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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, 2011
 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 LOGO)
 iPayment, Inc.
  Delaware
    
    62-1847043(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)40 Burton Hills Boulevard, Suite 415Nashville, Tennessee
    
    37215(Address of principal executive offices)
    
    (Zip Code)
  o þ
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
 Title of each class
    
    Shares Outstanding at May 12, 2011(Common stock, $0.01 par value)
    
    100




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PagePART I  FINANCIAL INFORMATIONItem 1Financial StatementsConsolidated Balance Sheets as of March 31, 2011
(Unaudited) and December 31, 2010
    
    
    3Unaudited Consolidated Income Statements for the
three-month periods ended March 31, 2011 and 2010
    
    
    4Unaudited Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2011 and 2010
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
    
    
    14Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    22Item 1ARisk Factors
    
    
    23Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3Defaults Upon Senior Securities
    
    
    24Item 4Removed and ReservedItem 5Other Information
    
    
    24Item 6Exhibits
    
    
    24SIGNATURES
    
    
    25EXHIBITS
    
    
    26EX-31.1EX-31.2EX-32.1EX-32.2
  2




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Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2011
    
    
    2010(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1
    
    
    $
    1Accounts
receivable, net of allowance for doubtful accounts of $795 and $735 at
March 31, 2011 and December 31, 2010, respectively
    
    
    28,418
    
    
    
    27,542Prepaid expenses and other current assets
    
    
    1,454
    
    
    
    1,191Deferred tax assets
    
    
    2,074
    
    
    
    2,073Total current assets
    
    
    31,947
    
    
    
    30,807Restricted cash
    
    
    558
    
    
    
    556Property and equipment, net
    
    
    4,938
    
    
    
    4,766Intangible assets and other, net of accumulated amortization of $187,516 and $177,600
at March 31, 2011 and December 31, 2010, respectively
    
    
    147,620
    
    
    
    156,734Goodwill
    
    
    527,978
    
    
    
    527,978Deferred tax assets, net
    
    
    3,876
    
    
    
    4,324Other assets, net
    
    
    10,160
    
    
    
    10,464Total assets
    
    $
    727,077
    
    
    $
    735,629LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,483
    
    
    $
    3,265Income taxes payable
    
    
    4,315
    
    
    
    11,818Accrued interest
    
    
    7,194
    
    
    
    2,573Accrued liabilities and other
    
    
    16,740
    
    
    
    17,060Current portion of long-term debt
    
    
    
    
    
    
    5,823Total current liabilities
    
    
    30,732
    
    
    
    40,539Long-term debt
    
    
    613,481
    
    
    
    619,144Other liabilities
    
    
    2,861
    
    
    
    3,505Total liabilities
    
    
    647,074
    
    
    
    663,188Commitments and contingencies (Note 8)EquityCommon stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at March 31, 2011 and December 31, 2010
    
    
    20,055
    
    
    
    20,055Retained earnings
    
    
    59,948
    
    
    
    52,386Total stockholders equity
    
    
    80,003
    
    
    
    72,441Total liabilities and stockholders equity
    
    $
    727,077
    
    
    $
    735,629
  3




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iPAYMENT, INC.
 
 CONSOLIDATED INCOME STATEMENTS
 Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2011
    
    
    2010(Unaudited)
    
    
    (Unaudited)Revenues
    
    $
    169,613
    
    
    $
    159,540Operating expenses:Interchange
    
    
    90,728
    
    
    
    90,997Other costs of services
    
    
    54,741
    
    
    
    50,601Selling, general and administrative
    
    
    4,290
    
    
    
    3,082Total operating expenses
    
    
    149,759
    
    
    
    144,680Income from operations
    
    
    19,854
    
    
    
    14,860Other expense:Interest expense, net
    
    
    7,901
    
    
    
    11,371Other expense, net
    
    
    (30
    )
    
    
    (229
    )Income before income taxes
    
    
    11,983
    
    
    
    3,718Income tax provision
    
    
    4,421
    
    
    
    1,498Net income
    
    $
    7,562
    
    
    $
    2,220
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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2011
    
    
    2010(Unaudited)
    
    
    (Unaudited)Cash flows from operating activitiesNet income
    
    $
    7,562
    
    
    $
    2,220Adjustments to reconcile net income to net cash provided by operating
activitiesDepreciation and amortization
    
    
    10,523
    
    
    
    10,626Noncash interest expense
    
    
    646
    
    
    
    646Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    (876
    )
    
    
    2,230Prepaid expenses and other current assets
    
    
    (263
    )
    
    
    211Other assets
    
    
    (162
    )
    
    
    (1,532
    )Accounts payable and income taxes payable
    
    
    (8,285
    )
    
    
    (3,691
    )Accrued interest
    
    
    4,621
    
    
    
    4,655Accrued liabilities and other
    
    
    (964
    )
    
    
    (4,214
    )Net cash provided by operating activities
    
    
    12,802
    
    
    
    11,151Cash flows from investing activitiesChange in restricted cash
    
    
    (2
    )
    
    
    8Expenditures for property and equipment
    
    
    (739
    )
    
    
    (633
    )Payments for prepaid residual expenses
    
    
    (488
    )
    
    
    (3,043
    )Net cash used in investing activities
    
    
    (1,229
    )
    
    
    (3,668
    )Cash flows from financing activitiesNet repayments on line of credit
    
    
    (5,750
    )
    
    
    (7,484
    )Repayments of debt
    
    
    (5,823
    )
    
    
    Net cash used in financing activities
    
    
    (11,573
    )
    
    
    (7,484
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (1
    )Cash and cash equivalents, beginning of period
    
    
    1
    
    
    
    2Cash and cash equivalents, end of period
    
    $
    1
    
    
    $
    1Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    11,924
    
    
    $
    3,682Cash paid during the period for interest
    
    $
    2,635
    
    
    $
    6,110
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Notes to Consolidated Financial Statements
 (1) Organization and Business and Basis of Presentation
 Organization and Business
      Basis of Presentation
  Use of Estimates
  6




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Revenue and Cost Recognition
  Other Costs of Services
  Financial Instruments
  
    
    Level 1: Observable quoted prices in active markets for identical assets and
liabilities.
    
    Level 2: Observable quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market.
    
    Level 3: Model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models, discounted cash-flow models
and similar techniques.
  Derivative Financial Instruments
    7




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Amortization of Intangible Assets
    Common Stock
  (2) Acquisitions
    (3) Other Intangibles
 Payments for Prepaid Residual Expenses
  8




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(4) Long-Term Debt
       9




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(5) Segment Information and Geographical Information
  (6) Income Taxes
      (7) Comprehensive Income (Loss)
  (8) Commitments and Contingencies
 Legal Proceedings
  10




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(9) Recent Accounting Pronouncements
  (10) Related Party Transactions
    (11) Significant Developments
  (12) Subsequent Events
  11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
   Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets.
  14




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Revenue and Cost Recognition.
 Reporting
Revenue Gross as a Principal Versus Net as an Agent.
   15




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Reserve for Merchant Losses
 Income Taxes.
 Seasonality
  Off-Balance Sheet Arrangements
  16




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Results of Operations
 Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 Three months ended
    
    
    
    
    
    
    Three months ended
    
    
    
    
    

    ChangeMarch 31, 2011
    
    
    % of Total Revenue
    
    
    March 31, 2010
    
    
    % of Total Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    169,613
    
    
    
    100.0
    %
    
    $
    159,540
    
    
    
    100.0
    %
    
    $
    10,073
    
    
    
    6.3Operating ExpensesInterchange
    
    
    90,728
    
    
    
    53.5
    
    
    
    90,997
    
    
    
    57.0
    
    
    
    (269
    )
    
    
    (0.3
    )Other costs of services
    
    
    54,741
    
    
    
    32.3
    
    
    
    50,601
    
    
    
    31.7
    
    
    
    4,140
    
    
    
    8.2Selling, general and administrative
    
    
    4,290
    
    
    
    2.5
    
    
    
    3,082
    
    
    
    1.9
    
    
    
    1,208
    
    
    
    39.2Total operating expenses
    
    
    149,759
    
    
    
    88.3
    
    
    
    144,680
    
    
    
    90.7
    
    
    
    5,079
    
    
    
    3.5Income from operations
    
    
    19,854
    
    
    
    11.7
    
    
    
    14,860
    
    
    
    9.3
    
    
    
    4,994
    
    
    
    33.6Other expensesInterest expense, net
    
    
    7,901
    
    
    
    4.7
    
    
    
    11,371
    
    
    
    7.1
    
    
    
    (3,470
    )
    
    
    (30.5
    )Other expenses, net
    
    
    (30
    )
    
    
    (0.0
    )
    
    
    (229
    )
    
    
    (0.1
    )
    
    
    199
    
    
    
    (86.9
    )Total other expense
    
    
    7,871
    
    
    
    4.6
    
    
    
    11,142
    
    
    
    7.0
    
    
    
    (3,271
    )
    
    
    (29.4
    )Income before income taxes and earnings
attributable to noncontrolling interests
    
    
    11,983
    
    
    
    7.1
    
    
    
    3,718
    
    
    
    2.3
    
    
    
    8,265
    
    
    
    222.3Income tax provision
    
    
    4,421
    
    
    
    2.6
    
    
    
    1,498
    
    
    
    0.9
    
    
    
    2,923
    
    
    
    1.0Net Income
    
    $
    7,562
    
    
    
    4.5
    
    
    $
    2,220
    
    
    
    1.4
    
    
    $
    5,342
    
    
    
    240.6
 Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Liquidity and Capital Resources
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Operating activities
   Investing activities
   Financing activities
    18




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Contractual Obligations
  Payments due by periodContractual Obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 years(in thousands)Senior secured credit facility (1)
    
    $
    414,815
    
    
    $
    
    
    
    $
    414,815
    
    
    $
    
    
    
    $
    Senior subordinated notes (2)
    
    
    194,500
    
    
    
    
    
    
    
    
    
    
    
    194,500
    
    
    
    Interest (3)(4)
    
    
    80,154
    
    
    
    29,050
    
    
    
    48,734
    
    
    
    2,370
    
    
    
    Operating lease obligations
    
    
    8,458
    
    
    
    1,263
    
    
    
    2,208
    
    
    
    1,737
    
    
    
    3,250Purchase obligations (5)(6)(7)
    
    
    3,824
    
    
    
    3,658
    
    
    
    166
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    701,751
    
    
    $
    33,971
    
    
    $
    465,923
    
    
    $
    198,607
    
    
    $
    3,250
 
 (1)
    
    Does not include the $450 million New Senior Secured Credit
Facilities that we entered into on May 6, 2011. See Note 12 to
the Consolidated Financial Statements for more information(2)
    
    Does not include the $400 million in aggregate principal
amount New Senior Notes that we issued on May 6, 2011. See Note 12
to the Consolidated Financial Statements for more information.(3)
    
    Does not include interest obligations on the New Senior
Secured Credit Facilities and the New Senior Notes. See Note 12
to the Consolidated Financial Statements for more information.(4)
    
    Future interest obligations are calculated using current
interest rates on existing debt balances as of March 31, 2011, and
assume no principal reduction other than mandatory principal
repayments in accordance with the terms of the debt instruments as
described in Note 4 to our Consolidated Financial Statements.(5)
    
    Purchase obligations represent costs of contractually
guaranteed minimum processing volumes with certain of our
third-party transaction processors.(6)
    
    We are required to pay FDMS an annual processing fee through
2011 related to the FDMS Merchant Portfolio and the FDMS Bank
Portfolio. The minimum fee for 2011 will be at least 70% of such
fee paid to FDMS in 2010, or at least $3.8 million.(7)
    
    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, 2011, and are excluded from this table.   Effects of Inflation
  19




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
     20




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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
 Bruns v. E-Commerce Exchange Inc. (ECX), 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) (the Bruns Lawsuit) and related case
Truck Insurance Exchange v. E-Commerce Exchange, Inc. et al, Superior Court of Orange County, State
of California, Civil Action No. 30-2010- 00340649 (the TIC Declaratory Action)
   L. Green d/b/a Tisas Cakes v. Northern Leasing Systems, Inc., Online Data Corporation, and
iPayment, Inc., United States District Court, Eastern District of New York, Case No.
09CV05679-RJD-SMG.
   22




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Other  Contract Related
 Vericomm v. iPayment, Inc., et al United States District Court, Central District of
California, Case No. 2:2011-cv-00608-MMM-AGR
   
 Item 1A. Risk Factors
  Our business could be adversely affected by a deteriorating economic environment that causes
our merchants to experience adverse business conditions, as they may generate fewer transactions
for us to process or may become insolvent, thereby increasing our exposure to chargeback
liabilities.
   23




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If the Equity Redemption is not consummated for any reason, we and our directors, officers and
affiliates could continue to be involved in disputes relating to, or arising out of, the pending
litigation and bankruptcy of our Chief Executive Officer, Mr. Daily, which could have a material
adverse effect on our business, financial condition and results of operations.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Removed and Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
  24




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SIGNATURES
  iPayment, Inc.Date: May 12, 2011
    By:
    /s/  Gregory S. DailyGregory S. DailyChairman and Chief Executive Officer
(Principal Executive Officer)Date: May 12, 2011
    By:
    /s/  Mark C. MonacoMark C. MonacoChief Financial Officer
(Principal Financial and Accounting Officer) 25




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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    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 pursuant to 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(b) 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(b) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.
 26