##### 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 September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-50280
 
 iPayment, Inc.
 (Exact name of registrant as specified in its charter)
 www.ipaymentinc.com
 DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    62-1847043
(I.R.S. Employer
Identification No.)
 40 Burton Hills Boulevard, Suite 415
Nashville, Tennessee
(Address of principal executive offices)
    
    37215
(Zip Code)
 Registrants telephone number, including area code (615) 665-1858
 þ o
  o o þ
 o þ
  Title of each class
    
    Shares Outstanding at October 31, 2006(Common stock, $0.01 par value)
    
    100




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2006 (successor, unaudited) and December 31, 2005 (predecessor)
    
    
    3Unaudited Consolidated Statements of Operations  Three months ended September 30, 2006 (successor) and 2005 (predecessor); period from January 1, 2006 through May 10, 2006 (predecessor); period from May 11 through September 30, 2006 (successor); and nine months ended September 30, 2005 (predecessor)
    
    
    4Unaudited Consolidated Statements of Cash Flows  Period from January 1, 2006 through May 10, 2006 (predecessor); period from May 11, 2006 through September 30, 2006 (successor); and nine months ended September 30, 2005 (predecessor)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    15Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    25Item 1A
    
    Risk Factors
    
    
    25Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3
    
    Defaults Upon Senior Securities
    
    
    26Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5
    
    Other Information
    
    
    26Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    26EXHIBITS
    
    
    27CERTIFICATIONSEx-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 CFOEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification




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##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2006
    
    
    2005Successor
    
    
    Predecessor(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,808
    
    
    $
    1,023Accounts receivable, net of allowance for doubtful accounts of $232 and $508 at
September 30, 2006 and December 31, 2005, respectively
    
    
    20,146
    
    
    
    22,718Prepaid expenses and other current assets
    
    
    2,958
    
    
    
    2,549Total current assets
    
    
    27,912
    
    
    
    26,290Restricted cash
    
    
    1,050
    
    
    
    3,090Property and equipment, net
    
    
    3,591
    
    
    
    2,907Intangible
assets, net of accumulated amortization of $15,374 and $65,199
at September 30, 2006 and December 31, 2005, respectively.
    
    
    235,706
    
    
    
    192,343Goodwill, net
    
    
    501,526
    
    
    
    105,178Deferred tax asset, net
    
    
    
    
    
    
    5,757Other assets, net
    
    
    20,142
    
    
    
    5,416Total assets
    
    $
    789,927
    
    
    $
    340,981LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,811
    
    
    $
    1,697Income taxes payable
    
    
    
    
    
    
    4,697Accrued liabilities and other
    
    
    35,338
    
    
    
    24,575Current portion of long-term debt
    
    
    5,241
    
    
    
    Total current liabilities
    
    
    42,390
    
    
    
    30,969Minority interest in (deficit) equity of consolidated subsidiaries
    
    
    (957
    )
    
    
    431Deferred tax liabilities
    
    
    16,870
    
    
    
    Long-term debt
    
    
    709,788
    
    
    
    100,228Other liabilities
    
    
    7,149
    
    
    
    Total liabilities
    
    
    775,240
    
    
    
    131,628Commitments and contingenciesStockholders equityPreferred stock, $0.01 par value; 17,422,800 shares authorized, no shares
issued or outstanding at September 30, 2006, and December 31, 2005
    
    
    
    
    
    
    Common stock, $0.01 par value; 1,000 shares authorized, 100 shares issued
and outstanding at September 30, 2006; 180,000,000 shares authorized,
17,725,181 shares issued and outstanding at December 31, 2005
    
    
    19,602
    
    
    
    155,870Deferred compensation
    
    
    
    
    
    
    (3,413
    )Accumulated
other comprehensive loss
    
    
    (4,310
    )
    
    
    (Accumulated
deficit) retained earnings
    
    
    (605
    )
    
    
    56,896Total stockholders equity
    
    
    14,689
    
    
    
    209,353Total liabilities and stockholders equity
    
    $
    789,926
    
    
    $
    340,981
  Page 3 of 31




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of OPERATIONS
   Period from
    
    
    NineMay 11
    
    
    January 1
    
    
    MonthsThree Months Ended
    
    
    through
    
    
    through
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    May 10,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2005Successor
    
    
    Predecessor
    
    
    Successor
    
    
    Predecessor
    
    
    PredecessorRevenues
    
    $
    186,959
    
    
    $
    175,176
    
    
    $
    294,508
    
    
    $
    252,514
    
    
    $
    519,677Operating expenses:Interchange
    
    
    109,584
    
    
    
    100,747
    
    
    
    171,973
    
    
    
    145,459
    
    
    
    303,618Other costs of services
    
    
    58,870
    
    
    
    54,140
    
    
    
    91,294
    
    
    
    78,006
    
    
    
    158,409Selling, general and administrative
    
    
    3,882
    
    
    
    4,963
    
    
    
    6,204
    
    
    
    13,420
    
    
    
    13,341Total operating expenses
    
    
    172,336
    
    
    
    159,850
    
    
    
    269,471
    
    
    
    236,885
    
    
    
    475,368Income from operations
    
    
    14,623
    
    
    
    15,326
    
    
    
    25,037
    
    
    
    15,629
    
    
    
    44,309Other expense:Interest expense
    
    
    15,711
    
    
    
    2,132
    
    
    
    24,313
    
    
    
    5,229
    
    
    
    6,710Other expense
    
    
    161
    
    
    
    334
    
    
    
    2,116
    
    
    
    6,729
    
    
    
    911(Loss) income before income taxes and minority
interest in losses of consolidated subsidiary
    
    
    (1,249
    )
    
    
    12,860
    
    
    
    (1,392
    )
    
    
    3,671
    
    
    
    36,688Income tax (benefit) provision
    
    
    (161
    )
    
    
    5,015
    
    
    
    (236
    )
    
    
    3,343
    
    
    
    14,308Minority interest in losses
of consolidated subsidiary
    
    
    358
    
    
    
    284
    
    
    
    551
    
    
    
    522
    
    
    
    350Net (loss) income
    
    $
    (730
    )
    
    $
    8,129
    
    
    $
    (605
    )
    
    $
    850
    
    
    $
    22,730
  Page 4 of 31




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
   Period fromMay 11
    
    
    January 1
    
    
    Nine Monthsthrough
    
    
    through
    
    
    EndedSeptember 30,
    
    
    May 10
    
    
    September 30,2006
    
    
    2006
    
    
    2005Successor
    
    
    Predecessor
    
    
    PredecessorCash flows from operating activitiesNet (loss) income
    
    $
    (605
    )
    
    $
    850
    
    
    $
    22,730Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,602
    
    
    
    17,279
    
    
    
    30,472Stock-based compensation
    
    
    3,253
    
    
    
    4,466
    
    
    
    Noncash interest expense
    
    
    681
    
    
    
    2,958
    
    
    
    741Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    (10,916
    )
    
    
    13,488
    
    
    
    (2,205
    )Prepaid expenses and other current assets
    
    
    46
    
    
    
    (461
    )
    
    
    (3,030
    )Other assets
    
    
    7,258
    
    
    
    (6,017
    )
    
    
    (4,979
    )Accounts payable and income taxes payable
    
    
    23
    
    
    
    (4,444
    )
    
    
    5,302Accrued liabilities and other
    
    
    (10,723
    )
    
    
    20,322
    
    
    
    3,759Net cash provided by operating activities
    
    
    1,619
    
    
    
    48,441
    
    
    
    52,790Cash flows from investing activitiesChange in restricted cash
    
    
    990
    
    
    
    1,050
    
    
    
    (609
    )Expenditures for property and equipment
    
    
    (882
    )
    
    
    (587
    )
    
    
    (929
    )Acquisitions of businesses, portfolios and other intangibles, net of cash acquired
    
    
    (287
    )
    
    
    (524
    )
    
    
    (18,953
    )Payments related to businesses previously acquired
    
    
    (3,000
    )
    
    
    (11,500
    )
    
    
    Net cash used in investing activities
    
    
    (3,179
    )
    
    
    (11,561
    )
    
    
    (20,491
    )Cash flows from financing activitiesNet repayments (borrowings) on line of credit
    
    
    
    
    
    
    (100,000
    )
    
    
    (34,500
    )Proceeds received in exchange for ownership interest in Successor company
    
    
    3,378
    
    
    
    
    
    
    
    Repayments of debt
    
    
    (2,610
    )
    
    
    (28
    )
    
    
    (696
    )Proceeds from issuance of debt, net of finance costs
    
    
    (120
    )
    
    
    701,165
    
    
    
    Repurchase of common stock
    
    
    (633,702
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    382
    
    
    
    2,632Net cash (used in) provided by financing activities
    
    
    (633,054
    )
    
    
    601,519
    
    
    
    (32,564
    )Net (decrease) increase in cash and cash equivalents
    
    
    (634,614
    )
    
    
    638,399
    
    
    
    (265
    )Cash and cash equivalents, beginning of period
    
    
    639,422
    
    
    
    1,023
    
    
    
    888Cash and cash equivalents, end of period
    
    $
    4,808
    
    
    $
    639,422
    
    
    $
    623Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    321
    
    
    $
    4,866
    
    
    $
    11,055Cash paid during the period for interest
    
    $
    15,311
    
    
    $
    2,663
    
    
    $
    6,535Supplemental schedule of non-cash activities:Accrual of deferred payments for acquisitions of businesses
    
    $
    11,896
    
    
    $
    
    
    
    $
    10,490Restricted stock issued to employees
    
    $
    
    
    
    $
    
    
    
    $
    3,625Cancellation of restricted stock issued to employees
    
    $
    
    
    
    $
    
    
    
    $
    1,000Conversion of debt to common stock
    
    $
    
    
    
    $
    
    
    
    $
    15,331Non-cash increases in assets from acquisitions:Intangible assets
    
    $
    71,411
    
    
    $
    
    
    
    $
    Goodwill
    
    $
    357,764
    
    
    $
    
    
    
    $
    
  Page 5 of 31




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iPAYMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Organization and Business and Basis of Presentation
 Organization and Business
     Basis of Presentation
   Use of Estimates
  Page 6 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Share-based Compensation
 Share-Based Payment, Accounting for Share-based Compensation Accounting for Stock Issued to Employees
     Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2005Predecessor
    
    
    PredecessorNet income, as reported
    
    $
    8,129
    
    
    $
    22,730Deduct: Total stock-based employee compensation expense
determined under fair-value-based method, net of tax
    
    
    (587
    )
    
    
    (1,752
    )Pro forma net income
    
    $
    7,542
    
    
    $
    20,978
  Page 7 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 Amortization of Merchant Processing Portfolios
   (2)
    
    Going Private and Financing Transactions
  Page 8 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  3 4
 Basis in Leverage Buyout Transactions Allocating Basis to Individual Assets and Liabilities within
the Scope of Issue 88-16
 Goodwill and Other Intangible Assets
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Gross revenues
    
    $
    186,959
    
    
    $
    175,176
    
    
    $
    547,022
    
    
    $
    519,677Income from operations
    
    $
    14,623
    
    
    $
    15,375
    
    
    $
    40,665
    
    
    $
    44,729Interest expense
    
    $
    15,176
    
    
    $
    15,176
    
    
    $
    45,529
    
    
    $
    45,529Net (loss) income
    
    $
    (6
    )
    
    $
    422
    
    
    $
    2,592
    
    
    $
    (191
    )
  Page 9 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   (3) Acquisitions
  Other Acquisitions
  (4) Long-Term Debt
  Accounting for Derivative Instruments and Hedging
Activities
  Page 10 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 3 4
  (5) Segment Information and Geographical Information
  (6) Income Taxes
 Accounting for Income
Taxes
  (7) Commitments and Contingencies
 Litigation
 Thomas Zito v. Leasecomm Corporation, E-Commerce Exchange, Inc., etc. et al , United
States District Court, Southern District of New York, Case No. 02CV8074.
   Venus L. Franklin and Sandra Lindsey v. Leasecomm Corporation and E-Commerce Exchange,
Inc ., Cambridge District Court, Commonwealth of Massachusetts, Civil Action No. 04-338.
  Page 11 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Howard Ehrenberg, Chapter 7 Trustee for the Estate of ITSV, Inc., v. 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.
  France Vacations, Inc., etc. v. Citibank, etc., and iPayment, Inc. et al ., Los Angeles
County Superior Court, State of California, Case No. BC327932.
  Robert Aguilard, et al., on behalf of themselves and all persons similarly situated v.
E-Commerce Exchange, Inc . , A-1 Leasing LLC, and Duvera Billing Services Civil Action No.
05CC02794  State of California, Superior Court of Orange County.
   Fogazzo Wood Fired Ovens and Barbecues, LLC v. iPayment, Inc . Los Angeles County Superior
Court, State of California, Case No. BC342878
  Page 12 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  In re iPayment, Inc. Shareholders Litigation , Chancery Court for Davidson County, 20th
Judicial District, State of Tennessee, Lead Case No. 05-1250-I
    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)
    Page 13 of 31




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Other
   (8) Significant Developments and Subsequent Events
 In re iPayment, Inc. Shareholders Litigation
 3 4
   Page 14 of 31




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
      Page 15 of 31




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Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
     Page 16 of 31




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Share-Based Compensation. Share-Based Payment, Accounting for Share-based Compensation Accounting for
Stock Issued to Employees
   Reserve for Merchant Losses
 Income Taxes. Accounting for Income Taxes.
 Minority Interest.
 Consolidation of Variable Interest Entities
 Page 17 of 31




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Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging
Activities
 Merger Transaction. Business Combinations, Basis in Leveraged Buyout Transactions.
 Components of Revenues and Expenses
  Reporting Revenue Gross as a Principal Versus Net as
an Agent,
     Page 18 of 31




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Seasonality Trend
  Off-Balance Sheet Arrangements
  Results of Operations
 Three Months Ended September 30, 2006 (2006) Compared to Three Months Ended September 30, 2005
(2005)
 In thousands (Unaudited)
 Three months ended September 30,% of Total
    
    
    
    
    
    
    % of Total
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Amount
    
    
    %Successor
    
    
    
    
    
    
    PredecessorRevenues
    
    $
    186,959
    
    
    
    100.0
    %
    
    $
    175,176
    
    
    
    100.0
    %
    
    $
    11,783
    
    
    
    6.7
    %Operating ExpensesInterchange
    
    
    109,584
    
    
    
    58.6
    
    
    
    100,747
    
    
    
    57.5
    
    
    
    8,837
    
    
    
    8.8Other costs of services
    
    
    58,870
    
    
    
    31.5
    
    
    
    54,140
    
    
    
    30.9
    
    
    
    4,730
    
    
    
    8.7Selling, general and administrative
    
    
    3,882
    
    
    
    2.1
    
    
    
    4,963
    
    
    
    2.8
    
    
    
    (1,081
    )
    
    
    (21.8
    )Total operating expenses
    
    
    172,336
    
    
    
    92.2
    
    
    
    159,850
    
    
    
    91.3
    
    
    
    12,486
    
    
    
    7.8Income from operations
    
    
    14,623
    
    
    
    7.8
    
    
    
    15,326
    
    
    
    8.7
    
    
    
    (703
    )
    
    
    (4.6
    )Other expenseInterest expense
    
    
    15,711
    
    
    
    8.4
    
    
    
    2,132
    
    
    
    1.2
    
    
    
    13,579
    
    
    
    636.9Other
    
    
    161
    
    
    
    0.1
    
    
    
    334
    
    
    
    0.2
    
    
    
    (173
    )
    
    
    (51.8
    )Total other expense
    
    
    15,872
    
    
    
    8.5
    
    
    
    2,466
    
    
    
    1.4
    
    
    
    13,406
    
    
    
    543.6(Loss) income before income taxes and minority
interest in losses of subsidiary
    
    
    (1,249
    )
    
    
    (0.7
    )
    
    
    12,860
    
    
    
    7.3
    
    
    
    (14,109
    )
    
    
    (109.7
    )Income tax (benefit) provision
    
    
    (161
    )
    
    
    (0.1
    )
    
    
    5,015
    
    
    
    2.9
    
    
    
    (5,176
    )
    
    
    (103.3
    )Minority interest in losses of subsidiary
    
    
    358
    
    
    
    0.2
    
    
    
    284
    
    
    
    0.2
    
    
    
    74
    
    
    
    26.1Net (loss) income
    
    $
    (730
    )
    
    
    (0.4
    )
    
    $
    8,129
    
    
    
    4.6
    
    
    $
    (8,859
    )
    
    
    (108.9
    )Other Data:Cash flows from:Operating activities
    
    $
    13,774
    
    
    
    
    
    
    $
    18,507Investing activities
    
    $
    (348
    )
    
    
    
    
    
    $
    (1,739
    )Financing activities
    
    $
    (8,807
    )
    
    
    
    
    
    $
    (18,494
    )EBITDA (a)
    
    $
    25,044
    
    
    
    
    
    
    $
    25,476Adjusted EBITDA (a)
    
    $
    25,205
    
    
    
    
    
    
    $
    25,810
 
 (a)
    
    EBITDA is defined as net income (loss) before (i) depreciation and amortization, (ii)
interest expense, and (iii) provision (benefit) for income taxes. Adjusted EBITDA excludes
certain additional items. We consider EBITDA and adjusted EBITDA to be important indicators
of the performance of our business. We have included these non-GAAP financial measures
because they provide management with important information for assessing our performance
and as indicators of our ability to service or incur indebtedness, make capital
expenditures and finance working capital requirements. EBITDA and adjusted EBITDA are not
measures of financial performance under GAAP and should not be considered in isolation or
as alternatives to cash flow from operating activities or as alternatives to net income as
indicators of operating performance or any other measures of performance derived in
accordance with GAAP. Other companies in our industry may calculate EBITDA and adjusted
EBITDA differently than we do and EBITDA and adjusted EBITDA may not be comparable with
similarly titled measures reported by other companies. The reconciliation of net income
(loss) under GAAP to EBITDA and adjusted EBITDA is as follows (dollars in thousands): Page 19 of 31




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##### Table of Contents



Three months ended September 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net (loss) income
    
    $
    (730
    )
    
    $
    8,129Interest expense, net
    
    
    15,711
    
    
    
    2,132Income tax (benefit) provision
    
    
    (161
    )
    
    
    5,015Depreciation and amortization
    
    
    10,224
    
    
    
    10,200EBITDA
    
    
    25,044
    
    
    
    25,476Other
expense (1)
    
    
    161
    
    
    
    334Adjusted EBITDA
    
    $
    25,205
    
    
    $
    25,810
 
 (1)
    
    Represents certain expenses of the Company primarily related to the Transaction
which closed on May 10, 2006. Revenues.
 Interchange
Expenses
 Other
Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Minority Interest.
 EBITDA and Adjusted EBITDA
 Page 20 of 31




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##### Table of Contents



Nine Months Ended September 30, 2006 (2006) Compared to Nine Months Ended September 30, 2005
(2005)
 In thousands (Unaudited)
 Nine months ended September 30,% of Total
    
    
    
    
    
    
    % of Total
    
    
    Change2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    Amount
    
    
    %Combined
    
    
    
    
    
    
    PredecessorRevenues
    
    $
    547,022
    
    
    
    100.0
    %
    
    $
    519,677
    
    
    
    100.0
    %
    
    $
    27,345
    
    
    
    5.3
    %Operating ExpensesInterchange
    
    
    317,432
    
    
    
    58.0
    
    
    
    303,618
    
    
    
    58.4
    
    
    
    13,814
    
    
    
    4.5Other costs of services
    
    
    169,301
    
    
    
    30.9
    
    
    
    158,409
    
    
    
    30.5
    
    
    
    10,892
    
    
    
    6.9Selling, general and administrative
    
    
    19,624
    
    
    
    3.6
    
    
    
    13,341
    
    
    
    2.6
    
    
    
    6,283
    
    
    
    47.1Total operating expenses
    
    
    506,357
    
    
    
    92.6
    
    
    
    475,368
    
    
    
    91.5
    
    
    
    30,989
    
    
    
    6.5Income from operations
    
    
    40,665
    
    
    
    7.4
    
    
    
    44,309
    
    
    
    8.5
    
    
    
    (3,644
    )
    
    
    (8.2
    )Other expenseInterest expense
    
    
    29,542
    
    
    
    5.4
    
    
    
    6,710
    
    
    
    1.3
    
    
    
    22,832
    
    
    
    340.3Other expense
    
    
    8,845
    
    
    
    1.6
    
    
    
    911
    
    
    
    0.2
    
    
    
    7,934
    
    
    
    870.9Total other expense
    
    
    38,387
    
    
    
    7.0
    
    
    
    7,621
    
    
    
    1.5
    
    
    
    30,766
    
    
    
    403.7Income before income taxes and minority
interest in losses of subsidiary
    
    
    2,278
    
    
    
    0.4
    
    
    
    36,688
    
    
    
    7.1
    
    
    
    (34,410
    )
    
    
    (93.8
    )Income tax provision
    
    
    3,106
    
    
    
    0.6
    
    
    
    14,308
    
    
    
    2.8
    
    
    
    (11,202
    )
    
    
    (78.3
    )Minority interest in losses of subsidiary
    
    
    1,073
    
    
    
    0.2
    
    
    
    350
    
    
    
    0.1
    
    
    
    723
    
    
    
    206.6Net income
    
    $
    245
    
    
    
    0.0
    
    
    $
    22,730
    
    
    
    4.4
    
    
    $
    (22,485
    )
    
    
    (98.9
    )Other Data:Cash flows from:Operating activities
    
    $
    50,060
    
    
    
    
    
    
    $
    52,790Investing activities
    
    $
    (14,740
    )
    
    
    
    
    
    $
    (20,491
    )Financing activities
    
    $
    (31,535
    )
    
    
    
    
    
    $
    (32,564
    )EBITDA (a)
    
    $
    62,774
    
    
    
    
    
    
    $
    74,220Adjusted EBITDA (a)
    
    $
    79,338
    
    
    
    
    
    
    $
    75,131
 
 (a)
    
    EBITDA is defined as net income (loss) before (i) depreciation and amortization, (ii)
interest expense, and (iii) provision (benefit) for income taxes. Adjusted EBITDA excludes
certain additional items. We consider EBITDA and adjusted EBITDA to be important indicators
of the performance of our business. We have included these non-GAAP financial measures
because they provide management with important information for assessing our performance
and as indicators of our ability to service or incur indebtedness, make capital
expenditures and finance working capital requirements. EBITDA and adjusted EBITDA are not
measures of financial performance under GAAP and should not be considered in isolation or
as alternatives to cash flow from operating activities or as alternatives to net income as
indicators of operating performance or any other measures of performance derived in
accordance with GAAP. Other companies in our industry may calculate EBITDA and adjusted
EBITDA differently than we do and EBITDA and adjusted EBITDA may not be comparable with
similarly titled measures reported by other companies. The reconciliation of net income
(loss) under GAAP to EBITDA and adjusted EBITDA is as follows (dollars in thousands): Nine months ended
September 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net Income
    
    $
    245
    
    
    $
    22,730Interest expense, net
    
    
    29,542
    
    
    
    6,710Income tax provision
    
    
    3,106
    
    
    
    14,308Depreciation and amortization
    
    
    29,881
    
    
    
    30,472EBITDA
    
    
    62,774
    
    
    
    74,220Stock-based
compensation (1)
    
    
    7,719
    
    
    
    Other
expense (2)
    
    
    8,845
    
    
    
    911Adjusted EBITDA
    
    $
    79,338
    
    
    $
    75,131
 
 (1)
    
    Represents compensation expense related to stock options granted to employees
recognized due to the adoption of FAS 123R on January 1, 2006, and compensation
expense related to the accelerated vesting of stock options and restricted stock
recognized as a result of the closing of the Transaction on May 10, 2006.(2)
    
    Represents certain expenses of the Company primarily related to the Transaction
which closed on May 10, 2006. Page 21 of 31




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##### Table of Contents



Revenues.
 Interchange
Expenses
 Other
Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Minority Interest.
 EBITDA and Adjusted EBITDA
 Liquidity and Capital Resources
  Operating activities
  Page 22 of 31




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##### Table of Contents



Investing activities
   Financing activities
    Accounting for Derivative Instruments and Hedging
Activities
 3 4
 Page 23 of 31




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Contractual Obligations
  Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsContractual Obligations
    
    (in thousands)Credit facility
    
    $
    512,425
    
    
    $
    5,150
    
    
    $
    10,300
    
    
    $
    10,300
    
    
    $
    486,675Senior Notes
    
    
    205,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205,000Interest (1)
    
    
    394,772
    
    
    
    57,790
    
    
    
    113,888
    
    
    
    112,372
    
    
    
    110,722Capital lease obligations
    
    
    255
    
    
    
    91
    
    
    
    144
    
    
    
    20
    
    
    
    Operating lease obligations
    
    
    4,157
    
    
    
    1,432
    
    
    
    2,191
    
    
    
    534
    
    
    
    Purchase obligations (2)(3)(4)
    
    
    42,564
    
    
    
    14,630
    
    
    
    17,735
    
    
    
    6,845
    
    
    
    3,354Total contractual obligations
    
    $
    1,159,173
    
    
    $
    79,093
    
    
    $
    144,258
    
    
    $
    130,071
    
    
    $
    805,751
 
 (1)
    
    Future interest obligations are calculated using current
interest rates on existing debt balances as of September
30, 2006, 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)
    
    Purchase obligations represent costs of contractually
guaranteed minimum processing volumes with certain of
our third-party transaction processors.(3)
    
    We are required to pay FDMS an annual processing fee
related to the FDMS Merchant Portfolio and the FDMS
Agent Bank Portfolio of at least $11.7 million in fiscal
2006, 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 2006, included in the table
above are based on the preceding year minimum amounts.
The actual minimum commitments for such years may vary
based on actual results in preceding years.(4)
    
    We have agreed to utilize FDMS to process at least 75%
of our consolidated transaction sales volume in any
calendar year through 2011. The minimum commitments for
such years are not calculable as of September 30, 2006,
and are excluded from this table.  Page 24 of 31




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##### Table of Contents



Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal control over financial reporting
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Page 25 of 31




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  
 SIGNATURES
  iPayment, Inc.Date: November 14, 2006
    
    By:
    
    /s/ Gregrory S. DailyGregory S. DailyChief Executive Officer(Principal Executive Officer)Date: November 14, 2006
    
    By:
    
    /s/ Clay M. WhitsonClay M. WhitsonChief Financial Officer(Principal Financial and Accounting Officer)
 Page 26 of 31




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##### Table of Contents



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 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.
 Page 27 of 31