    
    
    709,415Other liabilities
    
    
    6,719
    
    
    
    5,985Total liabilities
    
    
    762,522
    
    
    
    766,536Commitments and contingencies (Note 8)Stockholders equityCommon stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at March 31, 2007, and December 31, 2006
    
    
    20,055
    
    
    
    20,055Accumulated other comprehensive loss, net of tax benefits of $1,920 and $1,517 at
March 31, 2007, and December 31, 2006, respectively.
    
    
    (2,881
    )
    
    
    (2,275
    )Accumulated deficit
    
    
    (2,630
    )
    
    
    (890
    )Total stockholders equity
    
    
    14,544
    
    
    
    16,890Total liabilities and stockholders equity
    
    $
    777,066
    
    
    $
    783,426
  3




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended March 31,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Successor
    
    
    PredecessorRevenues
    
    $
    177,740
    
    
    $
    170,901Operating expenses:Interchange
    
    
    103,662
    
    
    
    98,113Other costs of services
    
    
    54,242
    
    
    
    52,650Selling, general and administrative
    
    
    6,549
    
    
    
    5,320Total operating expenses
    
    
    164,453
    
    
    
    156,083Income from operations
    
    
    13,287
    
    
    
    14,818Other expense:Interest expense, net
    
    
    15,268
    
    
    
    1,848Other expense, net
    
    
    18
    
    
    
    878(Loss) Income before income taxes and minority interest
in earnings of consolidated subsidiary
    
    
    (1,999
    )
    
    
    12,092Income tax (benefit) provision
    
    
    (129
    )
    
    
    4,818Minority interest in losses of consolidated subsidiaries
    
    
    155
    
    
    
    348Net (loss) income
    
    $
    (1,715
    )
    
    $
    7,622
  4




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
  Three Months Ended March 31,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Successor
    
    
    PredecessorCash flows from operating activitiesNet (loss) income
    
    $
    (1,715
    )
    
    $
    7,622Adjustments to reconcile net (loss) income to net cash provided by operating activitiesDepreciation and amortization
    
    
    9,401
    
    
    
    9,703Stock-based compensation
    
    
    
    
    
    
    579Noncash interest expense
    
    
    644
    
    
    
    252Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    1,406
    
    
    
    2,757Prepaid expenses and other current assets
    
    
    (235
    )
    
    
    (422
    )Other assets
    
    
    (1,433
    )
    
    
    (1,508
    )Accounts payable and income taxes payable
    
    
    (4,274
    )
    
    
    3,195Accrued liabilities and other
    
    
    3,955
    
    
    
    (3,884
    )Net cash provided by operating activities
    
    
    7,749
    
    
    
    18,294Cash flows from investing activitiesChange in restricted cash
    
    
    (9
    )
    
    
    1,043Expenditures for property and equipment
    
    
    (463
    )
    
    
    (495
    )Acquisitions of businesses, portfolios and other intangibles, net of cash acquired
    
    
    (361
    )
    
    
    (524
    )Payments related to businesses previously acquired
    
    
    (8,668
    )
    
    
    (9,500
    )Net cash used in investing activities
    
    
    (9,501
    )
    
    
    (9,476
    )Cash flows from financing activitiesNet borrowings (repayments) on line of credit
    
    
    4,050
    
    
    
    (9,900
    )Repayments of debt
    
    
    (2,312
    )
    
    
    (20
    )Proceeds from issuance of common stock and exercise of options
    
    
    
    
    
    
    289Net cash provided by (used in) financing activities
    
    
    1,738
    
    
    
    (9,631
    )Net decrease in cash and cash equivalents
    
    
    (14
    )
    
    
    (813
    )Cash and cash equivalents, beginning of period
    
    
    96
    
    
    
    1,023Cash and cash equivalents, end of period
    
    $
    82
    
    
    $
    210Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    2,211
    
    
    $
    6,815Cash paid during the period for interest
    
    $
    9,718
    
    
    $
    1,756Non-cash increases in assets (liabilities):Increase in goodwill
    
    $
    
    
    
    $
    407
  5




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(1) Organization and Business and Basis of Presentation
 Organization and Business
    Basis of Presentation
   Use of Estimates
  Share-Based Compensation
 Share-Based Payment, Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  6




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Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 Amortization of Merchant Processing Portfolios
   Common Stock
  (2) Acquisitions
  7




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Other Acquisitions
  (3) Long-Term Debt
  Accounting for Derivative Instruments and Hedging
Activities
 3 4
 Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
  (4) Segment Information and Geographical Information
  (5) Income Taxes
 Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No.
 8




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109
     (6) Commitments and Contingencies
 Litigation
 Robert Aguilard, et al., on behalf of themselves and all persons similarly situated v.
E-Commerce Exchange, Inc ., A-1 Leasing LLC, and Duvera Billing Services Civil Action No.
05CC02794  State of California, Superior Court of Orange County.
  9




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##### Table of Contents



Bruns v. E-Commerce Exchange Inc., et al , Orange County Superior Court, State of
California, Case No. 00CC02450 (coordinated under the caption TCPA Cases, Los Angeles County
Superior Court, State of California, Case No. JCCO 43500)
  Other
  10




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##### Table of Contents



(7) Restructuring
 Accounting for Costs Associated with Exit or Disposal Activities,
 One-Time Termination Benefits.
 Contract Termination Costs.
 Other Associated Costs.
  January 1,
    
    
    Charged to Costs
    
    
    
    
    
    
    March 31,2007
    
    
    or Expenses
    
    
    Deductions
    
    
    2007One-time termination benefits
    
    $
    
    
    
    $
    392
    
    
    $
    357
    (1)
    
    $
    35Contract termination costs
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    245Other associated costs
    
    
    
    
    
    
    273
    
    
    
    244
    (2)
    
    
    29$
    
    
    
    $
    911
    
    
    $
    601
    
    
    $
    310
 
 (1)
    
    Payments of one-time termination benefits(2)
    
    Payments of other associated costs (8) Significant Developments and Subsequent Events
   11




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12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
        13




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Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
     Reserve for Merchant Losses
 Income Taxes. Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
 14




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Minority Interest.
 Consolidation of Variable Interest Entities
 Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging Activities
 Merger Transaction. Business Combinations, Basis in Leveraged Buyout Transactions.
 Restructuring. Accounting for Costs Associated with Exit or Disposal
Activities
 Components of Revenues and Expenses
  Reporting Revenue Gross as a Principal Versus Net as
an Agent,
 15




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Seasonality Trend
  Off-Balance Sheet Arrangements
  16




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Results of Operations
 Three Months Ended March 31, 2007 (2007) Compared to Three Months Ended March 31, 2006 (2006)
 ChangeThree months ended
    
    
    % of Total
    
    
    Three months ended
    
    
    % of TotalMarch 31, 2007
    
    
    Revenue
    
    
    March 31, 2006
    
    
    Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    177,740
    
    
    
    100.0
    %
    
    $
    170,901
    
    
    
    100.0
    %
    
    $
    6,839
    
    
    
    4.0Operating ExpensesInterchange
    
    
    103,662
    
    
    
    58.3
    
    
    
    98,113
    
    
    
    57.4
    
    
    
    5,549
    
    
    
    5.7Other costs of services
    
    
    54,242
    
    
    
    30.5
    
    
    
    52,650
    
    
    
    30.8
    
    
    
    1,592
    
    
    
    3.0Selling, general and administrative
    
    
    6,549
    
    
    
    3.7
    
    
    
    5,320
    
    
    
    3.1
    
    
    
    1,229
    
    
    
    23.1Total operating expenses
    
    
    164,453
    
    
    
    92.5
    
    
    
    156,083
    
    
    
    91.3
    
    
    
    8,370
    
    
    
    5.4Income from operations
    
    
    13,287
    
    
    
    7.5
    
    
    
    14,818
    
    
    
    8.7
    
    
    
    (1,531
    )
    
    
    (10.3
    )Other expenseInterest expense, net
    
    
    15,268
    
    
    
    8.6
    
    
    
    1,848
    
    
    
    1.1
    
    
    
    13,420
    
    
    
    726.2Other expense, net
    
    
    18
    
    
    
    0.1
    
    
    
    878
    
    
    
    0.5
    
    
    
    (860
    )
    
    NMTotal other expense
    
    
    15,286
    
    
    
    8.6
    
    
    
    2,726
    
    
    
    1.6
    
    
    
    12,560
    
    
    
    460.7(Loss) income before income taxes
    
    
    (1,999
    )
    
    
    (1.1
    )
    
    
    12,092
    
    
    
    7.1
    
    
    
    (14,091
    )
    
    
    (116.5
    )Income tax (benefit) provision
    
    
    (129
    )
    
    
    (0.1
    )
    
    
    4,818
    
    
    
    2.8
    
    
    
    (4,947
    )
    
    
    (102.7
    )Minority interest
    
    
    155
    
    
    
    0.1
    
    
    
    348
    
    
    
    0.2
    
    
    
    (193
    )
    
    
    (55.46
    )Net (loss) income
    
    $
    (1,715
    )
    
    
    (1.0
    )
    
    $
    7,622
    
    
    
    4.5
    
    
    $
    (9,337
    )
    
    
    (122.5
    )NM = Not meaningfulOther Data:Cash flows from:Operating activities
    

    $
    7,749
    
    
    $
    18,294Investing activities
    

    $
    (9,501
    )
    
    $
    (9,476
    )Financing activities
    

    $
    1,738
    
    
    $
    (9,631
    )EBITDA (a)
    

    $
    22,825
    
    
    $
    23,992Adjusted EBITDA (a)
    

    $
    22,843
    
    
    $
    25,450
 
 (a)
    
    EBITDA is defined as net income (loss) before (i) depreciation and amortization, (ii)
interest expense, and (iii) provision (benefit) for income taxes. Adjusted EBITDA excludes
certain additional items. We consider EBITDA and adjusted EBITDA to be important
indicators of the performance of our business. We have included these non-GAAP financial
measures because they provide management with important information for assessing our
performance and as indicators of our ability to service or incur indebtedness, make capital
expenditures and finance working capital requirements. EBITDA and adjusted EBITDA are not
measures of financial performance under GAAP and should not be considered in isolation or
as alternatives to cash flow from operating activities or as alternatives to net income as
indicators of operating performance or any other measures of performance derived in
accordance with GAAP. Other companies in our industry may calculate EBITDA and adjusted
EBITDA differently than we do and EBITDA and adjusted EBITDA may not be comparable with
similarly titled measures reported by other companies. The reconciliation of net income
(loss) under GAAP to EBITDA and adjusted EBITDA is as follows (dollars in thousands): 2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Net (loss) income
    
    $
    (1,715
    )
    
    $
    7,622Interest expense, net
    
    
    15,268
    
    
    
    1,848Income tax (benefit) provision
    
    
    (129
    )
    
    
    4,818Depreciation and amortization
    
    
    9,401
    
    
    
    9,704EBITDA
    
    
    22,825
    
    
    
    23,992Share-based compensation
    
    
    
    
    
    
    580Other expense (1)
    
    
    18
    
    
    
    878Adjusted EBITDA
    
    $
    22,843
    
    
    $
    25,450
 
 (1)
    
    Amounts represent certain expenses of the Company primarily related to the Transaction
which closed on May 10, 2006. 17




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Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Minority Interest.
 EBITDA and Adjusted EBITDA
 18




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Liquidity and Capital Resources
  Operating activities
   Investing activities
   Financing activities
    Accounting for Derivative Instruments and Hedging
Activities
  19




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3 4
  Contractual Obligations
  Payments due by periodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsCredit facility
    
    $
    514,750
    
    
    $
    5,150
    
    
    $
    10,300
    
    
    $
    10,300
    
    
    $
    489,000Senior Notes
    
    
    204,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,000Interest (1)
    
    
    314,435
    
    
    
    57,691
    
    
    
    114,245
    
    
    
    112,664
    
    
    
    29,835Capital lease obligations
    
    
    208
    
    
    
    108
    
    
    
    90
    
    
    
    10
    
    
    
    Operating lease obligations
    
    
    3,359
    
    
    
    1,209
    
    
    
    1,902
    
    
    
    248
    
    
    
    Purchase obligations (2)(3)(4)
    
    
    33,962
    
    
    
    13,358
    
    
    
    14,571
    
    
    
    6,033
    
    
    
    Total contractual obligations
    
    $
    1,070,714
    
    
    $
    77,516
    
    
    $
    141,108
    
    
    $
    129,255
    
    
    $
    722,835
 
 (1)
    
    Future interest obligations are calculated using current interest
rates on existing debt balances as of March 31, 2007, and assume
no principal reduction other than mandatory principal repayments
in accordance with the terms of the debt instruments as described
in Note 3 in our Consolidated Financial Statements.(2)
    
    Purchase obligations represent costs of contractually guaranteed
minimum processing volumes with certain of our third-party
transaction processors.(3)
    
    We are required to pay FDMS an annual processing fee related to
the FDMS Merchant Portfolio and the FDMS Agent Bank Portfolio of
at least $10.3 million in fiscal 2007, and for each subsequent
year through 2011 of at least 70% of the amount of the processing
fee paid during the immediately preceding year. The minimum
commitment for years after 2007, included in the table above are
based on the preceding year minimum amounts. The actual minimum
commitments for such years may vary based on actual results in
preceding years.(4)
    
    We have agreed to utilize FDMS to process at least 75% of our
consolidated transaction sales volume in any calendar year through
2011. The minimum commitments for such years are not calculable as
of March 31, 2007, and are excluded from this table.  20




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Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal control over financial reporting
 21




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  22




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SIGNATURES
  iPayment, Inc.Date: May 14, 2007
    
    By:
    
    /s/ Gregrory S. DailyGregory S. Daily
Chief Executive Officer
(Principal Executive Officer)Date: May 14, 2007
    
    By:
    
    /s/ Clay M. WhitsonClay M. Whitson
Chief Financial Officer
(Principal Financial and Accounting Officer)
 23




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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Sponsorship Agreement, dated as of January 29, 2007, among iPayment, Inc.,
First Data Merchant Services Corporation and Wells Fargo Bank, N.A., filed herewith.10.2
    
    Sixth Amendment to Service Agreement dated as of January 29, 2007, between
First Data Merchant Services Corporation and iPayment, Inc., filed herewith.31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a  14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002), filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a  14(a) (as adopted Section 302 of the Sarbanes-Oxley Act of 2002), filed
herewith.32.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a  14(a) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.32.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a  14(a) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.
 24