##### Table of Contents



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, 2009
  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)
  þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Title of each class
    
    Shares Outstanding at
May 12, 2009(Common stock, $0.01 par value)
    
    100




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##### 



PagePART I
 FINANCIAL INFORMATIONItem 1
    

Financial
StatementsConsolidated Balance
Sheets as of March 31, 2009 (Unaudited) and December 31,
2008
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended March 31,
2009 and 2008
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three months ended March 31,
2009 and 2008
    
    
    5Notes to Unaudited
Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
    
    
    12Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4
    
    Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    21Item 1A
    
    Risk Factors
    
    
    21Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3
    
    Defaults Upon Senior Securities
    
    
    21Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5
    
    Other Information
    
    
    21Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    21SIGNATURES
    
    
    22EXHIBITS
    
    
    23EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 
 iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    235
    
    
    $
    3,589Accounts receivable, net of allowance for doubtful accounts of $1,055 and $998 at
March 31, 2009 and December 31, 2008, respectively
    
    
    23,492
    
    
    
    25,693Prepaid expenses and other current assets
    
    
    1,828
    
    
    
    2,286Investment in merchant advances, net of allowance for doubtful accounts of $3,826
and $3,822 at March 31, 2009 and December 31, 2008, respectively
    
    
    1,962
    
    
    
    4,460Deferred tax assets
    
    
    2,725
    
    
    
    3,442Total current assets
    
    
    30,242
    
    
    
    39,470Restricted cash
    
    
    991
    
    
    
    999Property and equipment, net
    
    
    4,561
    
    
    
    4,714Intangible assets and other, net of accumulated amortization of $106,694 and $95,286
at March 31, 2009 and December 31, 2008, respectively.
    
    
    165,853
    
    
    
    176,548Goodwill
    
    
    528,324
    
    
    
    527,912Deferred tax asset
    
    
    5,029
    
    
    
    4,991Other assets, net
    
    
    13,432
    
    
    
    14,230Total assets
    
    $
    748,432
    
    
    $
    768,864LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,392
    
    
    $
    2,012Income taxes payable
    
    
    
    
    
    
    7,941Accrued liabilities and other
    
    
    21,465
    
    
    
    22,366Current portion of long-term debt
    
    
    23
    
    
    
    17,347Total current liabilities
    
    
    23,880
    
    
    
    49,666Long-term debt
    
    
    675,990
    
    
    
    669,979Other liabilities
    
    
    19,870
    
    
    
    21,627Total liabilities
    
    
    719,740
    
    
    
    741,272Commitments and contingencies (Note 8)EquityiPayment, Inc. stockholders equityCommon stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at March 31, 2009, and December 31, 2008
    
    
    20,055
    
    
    
    20,055Accumulated other comprehensive loss, net of tax benefits of $7,462 and $8,178 at
March 31, 2009, and December 31, 2008, respectively.
    
    
    (11,193
    )
    
    
    (12,268
    )Retained earnings
    
    
    18,609
    
    
    
    18,818Total iPayment, Inc. stockholders equity
    
    
    27,471
    
    
    
    26,605Noncontrolling interest
    
    
    1,221
    
    
    
    987Total equity
    
    
    28,692
    
    
    
    27,592Total liabilities and equity
    
    $
    748,432
    
    
    $
    768,864
  3




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iPAYMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2009
    
    
    2008(Unaudited)
    
    
    (Unaudited)Revenues
    
    $
    170,053
    
    
    $
    185,455Operating expenses:Interchange
    
    
    96,910
    
    
    
    108,381Other costs of services
    
    
    55,543
    
    
    
    55,773Selling, general and administrative
    
    
    4,817
    
    
    
    4,818Total operating expenses
    
    
    157,270
    
    
    
    168,972Income from operations
    
    
    12,783
    
    
    
    16,483Other expense:Interest expense, net
    
    
    11,656
    
    
    
    14,311Other expense, net
    
    
    19
    
    
    
    3Income before income taxes and earnings attributable to
noncontrolling interests
    
    
    1,108
    
    
    
    2,169Income tax
(benefit) provision
    
    
    (116
    )
    
    
    838Net income
    
    
    1,224
    
    
    
    1,331Less: Net income attributable to noncontrolling interests
    
    
    (1,434
    )
    
    
    Net (loss) income attributable to iPayment, Inc.
    
    $
    (210
    )
    
    $
    1,331
  4




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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CASH FLOWS
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31
    
    
    March 312009
    
    
    2008(Unaudited)
    
    
    (Unaudited)Cash flows from operating activitiesNet (loss) income
    
    $
    (210
    )
    
    $
    1,331Adjustments to reconcile net (loss) income to net cash provided by operating activitiesDepreciation and amortization
    
    
    11,956
    
    
    
    8,563Noncash interest expense
    
    
    646
    
    
    
    646Net income
attributable to noncontrolling interests
    
    
    1,434
    
    
    
    Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    3,700
    
    
    
    2,031Prepaid expenses and other current assets
    
    
    458
    
    
    
    1,081Other assets
    
    
    (463
    )
    
    
    (110
    )Accounts payable and income taxes payable
    
    
    (9,060
    )
    
    
    (9,539
    )Accrued liabilities and other
    
    
    1,591
    
    
    
    3,004Net cash provided by operating activities
    
    
    10,052
    
    
    
    7,007Cash flows from investing activitiesChange in restricted cash
    
    
    8
    
    
    
    (42
    )Expenditures for property and equipment
    
    
    (382
    )
    
    
    (559
    )Investment in merchant advances, net
    
    
    2,498
    
    
    
    (4,819
    )Acquisitions of businesses & portfolios, net of cash acquired, and
payments related to businesses previously acquired
    
    
    (2,456
    )
    
    
    Payments for prepaid residual expenses
    
    
    (474
    )
    
    
    (3,534
    )Net cash used in investing activities
    
    
    (806
    )
    
    
    (8,954
    )Cash flows from financing activitiesNet borrowings on line of credit
    
    
    8,600
    
    
    
    4,950Repayments of debt
    
    
    (20,000
    )
    
    
    (3,025
    )Distributions to
noncontrolling interest in equity of consolidated subsidiary
    
    
    (1,200
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (12,600
    )
    
    
    1,925Net decrease in cash and cash equivalents
    
    
    (3,354
    )
    
    
    (22
    )Cash and cash equivalents, beginning of period
    
    
    3,589
    
    
    
    33Cash and cash equivalents, end of period
    
    $
    235
    
    
    $
    11Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    9,442
    
    
    $
    6,748Cash paid during the period for interest
    
    $
    6,444
    
    
    $
    9,410Supplemental schedule of non-cash activities:Accrual of deferred payments for acquisitions of businesses with a
corresponding increase in goodwill
    
    $
    412
    
    
    $
    
  5




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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
  Revenue Recognition
  Derivative Financial Instruments
  6




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Accounting for Derivative Instruments and Hedging Activities
 Amortization of Intangible Assets
    Common Stock
  (2) Acquisitions
  7




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(3) Investments
 Investments in Merchant Advances
 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases.
 Payments for Prepaid Residual Expenses
  (4) Long-Term Debt
  8




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Accounting for Derivative Instruments and
Hedging Activities
 3
 Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
  (5) Segment Information and Geographical Information
  (6) Income Taxes
 Accounting for Income
Taxes Accounting for Uncertainty in Income Taxes  an Interpretation
of FASB Statement No. 109
  Noncontrolling Interests in Consolidated Financial
Statements
  9




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(7) Comprehensive Income (Loss)
  (8) 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, et al , Civil Action
No. 05CC02794  State of California, Superior Court of Orange County.
  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)
   10




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Sharyns Jewelers, LLC v. iPayment, Inc. ,iPayment of Valencia, Vericomm and JP Morgan Chase
Bank , General Court of Justice , Superior Court Division, County of Carteret, State of North
Carolina, File No.: 05-CVS-92 / and related case Judgment Recovery Group, LLC, as assignee of
Sharyns Jewelers, LLC, v. iPayment, Inc., iPayment of Valencia, Vericomm, and JP Morgan Chase
Bank, Superior Court of the State of California, County of Los Angeles, Case No.: PS 009919
  Employment Development Department of the State of California, Notice of Assessment No. 00008
  Other  Merrick Bank
   (9) Recent Accounting Pronouncements
 Fair Value Measurements
 11




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Effective Date of FASB Statement No. 157,
 The Fair Value Option for Financial Assets and
Liabilities  Including an amendment of FASB Statement No. 115,
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 Disclosures about Derivative Instruments and
Hedging Activities
 (10) Significant Developments
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
  12




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Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
     13




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Reserve for Merchant Losses
  Income Taxes. Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
  Noncontrolling Interest.
 Consolidation of Variable Interest Entities
 Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging Activities
 Components of Revenues and Expenses
  14




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Reporting Revenue Gross as a Principal Versus Net as
an Agent,
    Seasonality Trend
  Off-Balance Sheet Arrangements
  15




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Results of Operations
 Three Months Ended March 31, 2009 (2009) Compared to Three Months Ended March 31, 2008 (2008)
 Three months ended
    
    
    % of Total
    
    
    Three months ended
    
    
    % of Total
    
    
    ChangeMarch 31, 2009
    
    
    Revenue
    
    
    March 31, 2008
    
    
    Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    170,053
    
    
    
    100.0
    %
    
    $
    185,455
    
    
    
    100.0
    %
    
    $
    (15,402
    )
    
    
    (8.3
    )Operating ExpensesInterchange
    
    
    96,910
    
    
    
    57.0
    
    
    
    108,381
    
    
    
    58.4
    
    
    
    (11,471
    )
    
    
    (10.6
    )Other costs of services
    
    
    55,543
    
    
    
    32.7
    
    
    
    55,773
    
    
    
    30.1
    
    
    
    (230
    )
    
    
    (0.4
    )Selling, general and administrative
    
    
    4,817
    
    
    
    2.8
    
    
    
    4,818
    
    
    
    2.6
    
    
    
    (1
    )
    
    
    (0.0
    )Total operating expenses
    
    
    157,270
    
    
    
    92.5
    
    
    
    168,972
    
    
    
    91.1
    
    
    
    (11,702
    )
    
    
    (6.9
    )Income from operations
    
    
    12,783
    
    
    
    7.5
    
    
    
    16,483
    
    
    
    8.9
    
    
    
    (3,700
    )
    
    
    (22.4
    )Other expenseInterest expense, net
    
    
    11,656
    
    
    
    6.9
    
    
    
    14,311
    
    
    
    7.7
    
    
    
    (2,655
    )
    
    
    (18.6
    )Other expense, net
    
    
    19
    
    
    
    0.1
    
    
    
    3
    
    
    
    0.0
    
    
    
    16
    
    
    
    533.3Total other expense
    
    
    11,675
    
    
    
    6.9
    
    
    
    14,314
    
    
    
    7.7
    
    
    
    (2,639
    )
    
    
    (18.4
    )Income before income taxes and earnings
attributable to noncontrolling interests
    
    
    1,108
    
    
    
    0.7
    
    
    
    2,169
    
    
    
    1.2
    
    
    
    (1,061
    )
    
    
    (48.9
    )Income tax
(benefit) provision
    
    
    (116
    )
    
    
    (0.1
    )
    
    
    838
    
    
    
    0.5
    
    
    
    (380
    )
    
    
    (45.3
    )Net Income
    
    
    1,224
    
    
    
    0.7
    
    
    
    1,331
    
    
    
    0.7
    
    
    
    (681
    )
    
    
    (51.2
    )Less: Net income attributable to noncontrolling
interests
    
    
    (1,434
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    (860
    )
    
    
    (100.00
    )Net (loss) income attributable to iPayment, Inc.
    
    $
    (210
    )
    
    
    (0.1
    )
    
    $
    1,331
    
    
    
    0.7
    
    
    $
    (1,541
    )
    
    
    (115.8
    )
 Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Noncontrolling Interests.
 16




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Liquidity and Capital Resources
   Operating activities
   Investing activities
   Financing activities
   17




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Accounting for Derivative Instruments and Hedging Activities
 3
 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
  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)Credit Facility
    
    $
    483,238
    
    
    $
    
    
    
    $
    17,613
    
    
    $
    465,625
    
    
    $
    Senior Subordinated Notes
    
    
    194,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,500Interest (1)
    
    
    171,024
    
    
    
    44,504
    
    
    
    72,735
    
    
    
    51,414
    
    
    
    2,371Capital lease obligations
    
    
    56
    
    
    
    23
    
    
    
    33
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    2,478
    
    
    
    1,344
    
    
    
    890
    
    
    
    244
    
    
    
    Purchase obligations (2)(3)
    
    
    12,133
    
    
    
    5,540
    
    
    
    6,593
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    863,429
    
    
    $
    51,411
    
    
    $
    97,864
    
    
    $
    517,283
    
    
    $
    196,871
 
 (1)
    
    Future interest obligations are calculated using current interest
rates on existing debt balances as of March 31, 2009, and assume no
principal reduction other than mandatory principal repayments in
accordance with the terms of the debt instruments as described in Note
4 in our consolidated financial statements.(2)
    
    We are required to pay First Data an annual processing fee related to
our previously purchased FDMS Merchant Portfolio and the FDMS Agent
Bank Portfolio of at least $5.5 million in fiscal 2009, 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
commitments for years after 2009, 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 First Data 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, 2009, and are excluded from this table.  Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
   19




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Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal control over financial reporting
 20




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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 and Reports on Form 8-K
  21




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SIGNATURES
  iPayment, Inc.Date:      May 12, 2009
    By:
    /s/  Gregrory S. DailyGregory S. DailyChief Executive Officer
(Principal Executive Officer)Date:      May 12, 2009
    By:
    /s/  Clay M. WhitsonClay M. WhitsonChief Financial Officer
(Principal Financial and Accounting Officer) 22




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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(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.
 23