##### 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, 2010
 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.
  Delaware
    
    62-1847043(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)
 40 Burton Hills Boulevard, Suite 415Nashville, Tennessee
    
    37215(Address of principal executive offices)
    
    (Zip Code)
  o þ
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
 Title of each class
    
    Shares Outstanding at May 12, 2010(Common stock, $0.01 par value)
    
    100




---



##### 



PagePART I  FINANCIAL INFORMATIONItem 1Financial StatementsConsolidated Balance Sheets as of March 31, 2010
(Unaudited) and December 31, 2009
    
    
    3Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2010 and 2009
    
    
    4Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2010 and 2009
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
    
    
    12Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    19Item 1ARisk Factors
    
    
    19Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3Defaults Upon Senior Securities
    
    
    20Item 5Other Information
    
    
    20Item 6Exhibits
    
    
    20SIGNATURES
    
    
    21EXHIBITS
    
    
    22EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1
    
    
    $
    2Accounts receivable, net of allowance for doubtful accounts of $917 and $857 at
March 31, 2010 and December 31, 2009, respectively.
    
    
    22,847
    
    
    
    25,077Prepaid expenses and other current assets
    
    
    1,252
    
    
    
    1,463Deferred tax assets
    
    
    2,352
    
    
    
    2,353Total current assets
    
    
    26,452
    
    
    
    28,895Restricted cash
    
    
    672
    
    
    
    680Property and equipment, net
    
    
    4,764
    
    
    
    4,673Intangible assets and other, net of accumulated amortization of $148,772 and $138,789
at March 31, 2010 and December 31, 2009, respectively.
    
    
    156,862
    
    
    
    163,774Goodwill
    
    
    527,978
    
    
    
    527,978Deferred tax asset
    
    
    7,291
    
    
    
    8,219Other assets, net
    
    
    11,869
    
    
    
    11,147Total assets
    
    $
    735,888
    
    
    $
    745,366LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,658
    
    
    $
    4,132Income taxes payable
    
    
    6,312
    
    
    
    8,529Accrued liabilities and other
    
    
    23,350
    
    
    
    22,835Total current liabilities
    
    
    32,320
    
    
    
    35,496Long-term debt
    
    
    644,122
    
    
    
    651,519Other liabilities
    
    
    12,512
    
    
    
    15,213Total liabilities
    
    
    688,954
    
    
    
    702,228Commitments and contingencies (Note 8)EquityCommon stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at March 31, 2010, and December 31, 2009
    
    
    20,055
    
    
    
    20,055Accumulated other comprehensive loss, net of tax benefits of $3,933 and $4,984
at
    
    
    (5,899
    )
    
    
    (7,475
    )March 31, 2010, and December 31, 2009, respectively.Retained earnings
    
    
    32,778
    
    
    
    30,558Total equity
    
    
    46,934
    
    
    
    43,138Total liabilities and equity
    
    $
    735,888
    
    
    $
    745,366
  3




---



##### Table of Contents



iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2010
    
    
    2009(Unaudited)
    
    
    (Unaudited)Revenues
    
    $
    159,540
    
    
    $
    170,053Operating expenses:Interchange
    
    
    90,997
    
    
    
    96,910Other costs of services
    
    
    50,826
    
    
    
    55,543Selling, general and administrative
    
    
    2,857
    
    
    
    4,817Total operating expenses
    
    
    144,680
    
    
    
    157,270Income from operations
    
    
    14,860
    
    
    
    12,783Other expense:Interest expense, net
    
    
    11,371
    
    
    
    11,656Other (income) expense, net
    
    
    (229
    )
    
    
    19Income before income taxes and earnings attributable to
noncontrolling interests
    
    
    3,718
    
    
    
    1,108Income tax provision (benefit)
    
    
    1,498
    
    
    
    (116
    )Net income
    
    
    2,220
    
    
    
    1,224Less: Net income attributable to noncontrolling interests
    
    
    
    
    
    
    (1,434
    )Net income (loss) attributable to iPayment, Inc. stockholders
    
    $
    2,220
    
    
    $
    (210
    )
  4




---



##### Table of Contents



iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31
    
    
    March 312010
    
    
    2009(Unaudited)
    
    
    (Unaudited)Cash flows from operating activitiesNet income
    
    $
    2,220
    
    
    $
    1,224Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    10,626
    
    
    
    11,956Noncash interest expense
    
    
    646
    
    
    
    646Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    2,230
    
    
    
    3,700Prepaid expenses and other current assets
    
    
    211
    
    
    
    458Other assets
    
    
    (1,532
    )
    
    
    (463
    )Accounts payable and income taxes payable
    
    
    (3,691
    )
    
    
    (9,060
    )Accrued liabilities and other
    
    
    441
    
    
    
    1,591Net cash provided by operating activities
    
    
    11,151
    
    
    
    10,052Cash flows from investing activitiesChange in restricted cash
    
    
    8
    
    
    
    8Expenditures for property and equipment
    
    
    (633
    )
    
    
    (382
    )Investment in merchant advances, net
    
    
    
    
    
    
    2,498Payments related to businesses previously acquired
    
    
    
    
    
    
    (2,456
    )Payments for prepaid residual expenses
    
    
    (3,043
    )
    
    
    (474
    )Net cash used in investing activities
    
    
    (3,668
    )
    
    
    (806
    )Cash flows from financing activitiesNet (repayments) borrowings on line of credit
    
    
    (7,484
    )
    
    
    8,600Repayments of debt
    
    
    
    
    
    
    (20,000
    )Distributions to noncontrolling interest in equity of consolidated subsidiary
    
    
    
    
    
    
    (1,200
    )Net cash used in financing activities
    
    
    (7,484
    )
    
    
    (12,600
    )Net decrease in cash and cash equivalents
    
    
    (1
    )
    
    
    (3,354
    )Cash and cash equivalents, beginning of period
    
    
    2
    
    
    
    3,589Cash and cash equivalents, end of period
    
    $
    1
    
    
    $
    235Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    3,682
    
    
    $
    9,442Cash paid during the period for interest
    
    $
    6,110
    
    
    $
    6,444Supplemental schedule of non-cash activities:Accrual of deferred payments for acquisitions of businesses with a
corresponding increase in goodwill
    
    $
    
    
    
    $
    412
  5




---



##### Table of Contents



Notes to Consolidated Financial Statements
 (1) Organization and Business and Basis of Presentation
 Organization and Business
     Basis of Presentation
   Use of Estimates
  Revenue Recognition
 6




---



##### Table of Contents



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




---



##### Table of Contents



Accounting for Derivative Instruments and Hedging
Activities
 Amortization of Intangible Assets
    Common Stock
  (2) Acquisitions
   8




---



##### Table of Contents



(3) Investments
 Payments for Prepaid Residual Expenses
  (4) Long-Term Debt
    
    
    Gregory S. Daily, our Chairman and Chief Executive Officer, Carl A. Grimstad, our
President, and certain other investors (collectively, the Permitted Holders) cease to
beneficially own equity interests in iPayment Holdings, Inc. (Holdings) representing
more than fifty percent of its voting equity interests;
    
    during any period of twelve consecutive months, a majority of Holdings Board of
Directors ceases to be composed of individuals who were members of Holdings Board of
Directors at the beginning of such period or who were elected or nominated by such
members or appointees of such members who constituted at least a majority of the Board
of Directors at the time of such election or nomination;
    
    Gregory S. Daily and certain trusts controlled by Mr. Daily cease to beneficially own
or control at least a majority of the equity interests in Holdings or any parent company
beneficially owned by the Permitted Holders; or
    
    a change of control occurs under the indenture governing our senior subordinated
notes (described below).
  
    
    any person or group other than one or more of the Permitted Holders or a parent
company becomes the beneficial owner of (i) 35% or more of the voting power of our
voting stock and (ii) more of the voting power of our voting stock than that
beneficially owned by the Permitted Holders; or
    
    a majority of the members of our Board of Directors cease to be continuing
directors.
  9




---



##### Table of Contents



(5) Segment Information and Geographical Information
  (6) Income Taxes
 Accounting for Income Taxes
     (7) Comprehensive Income (Loss)
  10




---



##### Table of Contents



(8) Commitments and Contingencies
 Legal
  (9) Recent Accounting Pronouncements
  (10) Related Party Transactions
  (11) Significant Developments
  11




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A)
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
   Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and
Other Intangible Assets
 12




---



##### Table of Contents



Revenue and Cost Recognition.
 Reporting Revenue Gross as a Principal Versus Net as
an Agent
   13




---



##### Table of Contents



Reserve for Merchant Losses
 Noncontrolling Interest.
 Consolidation of Variable Interest Entities
 Seasonality Trend
  Off-Balance Sheet Arrangements
  14




---



##### Table of Contents



Results of Operations
 Three Months Ended March 31, 2010 (2010) Compared to Three Months Ended March 31, 2009(2009)
 Three months ended
    
    
    
    
    
    
    Three months ended
    
    
    
    
    
    
    ChangeMarch 31, 2010
    
    
    % of Total Revenue
    
    
    March 31, 2009
    
    
    % of Total Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    159,540
    
    
    
    100.0
    %
    
    $
    170,053
    
    
    
    100.0
    %
    
    $
    (10,513
    )
    
    
    (6.2
    )Operating ExpensesInterchange
    
    
    90,997
    
    
    
    57.0
    
    
    
    96,910
    
    
    
    57.0
    
    
    
    (5,913
    )
    
    
    (6.1
    )Other costs of services
    
    
    50,826
    
    
    
    31.9
    
    
    
    55,543
    
    
    
    32.7
    
    
    
    (4,717
    )
    
    
    (8.5
    )Selling, general and administrative
    
    
    2,857
    
    
    
    1.8
    
    
    
    4,817
    
    
    
    2.8
    
    
    
    (1,960
    )
    
    
    (40.7
    )Total operating expenses
    
    
    144,680
    
    
    
    90.7
    
    
    
    157,270
    
    
    
    92.5
    
    
    
    (12,590
    )
    
    
    (8.0
    )Income from operations
    
    
    14,860
    
    
    
    9.3
    
    
    
    12,783
    
    
    
    7.5
    
    
    
    2,077
    
    
    
    16.2Other expenseInterest expense, net
    
    
    11,371
    
    
    
    7.1
    
    
    
    11,656
    
    
    
    6.9
    
    
    
    (285
    )
    
    
    (2.4
    )Other (income) expense, net
    
    
    (229
    )
    
    
    (0.1
    )
    
    
    19
    
    
    
    0.0
    
    
    
    (248
    )
    
    
    (1,305.3
    )Total other expense
    
    
    11,142
    
    
    
    7.0
    
    
    
    11,675
    
    
    
    6.9
    
    
    
    (533
    )
    
    
    (4.6
    )Income before income taxes and earnings attributable to
noncontrolling interests
    
    
    3,718
    
    
    
    2.3
    
    
    
    1,108
    
    
    
    0.7
    
    
    
    2,610
    
    
    
    235.6Income tax provision (benefit)
    
    
    1,498
    
    
    
    0.9
    
    
    
    (116
    )
    
    
    (0.1
    )
    
    
    1,614
    
    
    
    1.0Net Income
    
    
    2,220
    
    
    
    1.4
    
    
    
    1,224
    
    
    
    0.7
    
    
    
    996
    
    
    
    81.4Less: Net income attributable to noncontrolling
interests
    
    
    
    
    
    
    
    
    
    
    (1,434
    )
    
    
    (0.8
    )
    
    
    1,434
    
    
    
    (100.00
    )Net income (loss) income attributable to iPayment, Inc.
    
    $
    2,220
    
    
    
    1.4
    
    
    $
    (210
    )
    
    
    (0.1
    )
    
    $
    2,430
    
    
    
    (1,157.1
    )
 Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 15




---



##### Table of Contents



Income Tax Noncontrolling Interests
in Consolidated Financial Statements
 Noncontrolling Interests.
 Liquidity and Capital Resources
    Operating activities
   Investing activities
   16




---



##### Table of Contents



Financing activities
    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
    
    $
    451,055
    
    
    $
    
    
    
    $
    3,417
    
    
    $
    447,638
    
    
    $
    Senior Subordinated Notes
    
    
    194,500
    
    
    
    
    
    
    
    
    
    
    
    194,500
    
    
    
    Interest (1)
    
    
    121,113
    
    
    
    39,826
    
    
    
    58,847
    
    
    
    22,440
    
    
    
    Operating lease obligations
    
    
    9,354
    
    
    
    1,281
    
    
    
    2,178
    
    
    
    1,894
    
    
    
    4,001Purchase obligations (2)(3)
    
    
    7,361
    
    
    
    4,330
    
    
    
    3,031
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    783,383
    
    
    $
    45,437
    
    
    $
    67,473
    
    
    $
    666,472
    
    
    $
    4,001
 
 (1)
    
    Future interest obligations are calculated using current interest
rates on existing debt balances as of March 31, 2010, 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
transactions processors.(3)
    
    We are required to pay FDMS an annual processing fee through 2011
related to an FDMS Merchant Portfolio and the FDMS Agent Bank
Portfolio which fee will be at least $4.3 million in fiscal year
2010, and at least 70% of the amount of such fee paid to FDMS in
2010 in fiscal 2011. The minimum commitment for years after 2010,
included in the table above, is 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 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, 2010, and are excluded from this table.  17




---



##### 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
 18




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 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)
   L. Green d/b/a Tisas Cakes v. Northern Leasing Systems, Inc., Online Data Corporation, and
iPayment, Inc., , United States District Court, Eastern District of New York, Case No.
09CV05679-RJD-SMG.
   
 Item 1A. Risk Factors
  19




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
  
 Item 6. Exhibits
  20




---



##### Table of Contents



SIGNATURES
  iPayment, Inc.Date:      May 12, 2010
    By:
    /s/  Gregrory S. DailyGregory S. DailyChief Executive Officer
(Principal Executive Officer)Date:      May 12, 2010
    By:
    /s/  Clay M. WhitsonClay M. WhitsonChief Financial Officer
(Principal Financial and Accounting Officer) 21




---



##### 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 pursuant to Section 302 of the Sarbanes-Oxley Act of
2002), filed herewith.32.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a  14(b) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.32.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a  14(b) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.
 22