##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2005 Commission file number 000-50280 (IPAYMENT INC. LOGO)   Delaware
    
    62-1847043(State or Other Jurisdiction of Incorporation
or Organization)
    
    (I.R.S. Employer Identification No.)
 40 Burton Hills Boulevard, Suite 415
Nashville, Tennessee
    
    37215(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code:
    
    (615) 665-1858
 Former name, address and fiscal
year, if changed since last report:
    
    Not Applicable
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
þ   NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). YES þ   NO o Indicate the number of shares outstanding of each of the registrants classes of common stock as of
the latest practicable date. Class
    
    Outstanding at April 30, 2005Common Stock, $0.01 par value
    
    16,852,290




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PagePART I  FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Unaudited Consolidated Income Statements for the three months ended March 31, 2005 and 2004
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and
2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    11Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4
    
    Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    17Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3
    
    Defaults Upon Senior Securities
    
    
    17Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5
    
    Other Information
    
    
    17Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    17SIGNATURES
    
    
    18EXHIBITS
    
    
    18EX-10.1  COMPENSATION PLAN FOR EXECUTIVE OFFICERS, 2005EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEOEX-32.2  SECTION 906 CERTIFICATION OF THE CFO
  2




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Part 1. 
 Item 1. Financial Statements iPAYMENT, INC. 
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,024
    
    
    $
    888Accounts receivable, net of allowance for doubtful accounts of $119 and $130 at
March 31, 2005 and December 31, 2004, respectively
    
    
    17,330
    
    
    
    17,031Prepaid expenses and other current assets
    
    
    7,311
    
    
    
    6,765Total current assets
    
    
    25,665
    
    
    
    24,684Restricted cash
    
    
    2,532
    
    
    
    3,248Property and equipment, net
    
    
    2,895
    
    
    
    2,749Intangible
assets and other, net of accumulated amortization of $37,898 and $28,896 at
March 31, 2005 and December 31, 2004, respectively
    
    
    215,551
    
    
    
    219,331Goodwill, net
    
    
    90,260
    
    
    
    79,360Other assets, net
    
    
    7,134
    
    
    
    6,876Total
assets
    
    $
    344,037
    
    
    $
    336,248LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,898
    
    
    $
    2,418Accrued liabilities and other
    
    
    9,416
    
    
    
    11,377Total current liabilities
    
    
    11,314
    
    
    
    13,795Related party long-term debt
    
    
    16,027
    
    
    
    15,937Long-term debt
    
    
    153,500
    
    
    
    152,500Total liabilities
    
    
    180,841
    
    
    
    182,232Commitments and contingenciesStockholders equityPreferred stock, $0.01 par value; 17,422,800 shares authorized, no shares
issued or outstanding at March 31, 2005, and December 31, 2004
    
    
    
    
    
    
    Common stock, $0.01 par value; 180,000,000 shares authorized, 16,852,290
shares issued and outstanding at March 31, 2005; 180,000,000 shares
authorized, 16,757,891 shares issued and outstanding at December 31, 2004
    
    
    134,707
    
    
    
    132,825Deferred compensation
    
    
    (1,892
    )
    
    
    (2,318
    )Retained earnings
    
    
    30,381
    
    
    
    23,509Total stockholders equity
    
    
    163,196
    
    
    
    154,016Total
liabilities and stockholders equity
    
    $
    344,037
    
    
    $
    336,248
 See accompanying notes to consolidated financial statements. 3




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iPAYMENT, INC. 
 CONSOLIDATED INCOME STATEMENTS
   Three Months Ended March 31,2005
    
    
    2004Revenues
    
    $
    163,363
    
    
    $
    79,969Operating expenses:Interchange
    
    
    97,421
    
    
    
    37,315Other costs of services
    
    
    48,775
    
    
    
    31,702Selling, general and administrative
    
    
    3,524
    
    
    
    2,886Total operating expenses
    
    
    149,720
    
    
    
    71,903Income from operations
    
    
    13,643
    
    
    
    8,066Other expense:Interest expense
    
    
    2,297
    
    
    
    710Other
    
    
    81
    
    
    
    (339
    )Income before income taxes
    
    
    11,265
    
    
    
    7,695Income tax provision
    
    
    4,393
    
    
    
    2,693Net income
    
    $
    6,872
    
    
    $
    5,002Basic and diluted earnings per common share:Earnings per shareBasic
    
    $
    0.41
    
    
    $
    0.30Diluted
    
    $
    0.38
    
    
    $
    0.28Weighted average shares outstandingBasic
    
    
    16,721
    
    
    
    16,459Diluted
    
    
    18,230
    
    
    
    18,050
 See accompanying notes to consolidated financial statements. 4




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iPAYMENT, INC. 
 CONSOLIDATED STATEMENTS of CASH FLOWS
   Three Months Ended March 31,2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    6,872
    
    
    $
    5,002Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    10,086
    
    
    
    4,627Noncash interest expense
    
    
    249
    
    
    
    141Changes in assets and liabilities, excluding effects of
acquisitions:Accounts receivable
    
    
    (299
    )
    
    
    (1,775
    )Prepaid expenses and other current assets
    
    
    (556
    )
    
    
    (2,067
    )Other assets
    
    
    (395
    )
    
    
    (143
    )Accounts payable, accrued liabilities and other
    
    
    (1,439
    )
    
    
    1,383Net cash provided by operating activities
    
    
    14,518
    
    
    
    7,168Cash flows from investing activitiesChange in restricted cash
    
    
    716
    
    
    
    8,001Expenditures for property and equipment
    
    
    (443
    )
    
    
    (97
    )Acquisitions of businesses, portfolios and other
intangibles, net of cash acquired
    
    
    (16,556
    )
    
    
    (295
    )Net cash (used in) provided by investing activities
    
    
    (16,283
    )
    
    
    7,609Cash flows from financing activitiesNet borrowings (repayments) on line of credit
    
    
    1,000
    
    
    
    (11,000
    )Repayments of debt
    
    
    
    
    
    
    (4,507
    )Proceeds from issuance of common stock and exercise of options
    
    
    901
    
    
    
    525Net cash provided by (used in) financing activities
    
    
    1,901
    
    
    
    (14,982
    )Net increase (decrease) in cash and cash equivalents
    
    
    136
    
    
    
    (205
    )Cash and cash equivalents, beginning of period
    
    
    888
    
    
    
    733Cash and cash equivalents, end of period
    
    $
    1,024
    
    
    $
    528Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    4,734
    
    
    $
    874Cash paid during the period for interest
    
    $
    1,484
    
    
    $
    531Non-cash increases in assets (liabilities) from acquisitions:Plant and equipment
    
    $
    108
    
    
    $
    Intangible assets
    
    $
    5,382
    
    
    $
    295Goodwill
    
    $
    11,066
    
    
    $
    
 See accompanying notes to consolidated financial statements. 5




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iPAYMENT, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Organization and Business and Basis of Presentation Organization and Business iPayment, Inc. was originally incorporated as iPayment Holdings, Inc. in Tennessee and was
reincorporated in Delaware under the name iPayment, Inc. iPayment is a provider of card-based
payment processing services to small business merchants located across the United States. We enable
merchants to accept credit and debit cards as payment for their products and services by providing
card authorization, data capture, settlement, risk management, fraud detection and chargeback
services. Our services also include data organization and retrieval, ongoing merchant assistance
and resolution support in connection with disputes with cardholders. We market and sell our
services primarily through independent sales groups. As used in these Notes to Consolidated Financial Statements, the terms iPayment, the
Company, we, us, our and similar terms refer to iPayment, Inc. and, unless the context
indicates otherwise, its consolidated subsidiaries. Basis of Presentation The accompanying unaudited consolidated financial statements of iPayment have been prepared in
accordance with accounting principles generally accepted in the United States of America and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements reflect all adjustments considered necessary for a fair
presentation, consisting only of normal and recurring adjustments. All significant intercompany
transactions and balances have been eliminated in consolidation. Operating results for the three
months ended March 31, 2005, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2005. For further information, refer to the consolidated
financial statements and notes thereto for the year ended December 31, 2004 (included in our Annual
Report on Form 10-K). Certain prior year amounts have been reclassified to conform to the current year presentation.
Other costs of services include costs directly attributable to our provision of payment processing
and related services to our merchants such as residual payments to independent sales groups, which
are commissions we pay to our groups based upon a percentage of the net revenues we generate from
their merchant referrals, and assessment fees payable to card associations, which are a percentage
of the processing volume we generate from Visa and MasterCard. In addition, other costs of services
includes telecommunications costs, personnel costs, occupancy costs, losses due to merchant
defaults, other miscellaneous merchant supplies and service expenses, sponsorship costs and other
third-party processing costs. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates. Stock-Based Compensation We have adopted the disclosure-only provision of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure  an amendment of FASB Statement No. 123.
SFAS No. 148 requires prominent disclosures in annual and interim financial statements regarding
the method of accounting for stock-based employee compensation and the effect of the method used on
reported results. We measure compensation expense for our stock option awards under the intrinsic
value method in accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and related interpretations. APB 25 requires
compensation expense to be recognized based on the excess, if any, of the quoted market price of
the stock at the date of the grant over the amount an employee must pay to acquire the stock. 6




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iPAYMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 The following table presents the effect on net income and basic and diluted net income per
common share had we adopted the fair value method of accounting for stock-based compensation under
SFAS No. 123 (in thousands, except per share data): Three Months Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    6,872
    
    
    $
    5,002Deduct: Total stock-based employee compensation expense
determined under fair-value-based method
    
    
    (575
    )
    
    
    (445
    )Pro forma net income
    
    $
    6,297
    
    
    $
    4,557Earnings per share:As reported:Basic
    
    $
    0.41
    
    
    $
    0.30Diluted
    
    $
    0.38
    
    
    $
    0.28Pro Forma:Basic
    
    $
    0.38
    
    
    $
    0.28Diluted
    
    $
    0.35
    
    
    $
    0.26
 The weighted-average fair value of each stock option included in the preceding pro forma
amounts was estimated using the Black-Scholes option-pricing model and is amortized over the
vesting period of the underlying options. Because additional options are expected to be granted
each year, the above pro forma disclosures may not be representative of pro forma effects on
reported results for future periods. The following assumptions were applied: (i) no expected
dividend yield for all periods, (ii) expected volatility of 45% and 50% for 2005 and 2004,
respectively (iii) expected lives of 3 years for for all periods (iv) and risk-free interest rates
ranging from 2% to 4% for all periods. (2) Acquisitions The effective date of each of the acquisitions discussed in this Note are the dates the
acquisitions were recognized in our financial statements, unless otherwise noted. There were no
acquisitions of businesses during 2005 or 2004 that would require pro forma disclosure. For the
three months ended March 31, 2005 and 2004, respectively, amortization expense related to our
merchant processing portfolios and other intangible assets was $9,226,000 and $3,753,000. First Data Merchant Services Merchant Portfolio On December 28, 2004, we entered into an Asset Purchase Agreement with First Data Merchant
Services (FDMS), a subsidiary of First Data Corporation,
pursuant to which we acquired a portfolio
of merchant contracts (the FDMS Merchant Portfolio) for a price of $130.0 million in cash, of
which $0.9 million related to certain rental equipment. Pursuant to the terms of the Asset Purchase
Agreement, the acquisition became effective on Decemer 31, 2004, and we commenced receiving revenue
from the merchant contracts on January 1, 2005. The purchase price allocated to merchant
portfolios of $129.1 million is included in intangible assets in the accompanying consolidated
balance sheets and is being amortized over seven years for financial statement reporting purposes
and fifteen years for income tax purposes. Other Acquisitions Additionally, we made various other purchases of residual cash flow streams and merchant
processing portfolios, as well as one business (Petroleum Card Services), collectively totaling
$16.6 million during the three months ended March 31, 2005. Petroleum Card Services was acquired
during January 2005. Consideration included cash at closing and a contingent payment based upon
future performance over two years. The acquisition of Petroleum Card Services was recorded under
the purchase method with purchase price allocated to goodwill and merchant processing portfolios.
As such, the results of operations for Petroleum Card Services have been included in the
consolidated income statements as of January 1, 2005. The purchase prices for the residual cash
flow streams and merchant processing portfolios have been assigned to intangible assets in the
accompanying consolidated balance sheets and are amortized over their expected useful lives of four
to seven years. 7




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (3) Long-Term Debt As of March 31, 2005, we had notes and a revolving credit facility arrangement outstanding in
an aggregate principal amount of $169.5 million, consisting of $153.5 million outstanding under our
revolving credit facility and $16.0 million of convertible subordinated promissory notes (including
$1.0 million of accrued interest, of which $0.4 million is convertible). The convertible notes
carry an interest rate of 4.5% and may be converted into 662,079 shares of our common stock at the
discretion of the holders at a price of $23.16 per share. We currently have a $205.0 million revolving credit facility with Bank of America and JP
Morgan Chase as lead banks, which is expandable to $280.0 million. In December 2004 we amended our
existing credit facility from $80.0 million to $180.0 million to facilitate the acquisition of the
FDMS merchant portfolio. This was subsequently expanded to $205.0 million in February 2005. The
credit facility includes a $5.0 million letter of credit sublimit and is secured by the Companys
assets. Interest on outstanding borrowings is payable at a rate of LIBOR plus a margin of 1.50% to
2.25% (currently 2.00%) depending on our ratio of consolidated debt to EBITDA, as defined in the
agreement. We have the option to choose 1-month, 2-month, 3-month or 6-month LIBOR rates each time
we make a draw on the credit facility. In addition, the credit facility requires us to pay unused
commitment fees of up to 0.45% (currently 0.40%) on any undrawn amounts. Such undrawn amounts were
$51.5 million at March 31, 2005. The credit facility contains customary affirmative and negative
covenants including financial covenants requiring the maintenance of a debt-to-EBITDA ratio (as
defined therein) of less than 2.5 to 1.0, as well as specified limitations on capitalization and
restrictions on incurring liens and transactions with affiliates. We were in compliance with all
debt covenants as of March 31, 2005. At March 31, 2005, $153.5 million was outstanding under the
credit facility, at a weighted average interest rate of 4.75%. The amended credit facility expires
on December 28, 2008, and all outstanding borrowings are due at that time. We also have net capitalized debt issuance costs related to the credit facility totalling $3.7
million as of March 31, 2005. These costs are being amortized to interest expense on a
straight-line basis over the life of the credit facility. Amortization expense related to the
debt issuance costs was $0.2 million for the three months ended March 31, 2005. (4) Stockholders Equity Earnings Per Share We report net income or loss per share in accordance with SFAS No. 128, Earnings per Share.
Under SFAS No. 128, basic earnings per share (EPS), which excludes dilution, is computed by
dividing net income or loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock. Diluted EPS includes
in-the-money stock options and warrants using the treasury stock method and also includes the
assumed conversion of preferred stock and convertible debt using the if-converted method. During a
loss period, the assumed exercise of in-the-money stock options, warrants and conversion of
convertible securities has an anti-dilutive effect, and therefore are excluded from the computation
of diluted EPS. For the three months ended March 31, 2005, approximately 42,000 weighted average
common stock equivalents from stock options were excluded from the computation of diluted EPS
because their inclusion would have been anti-dilutive. A reconciliation of basic to diluted weighted average common shares outstanding is as follows
(in thousands): Three Months Ended March 31,2005
    
    
    2004Income
    
    
    Common
    
    
    Per Share
    
    
    Income
    
    
    Common
    
    
    Per ShareAvailable
    
    
    Shares
    
    
    Amount
    
    
    Available
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    6,872
    
    
    
    16,721
    
    
    $
    0.41
    
    
    $
    5,002
    
    
    
    16,459
    
    
    $
    0.30Effects of dilutive securities:Stock options
    
    
    
    
    
    
    815
    
    
    
    (0.02
    )
    
    
    
    
    
    
    894
    
    
    
    (0.01
    )Convertible debt
    
    
    100
    
    
    
    662
    
    
    
    (0.01
    )
    
    
    101
    
    
    
    662
    
    
    
    (0.01
    )Restricted stock
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    Diluted earnings per share
    
    $
    6,972
    
    
    
    18,230
    
    
    $
    0.38
    
    
    $
    5,103
    
    
    
    18,050
    
    
    $
    0.28
 8




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (5) Segment Information and Geographical Information We consider our business activities to be in a single reporting segment as we derive greater
than 90% of our revenue and results of operations from processing revenues and other fees from
card-based payments. We have no single customer that represents 2% or more of revenues.
Substantially all revenues are generated in the United States. (6) Recent Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board issued a
revision of SFAS No. 123 (SFAS 123R) which requires all share-based payments to employees to
be recognized in the income statement based on their fair values. Our option grants to employees,
non-employees and directors will represent share-based payments. We expect to calculate the fair
value of share-based payments under SFAS No. 123R on a basis substantially consistent with the fair
value approach of SFAS No. 123. We plan to adopt SFAS No. 123R in our fiscal year beginning January 1,
2006. We cannot reasonably estimate the impact of adoption at this time. (7) Income Taxes We account for income taxes pursuant to the provisions of SFAS No. 109, Accounting for Income
Taxes. Our income taxes currently payable for federal and state purposes have been reduced by the
tax benefits from certain stock option transactions. These benefits totaled $0.9 million and $0.1
million for the three months ended March 31, 2005 and 2004, respectively, and do not affect
reported income tax expense, but rather were reflected as an increase to common stock. (8) Commitments and Contingencies Litigation Howard Ehrenberg, Chapter 7 Trustee for the Estate of ITSV, Inc., vs. CREDITCARDS.COM, INC., a California corporation, IPAYMENT, INC., et al., U.S. B.C. Case No. LA 02-31259-EC,
Adversary Case No. 04-2214VZ. As previously reported in our Annual Report on Form 10-K, this matter arises
out of certain bankruptcy proceedings in the United States Bankruptcy Court, Los Angeles,
California, related to the Estate of ITSV, Inc. (the Debtor). In July 2004, the plaintiff,
Howard Ehrenberg, the Chapter 7 Trustee for the Debtor Estate, commenced an adversary proceeding in
the United States Bankruptcy Court on behalf of the Debtor Estate, in which the plaintiff alleged,
pursuant to a First Amended Complaint, causes of action for fraud, fraudulent transfer, conspiracy
to defraud, and for unfair competition against us, certain wholly owned subsidiaries of ours,
certain of our officers and directors and several other individuals and companies, including the
accounting firms of Ernst & Young LLP (EY) and Arthur Andersen LLP (AA), and the law firms of
Morgan, Lewis & Bockius LLP (MLB) and Brobeck, Harrison and Phleger (BHP). The complaint, as
amended, asked for general damages, treble damages, prejudgment interest, attorneys fees and
recovery of other costs associated with bringing the suit. We (and certain other defendants)
vigorously defended ourselves in this matter and contended that the claims and the underlying
allegations asserted in the complaint against us were without merit. We, along with various other
defendants, filed a Motion for Summary Judgment seeking a dismissal of the lawsuit. Prior to the
hearing date set for our Motion for Summary Judgment, the plaintiff voluntarily dismissed, with
prejudice, defendants, EY, AA, MLB and BHP. On January 13, 2005, our (and the remaining defendants)
Motion for Summary Judgment was granted, and a Judgment dismissing the lawsuit in its entirety was
entered on February 9, 2005. The plaintiff thereafter filed a Motion for Reconsideration of the
courts order granting the Motion for Summary Judgment, or in the alternative, for Leave to Amend,
which automatically extended the period for filing a notice of appeal of the Judgment of Dismissal.
We (and the remaining defendants) opposed the relief sought by the plaintiff in its Motion for
Reconsideration, and on March 31, 2005 the court denied the plaintiffs requested relief. On April
14, 2005 the court issued its order denying the plaintiffs Motion for Reconsideration, which was
entered by the Clerk of the Court on April 15, 2005. The plaintiff then filed a Notice of Appeal of
the Courts Order granting the Motion for Summary Judgment and Courts Order denying the
plaintiffs Motion for Reconsideration. 9




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) While we cannot predict with any certainty the outcome of the plaintiffs appeal, we believe
that it lacks merit, and we intend to vigorously oppose any relief sought by the plaintiffs appeal
and therefore believe that it should not be successful. We continue to believe that the claims
asserted against us in this lawsuit are without merit and if the order granting our Motion for
Summary Judgment is reversed on appeal, then in such event, we intend to continue to vigorously
defend ourselves in this matter, however, there can be no assurance that we will be successful in
our defense, or that a failure to prevail will not have a material adverse effect on our business
or financial condition or results of operations. 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 ServicesCivil Action
No.05CC02794  State of California, Superior Court of Orange County. This lawsuit, naming our subsidiary E-Commerce Exchange, Inc. (ECX), and several other
defendants, was filed on February 2, 2005 and was initially reported in our Annual Report on Form
10-K. On March 25, 2005, ECX filed a Demurrer and Motion to Strike to plaintiffs initial
complaint, setting a hearing date of April 27, 2005. In response to our Demurrer and Motion to
Strike, on April 8, 2005, the plaintiffs filed a First Amended Complaint which ECX must respond to
on or before May 13, 2005. Based on our present understanding of the factual and legal matters
related to this matter, we believe that we have meritorious defenses to these claims and we intend
to vigorously defend ourselves in this case, and to vigorously oppose the plaintiffs request for
the court to approval this matter as a certified class action, including a class as defined by
the plaintiffs in the complaint or as may otherwise be requested. Although we currently intend to
vigorously defend ourselves in this case and believe that we have meritorious defenses to these
claims, there can be no assurance that we will be successful in our defense. However, we believe
that the ultimate outcome will not have a material adverse effect on our business, financial
condition or results of operations. We are party to various other legal proceedings in the normal course of business. Please see
the description under the caption Legal Proceedings in the Companys Annual Report on Form 10-K
filed with the Commission on March 14, 2005, pursuant to Rule 424(b)(4) under the Securities Act
(File No. 000-50280). 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements May Prove Inaccurate This report includes various forward-looking statements regarding the Company that are subject
to risks and uncertainties, including, without limitation, the factors set forth below and under
the caption Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the Commission) on March 14, 2005, pursuant to Rule 424(b)(4) under the Securities
Act of 1933, as amended, in connection with the Companys Registration Statement on Form S-1 (File
No. 333-101705). Forward-looking statements include, but are not limited to, discussions regarding
our operating strategy, growth strategy, acquisition strategy, cost savings initiatives, industry,
economic conditions, financial condition, liquidity and capital resources and results of
operations. Such statements include, but are not limited to, statements preceded by, followed by or
that otherwise include the words believes, expects, anticipates, intends, estimates or
similar expressions. For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Certain important factors, which are discussed elsewhere in this document and in our Form 10-K
filed March 14, 2005, could affect our future financial results and could cause actual results to
differ materially from those expressed in forward-looking statements contained or incorporated by
reference in this document. Executive Overview We are one of the fastest growing providers of credit and debit card-based payment processing
services to small merchants. As of March 31, 2005, we provided our services to more than 130,000
small merchants located across the United States, up from over 92,000 as of March 31, 2004. Our
payment processing services enable our merchants to process both traditional card-present, or swipe
transactions, as well as card-not-present transactions over the Internet or by mail, fax or
telephone. We market and sell our services primarily through over 750 independent sales groups,
which gives us a non-employee, external sales force representing more than 2,600 sales
professionals. We outsource certain processing functions such as card authorization, data capture
and merchant accounting to third party processors such as First Data and Vital Processing Services,
and we rely on banks such as JP Morgan Chase to sponsor us for membership in the Visa and
MasterCard associations and to settle transactions with merchants. We perform several core
functions such as sales support, merchant services, underwriting, risk management and chargeback
services, in our main operating centers in Calabasas, California and Westchester, Illinois. Our strategy is to grow profitably by increasing our penetration of the expanding small
merchant marketplace for payment services. We find merchants through our independent sales groups
and make occasional acquisitions on an opportunistic basis in the fragmented small merchant segment
of the industry. Our operating results point to successful execution of this strategy during the first quarter
of 2005. Charge volume increased to $6,248 million for the three months ended March 31, 2005, from
$2,863 million for the three months ended March 31, 2004, and revenues increased 104% to $163,363
million for the three months ended March 31, 2005, from $80.0 million for the three months ended
March 31, 2004. These increases were primarily the result of acquisitions, principally the FDMS
Merchant Portfolio purchased in December of 2004 and two businesses purchased since September 2004.
Income from operations increased to $13.6 million for the three months ended March 31, 2005, from
$8.1 million for the three months ended March 31, 2004. Critical Accounting Policies The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require that management make
numerous estimates and assumptions. Actual results could differ from those estimates and
assumptions, impacting our reported results of operations and financial position. The critical
accounting policies described here are those that are most important to the depiction of our
financial condition and results of operations and their application requires managements most
subjective judgment in making estimates about the effect of matters that are inherently uncertain. Accounting for Goodwill and Intangible Assets.We follow Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,which addresses financial
accounting and reporting for acquired goodwill and other intangible assets, and requires that
goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment. If facts and circumstances indicate
goodwill may be impaired, we perform a recoverability evaluation. In accordance with SFAS No. 142,
the recoverability analysis is based on fair value. The calculation of fair value includes a number
of estimates and 11




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##### Table of Contents



assumptions, including projections of future income and cash flows, the identification of
appropriate market multiples and the choice of an appropriate discount rate. We completed the testing for impairment of goodwill as of July 31, 2004, using the present
value of future cash flows and determined that the fair value of the reporting unit exceeded the
carrying amount of the net assets of the reporting unit, including goodwill, and we determined that
goodwill was not impaired. We periodically evaluate the carrying value of long-lived assets, in relation to the
respective projected future undiscounted cash flows, to assess recoverability. An impairment loss
is recognized if the sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. The difference between the carrying amount of the long-lived
assets being evaluated and the fair value, calculated as the sum of the expected cash flows
discounted at a market rate, represents the impairment loss. We evaluated the carrying value of our
intangible assets as of December 31, 2004, and determined no impairment charge was required. Accounting for Stock-Based compensation.In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (Revised 2004), Share-Based Payment(SFAS No. 123R). This
standard requires expensing of stock options and other share-based payments and supersedes SFAS No.
123, which had allowed companies to choose between expensing stock options or showing proforma
disclosure only. This standard will be effective as of January 2006 and will apply to all awards
granted, modified, cancelled or repurchased after that date as well as the unvested portion of
prior awards. SFAS No. 123R permits public companies to adopt its requirements using one of three
methods: the modified prospective method, the modified retrospective method to January 1, 2005,
or the modified retrospective method to all prior years for which SFAS No. 123 was effective. We
have not yet determined which adoption method to utilize. We currently intend to adopt the
provisions of this standard on January 1, 2006, as required. As permitted by SFAS No. 123, we currently follow APB Opinion No. 25 which accounts for
share-based payments to employees using the intrinsic value method and, as such, generally
recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS No.
123R fair value method will have a significant impact on our consolidated results of operations,
although it will have no impact on our cash flows. The exact impact of the adoption of SFAS No.
123R cannot be determined at this time because it will depend on the number of options issued
during fiscal 2005 and 2006 as well as the assumptions and valuation method used to measure
compensation cost under the fair value method of accounting. The historical pro forma income
statement impact is not indicative of future results due to the uncertainty of the number of new
option grants as well as the assumptions and valuation method used. Reserve for Merchant Losses. Disputes between a cardholder and a merchant periodically arise
as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant
services. Such disputes may not be resolved in the merchants favor. In these cases, the
transaction is charged back to the merchant, which means the purchase price is refunded to the
customer through the merchants acquiring bank and charged to the merchant. If the merchant has
inadequate funds, we or, under limited circumstances, the acquiring bank and us, must bear the
credit risk for the full amount of the transaction. We evaluate the merchants risk for such
transactions and estimate its potential loss for chargebacks based primarily on historical
experience and other relevant factors. Income Taxes.We account for income taxes pursuant to the provisions of SFAS No. 109,
Accounting for Income Taxes.Under this method, deferred tax assets and liabilities are recorded to
reflect the future tax consequences attributable to the effects of differences between the carrying
amounts of existing assets and liabilities for financial reporting and for income tax purposes. At
December 31, 2004, we had approximately $5.8 million of federal net operating loss carryforwards
that will be available to offset regular taxable income through 2022, subject to annual limitations
of up to $2.5 million per year. We also have approximately $2.9 million of state net operating loss
carryforwards, again subject to similar annual limitations, that will expire in various states
between 2011 and 2022. We have placed a valuation allowance on a portion of our net deferred tax
asset, which is primarily comprised of operating loss carryforwards, as a result of limitations
placed on the ability to utilize such operating loss carryforwards due to ownership changes which
occurred prior to our initial public offering. 12




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Components of Revenues and Expenses Substantially all of our revenues are generated from fees charged to merchants for card-based
payment processing services. We typically charge these merchants a bundled rate, primarily based
upon the merchants monthly charge volume and risk profile. Our fees principally consist of
discount fees, which are a percentage of the dollar amount of each credit or debit transaction. We
charge all merchants higher discount rates for card-not-present transactions than for card-present
transactions in order to compensate ourselves for the higher risk of underwriting these
transactions. We derive the balance of our revenues from a variety of fixed transaction or service
fees, including fees for monthly minimum charge volume requirements, statement fees, annual fees
and fees for other miscellaneous services, such as handling chargebacks. We recognize discounts and
other fees related to payment transactions at the time the merchants transactions are processed.
We recognize revenues derived from service fees at the time the service is performed. Related
interchange and assessment costs are also recognized at that time. We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent,in determining our revenue reporting. Generally, where we have merchant portability,
credit risk and ultimate responsibility for the merchant, revenues are reported at the time of sale
on a gross basis equal to the full amount of the discount charged to the merchant. This amount
includes interchange paid to card issuing banks and assessments paid to credit card associations
pursuant to which such parties receive payments based primarily on processing volume for particular
groups of merchants. Revenues generated from certain agent bank portfolios acquired as part of the
FDMS acquisition are reported net of interchange, as required by EITF 99-19, where we may not have
credit risk, portability or the ultimate responsibility for the merchant accounts. The most significant component of operating expenses is interchange fees, which are amounts we
pay to the card issuing banks. Interchange fees are based on transaction processing volume and are
recognized at the time transactions are processed. Other costs of services include costs directly attributable to our provision of payment
processing and related services to our merchants such as residual payments to independent sales
groups, which are commissions we pay to our independent sales groups based upon a percentage of the
net revenues we generate from their merchant referrals, and assessment fees payable to card
associations, which is a percentage of the processing volume we generate from Visa and MasterCard.
In addition, other costs of services include telecommunications costs, personnel costs, occupancy
costs, losses due to merchant defaults, other miscellaneous merchant supplies and services
expenses, bank sponsorship costs and other third-party processing costs. Other costs of services also include depreciation and amortization expenses, which are
recognized on a straight-line basis over the estimated useful life of the asset. Amortization of
intangible assets results from our acquisitions of portfolios of merchant contracts or acquisitions
of a business where we allocated a portion of the purchase price to the existing merchant
processing portfolio. Selling, general and administrative expenses consist primarily of salaries and wages and other
general administrative expenses. Seasonality Trend Our revenues and earnings are impacted by the volume of consumer usage of credit and debit
cards at the point of sale. For example, we experience increased point of sale activity during the
traditional holiday shopping period in the fourth quarter. Revenues during the first quarter tend
to decrease in comparison to the remaining three quarters of our fiscal year on a same store basis. Off-Balance Sheet Arrangements We do not have transactions, arrangements and other relationships with unconsolidated entities
that are reasonably likely to affect our liquidity or capital resources. We have no special
purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market
or credit risk support, engage in leasing, hedging, research and development services, or other
relationships that expose us to liability that is not reflected on the face of the financial
statements. 13




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##### Table of Contents



Results of Operations The following table sets forth certain financial data as a percentage of revenues for the
periods indicated: (dollars in thousands) ChangeThree months ended
    
    
    % of Total
    
    
    Three months ended
    
    
    % of TotalMarch 31, 2005
    
    
    Revenue
    
    
    March 31, 2004
    
    
    Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    163,363
    
    
    
    100.0
    %
    
    $
    79,969
    
    
    
    100.0
    %
    
    $
    83,394
    
    
    
    104.3Operating ExpensesInterchange
    
    
    97,421
    
    
    
    59.6
    
    
    
    37,315
    
    
    
    46.7
    
    
    
    60,106
    
    
    
    161.1Other costs of services
    
    
    48,775
    
    
    
    29.8
    
    
    
    31,702
    
    
    
    39.6
    
    
    
    17,073
    
    
    
    53.9Selling, general and administrative
    
    
    3,524
    
    
    
    2.2
    
    
    
    2,886
    
    
    
    3.6
    
    
    
    638
    
    
    
    22.1Total operating expenses
    
    
    149,720
    
    
    
    91.6
    
    
    
    71,903
    
    
    
    89.9
    
    
    
    77,817
    
    
    
    108.2Income from operations
    
    
    13,643
    
    
    
    8.4
    
    
    
    8,066
    
    
    
    10.1
    
    
    
    5,577
    
    
    
    69.1Other expenseInterest expense
    
    
    2,297
    
    
    
    1.4
    
    
    
    710
    
    
    
    7.1
    
    
    
    1,587
    
    
    
    223.5Other
    
    
    81
    
    
    
    0.1
    
    
    
    (339
    )
    
    
    (0.4
    )
    
    
    420
    
    
    NMTotal other expense
    
    
    2,378
    
    
    
    1.5
    
    
    
    371
    
    
    
    7.1
    
    
    
    2,007
    
    
    
    541.0Income before income taxes
    
    
    11,265
    
    
    
    6.9
    
    
    
    7,695
    
    
    
    9.6
    
    
    
    3,570
    
    
    
    46.4Income tax provision
    
    
    4,393
    
    
    
    2.7
    
    
    
    2,693
    
    
    
    3.4
    
    
    
    1,700
    
    
    
    63.1Net income
    
    $
    6,872
    
    
    
    4.2
    
    
    $
    5,002
    
    
    
    6.3
    
    
    $
    1,870
    
    
    
    37.4
   NM = Not meaningful Three Months Ended March 31, 2005 (2005) Compared to Three Months Ended March 31, 2004 (2004) Revenues.Revenues increased 104.3% to $163.4 million in 2005 from $80.0 million in 2004.
Substantially all of this increase was attributable to our acquisition of two businesses and one
significant portfolio since September 2004. Interchange Expenses. Interchange expenses increased 161.1% to $97.4 million in 2005 from
$37.3 million in 2004. The increase was primarily attributable to increased charge volume driven
mainly by our acquisitions. Interchange expenses as a percentage of total revenues increased to
59.6% in 2005 from 46.7% in 2004 as interchange expenses as a percentage of revenues for the FDMS
Merchant Portfolio are higher than the rest of our mix of business. Other Costs of Services.Other costs of services increased $17.1 million or 53.9% to $48.8
million in 2005 from $31.7 million in 2004. Other costs of services as a percentage of revenues
decreased to 29.8% in 2005 from 39.6% in 2004 . Other costs of services as a percentage of
revenues decreased primarily due to a decrease in residuals and personnel costs as a percentage of
revenues as the additional revenues from the FDMS Merchant Portfolio acquisition did not require a
proportionate increase in these costs. Selling, General and Administrative.Selling, general and administrative expenses increased
22.1% to $3.5 million in 2005 from $2.9 million in 2004. The increase was primarily due to an
increase in personnel related costs. Selling, general and administrative expenses as a percentage
of revenues decreased to 2.2% in 2005 from 3.6% in 2004 as the additional revenues from the FDMS
Merchant Portfolio acquisition did not require a proportionate increase in personnel costs. Other Expense.Other expense in 2005 primarily consisted of $2.3 million of interest expense.
Other expense increased to $2.4 million from $0.4 million in 2004, primarily due to an increase in
interest expense resulting from an increase in borrowings to fund acquisitions. For the first
quarter of 2004, we benefited from a settlement of a lawsuit of $0.3 million pretax, net of legal
expenses, or approximately $0.01 per diluted share after tax. Income Tax. Income tax expense increased to $4.4 million in 2005 from $2.7 million in 2004 due
to an increase in taxable income. Income tax expense as a percentage of income before taxes was
39.0% in 2005, compared to 35.0% in 2004. As our taxable income increased in 2005, the
utilization of previously unrecognized net operating loss carryforwards had a proportionately
smaller beneficial impact on our effective rate than it did in 2004. 14




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Liquidity and Capital Resources As of March 31, 2005, we had cash and cash equivalents totaling $1.0 million, compared to $0.9
million as of December 31, 2004. We had net working capital (current assets in excess of current
liabilities) of $14.4 million as of March 31, 2005, compared to $10.9 million as of December 31,
2004. We believe that funds from future operations and proceeds from borrowings under our credit
facility will be sufficient to settle our current obligations. Operating activities Net cash provided by operating activities was $14.5 million in 2005, consisting of net income
of $6.9 million and depreciation and amortization of $10.1 million, partially offset by a net
unfavorable change in operating assets and liabilities of $2.7 million. Net cash provided by operating activities was $7.2 million in 2004, consisting of net income
of $5.0 million and depreciation and amortization of $4.6 million, partially offset by a net
unfavorable change in operating assets and liabilities of $2.6 million. The net unfavorable change
in operating assets and liabilities was primarily caused by an increase in prepaid expenses due to
monthly interchange expenses to a new sponsor bank and by an increase in accounts receivable due to
the addition of net revenues from the First Data portfolio as of January 1, 2004, partially offset
by an increase in income taxes payable. Investing activities Net cash used by investing activities was $16.3 million in 2005. Net cash used by investing
activities primarily consisted of $16.6 million paid for the purchases of several portfolios as
well as one business (Petroleum Card Services). We currently have no significant capital spending
or purchase commitments, but expect to continue to engage in capital spending in the ordinary
course of business. Net cash provided by investing activities was $7.6 million in 2004. Net cash provided by
investing activities primarily consisted of $8.0 million held on deposit by a former sponsor bank
that was returned to us. Financing activities Net cash provided by financing activities was $1.9 million in 2005, primarily consisting of
net borrowings on our credit facility of $1.0 million and $0.9 million of proceeds from stock
option exercises. Repayments of debt on our credit facility were $14.0 million during the first
quarter of 2005. Net cash used in financing activities was $15.0 million in 2004, primarily consisting of net
repayments on our credit facility of $11.0 million and repayments of other debt to our Chairman and
Chief Executive Officer totaling $4.5 million, partially offset by $0.5 million of proceeds from
stock option exercises. As of March 31, 2005, we had notes and a revolving credit facility arrangement outstanding in
an aggregate principal amount of $169.5 million, consisting of $153.5 million outstanding under our
revolving credit facility and $16.0 million of convertible subordinated promissory notes (including
$1.0 million of accrued interest, of which $0.4 million is convertible). The convertible notes
carry an interest rate of 4.5% and may be converted into 662,079 shares of our common stock at the
discretion of the holders at a price of $23.16 per share. We currently have a $205.0 million revolving credit facility with Bank of America and JP
Morgan Chase as lead banks, which is expandable to $280.0 million. In December 2004 we amended our
existing credit facility from $80.0 million to $180.0 million to facilitate the acquisition of the
FDMS merchant portfolio. This was subsequently expanded to $205.0 million in February 2005. The
credit facility includes a $5.0 million letter of credit sublimit and is secured by our assets.
Interest on outstanding borrowings is payable at a rate of LIBOR plus a margin of 1.50% to 2.25%
(currently 2.00%) depending on our ratio of consolidated debt to EBITDA, as defined in the
agreement. We have the option to choose 1-month, 2-month, 3-month or 6-month LIBOR rates each time
we make a draw on the credit facility. In addition, the credit facility requires us to pay unused
commitment fees of up to 0.45% (currently 0.40%) on any undrawn amounts. Such undrawn amounts were
$51.5 million as of March 31, 2005. The credit facility contains customary affirmative and
negative covenants including financial covenants requiring maintenance of a debt-to-EBITDA ratio
(as defined therein) of less than 2.5 to 1.0, as well as specified limitations on capitalization
and restrictions on incurring liens and transactions with affiliates. We were in compliance with
all debt covenants as of March 31, 2005. At March 31, 2005, $153.5 million was outstanding under
the credit facility, at a weighted average interest rate of 4.75%. The amended credit facility
expires on December 28, 2008, and all outstanding borrowings are due at that time. 15




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We also have net capitalized debt issuance costs related to the credit facility totalling $3.7
million as of March 31, 2005. These costs are being amortized to interest expense on a
straight-line basis over the life of the credit facility. The following table of our material contractual obligations as of March 31, 2005, summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the periods
indicated: (in thousands) Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsCredit facility
    
    $
    153,500
    
    
    $
    
    
    
    $
    
    
    
    $
    153,500
    
    
    $
    Convertible notes (including
accrued interest)
    
    
    16,027
    
    
    
    
    
    
    
    16,027
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    4,308
    
    
    
    1,106
    
    
    
    1,961
    
    
    
    1,241
    
    
    
    Purchase obligations (1)(2)(3)
    
    
    56,631
    
    
    
    19,514
    
    
    
    22,927
    
    
    
    10,266
    
    
    
    3,924Total contractual obligations
    
    $
    230,466
    
    
    $
    20,620
    
    
    $
    40,915
    
    
    $
    165,007
    
    
    $
    3,924
   (1)
    
    Purchase obligations represent costs of contractually
guaranteed minimum processing volumes with certain of
our third-party transaction processors.(2)
    
    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 $13.7 million in fiscal
2005, 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 2005, 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.(3)
    
    We have agreed to utilize FDMS to process at least 75%
of our consolidated transaction sales volume in any
calendar year beginning in 2005 and continuing through
2011. The minimum commitments for such years are not
calculable as of March 31, 2005, and are excluded from
this table. We expect to be able to fund our operations, capital expenditures and contractual
obligations above (other than repayment of our credit facility) using our cash from operations. We
intend to use our credit facility primarily to fund additional acquisition opportunities as they
arise. To the extent we are unable to fund our operations, capital expenditures and contractual
obligations above using cash from operations, we intend to use borrowings under our credit facility
or future debt or equity financings. In addition, we may seek to sell additional equity or arrange
debt financing to give us financial flexibility to pursue opportunities that may arise in the
future if an opportunity that we consider attractive arises to raise additional funding. If we
raise additional funds through the sale of equity or convertible debt securities, these
transactions may dilute the value of our outstanding common stock. We may also decide to issue
securities, including debt securities, which have rights, preferences and privileges senior to our
common stock. If future financing is not available or is not available on acceptable terms, we may
not be able to fund our future needs, which may prevent us from increasing our market share,
capitalizing on new business opportunities or remaining competitive in our industry. Effects of Inflation Our monetary assets, consisting primarily of cash and receivables, are not significantly
affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and
goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture
and leasehold improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, such as those for employee compensation and telecommunications,
which may not be readily recoverable in the price of services offered by us. 16




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure about Market Risk We transact business with merchants exclusively in the United States and receive payment for
our services exclusively in United States dollars. As a result, our financial results are unlikely
to be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Our interest expense is sensitive to changes in the general level of interest rates in the
United States, because a majority of our indebtedness is at variable rates. At March 31, 2005,
$153.5 million of our outstanding indebtedness was at variable interest rates based on LIBOR. A
rise in LIBOR rates of one percentage point would result in additional annual interest expense of
$1.5 million. We do not hold derivative financial or commodity instruments, nor engage in any foreign
currency denominated transactions, and all of our cash and cash equivalents are held in money
market and checking funds. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. An evaluation was conducted under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2005. Based on that evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the Exchange Act)) were effective as of such date to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms. Changes in internal control over financial reporting. There was no change in our
internal control over financial reporting during our first fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings Information regarding legal proceedings is contained in Note 8 to the Consolidated Financial
Statements contained in this Report and is incorporated herein by reference. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits 17




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##### Table of Contents



The exhibits to this report are listed in the Exhibit Index. 
 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned party duly authorized. iPayment, Inc.Date: May 6, 2005
    
    By: /s/ Gregory S. DailyGregory S. DailyChief Executive Officer
(Principal Executive Officer)Date: May 6, 2005
    
    By: /s/ Clay M. WhitsonClay M. WhitsonChief Financial Officer
(Principal Financial and Accounting Officer)
 
 EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    Compensation Plan for Executive Officers 2005, 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.
 18