##### 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 June 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 415Nashville, 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 July 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 June 30, 2006 (successor, unaudited) and December 31, 2005 (predecessor)
    
    
    3Unaudited Consolidated Statements of Operations  May 11, 2006 through June 30, 2006 (successor); April 1, 2006
through May 10, 2006 (predecessor); January 1, 2006 through May 10, 2006 (predecessor); three and six
months ended June 30, 2005 (predecessor)
    
    
    4Unaudited Consolidated Statements of Cash Flows  January 1, 2006 through May 10, 2006 (predecessor);
May 11, 2006 through June 30, 2006 (successor); Six months ended June 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)
    
    
    16Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4
    
    Controls and Procedures
    
    
    26PART II  OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 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
    
    
    
    
    27EXHIBITS
    
    
    
    
    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 CFO




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##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005Successor
    
    
    Predecessor(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    189
    
    
    $
    1,023Accounts receivable, net of allowance for doubtful accounts of $220 and $508 at
June 30, 2006 and December 31, 2005, respectively
    
    
    20,778
    
    
    
    22,718Prepaid expenses and other current assets
    
    
    2,934
    
    
    
    2,549Total current assets
    
    
    23,901
    
    
    
    26,290Restricted cash
    
    
    1,094
    
    
    
    3,090Property and equipment, net
    
    
    3,485
    
    
    
    2,907Intangible assets, net of accumulated amortization of $5,490 and $65,199
at June 30, 2006 and December 31, 2005, respectively.
    
    
    246,653
    
    
    
    192,343Goodwill, net
    
    
    488,205
    
    
    
    105,178Deferred tax asset, net
    
    
    
    
    
    
    5,757Other assets, net
    
    
    19,684
    
    
    
    5,416Total assets
    
    $
    783,022
    
    
    $
    340,981LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,400
    
    
    $
    1,697Income taxes payable
    
    
    
    
    
    
    4,697Accrued liabilities and other
    
    
    17,729
    
    
    
    24,575Current portion of long-term debt
    
    
    5,241
    
    
    
    Total current liabilities
    
    
    27,370
    
    
    
    30,969Minority interest in (deficit) equity of consolidated subsidiaries
    
    
    (360
    )
    
    
    431Deferred tax liabilities
    
    
    16,373
    
    
    
    Long-term debt
    
    
    718,508
    
    
    
    100,228Total liabilities
    
    
    761,891
    
    
    
    131,628Commitments and contingenciesStockholders equityPreferred stock, $0.01 par value; 17,422,800 shares authorized, no shares
issued or outstanding at June 30, 2006, and December 31, 2005
    
    
    
    
    
    
    Common stock, $0.01 par value; 1,000 shares authorized, 100 shares issued
and outstanding at June 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 income
    
    
    1,403
    
    
    
    Retained earnings
    
    
    126
    
    
    
    56,896Total stockholders equity
    
    
    21,131
    
    
    
    209,353Total liabilities and stockholders equity
    
    $
    783,022
    
    
    $
    340,981
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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of OPERATIONS
 Period from
    
    
    Three
    
    
    Period from
    
    
    SixMay 11
    
    
    April 1
    
    
    Months
    
    
    May 11
    
    
    January 1
    
    
    Monthsthrough
    
    
    through
    
    
    Ended
    
    
    through
    
    
    through
    
    
    EndedJune 30,
    
    
    May 10,
    
    
    June 30,
    
    
    June 30,
    
    
    May 10,
    
    
    June 30,2006
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2005Successor
    
    
    Predecessor
    
    
    Predecessor
    
    
    Successor
    
    
    Predecessor
    
    
    PredecessorRevenues
    
    $
    107,549
    
    
    $
    81,613
    
    
    $
    181,138
    
    
    $
    107,549
    
    
    $
    252,514
    
    
    $
    344,501Operating expenses:Interchange
    
    
    62,389
    
    
    
    47,346
    
    
    
    106,031
    
    
    
    62,389
    
    
    
    145,459
    
    
    
    203,452Other costs of services
    
    
    32,424
    
    
    
    24,656
    
    
    
    55,091
    
    
    
    32,424
    
    
    
    78,006
    
    
    
    103,866Selling, general and administrative
    
    
    2,322
    
    
    
    8,800
    
    
    
    4,676
    
    
    
    2,322
    
    
    
    13,420
    
    
    
    8,200Total operating expenses
    
    
    97,135
    
    
    
    80,802
    
    
    
    165,798
    
    
    
    97,135
    
    
    
    236,885
    
    
    
    315,518Income from operations
    
    
    10,414
    
    
    
    811
    
    
    
    15,340
    
    
    
    10,414
    
    
    
    15,629
    
    
    
    28,983Other expense:Interest expense
    
    
    8,602
    
    
    
    3,380
    
    
    
    2,281
    
    
    
    8,602
    
    
    
    5,229
    
    
    
    4,578Other expense
    
    
    1,956
    
    
    
    5,850
    
    
    
    496
    
    
    
    1,956
    
    
    
    6,729
    
    
    
    577(Loss) Income before income taxes and minority
interest in losses of consolidated subsidiary
    
    
    (144
    )
    
    
    (8,419
    )
    
    
    12,563
    
    
    
    (144
    )
    
    
    3,671
    
    
    
    23,828Income tax (benefit) provision
    
    
    (77
    )
    
    
    (1,475
    )
    
    
    4,900
    
    
    
    (77
    )
    
    
    3,343
    
    
    
    9,293Minority interest in losses
of consolidated subsidiary
    
    
    193
    
    
    
    173
    
    
    
    66
    
    
    
    193
    
    
    
    522
    
    
    
    66Net income (loss)
    
    $
    126
    
    
    $
    (6,771
    )
    
    $
    7,729
    
    
    $
    126
    
    
    $
    850
    
    
    $
    14,601
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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
 Period fromMay 11
    
    
    January 1
    
    
    Six Monthsthrough
    
    
    through
    
    
    EndedJune 30,
    
    
    May 10
    
    
    June 30,2006
    
    
    2006
    
    
    2005Successor
    
    
    Predecessor
    
    
    PredecessorCash flows from operating activitiesNet income
    
    $
    126
    
    
    $
    850
    
    
    $
    14,601Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,378
    
    
    
    17,279
    
    
    
    20,272Stock-based compensation
    
    
    3,253
    
    
    
    4,466
    
    
    
    Noncash interest expense
    
    
    49
    
    
    
    2,958
    
    
    
    495Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    (11,548
    )
    
    
    13,488
    
    
    
    (3,399
    )Prepaid expenses and other current assets
    
    
    70
    
    
    
    (461
    )
    
    
    (2,668
    )Other assets
    
    
    7,584
    
    
    
    (6,017
    )
    
    
    (4,368
    )Accounts payable and income taxes payable
    
    
    2,612
    
    
    
    (4,444
    )
    
    
    5,718Accrued liabilities and other
    
    
    (16,679
    )
    
    
    20,322
    
    
    
    3,632Net cash (used in) provided by operating activities
    
    
    (12,155
    )
    
    
    48,441
    
    
    
    34,283Cash flows from investing activitiesChange in restricted cash
    
    
    946
    
    
    
    1,050
    
    
    
    770Expenditures for property and equipment
    
    
    (490
    )
    
    
    (587
    )
    
    
    (810
    )Acquisitions of businesses, portfolios and other intangibles, net of cash acquired
    
    
    (287
    )
    
    
    (524
    )
    
    
    (18,712
    )Payments related to businesses previously acquired
    
    
    (3,000
    )
    
    
    (11,500
    )
    
    
    Net cash used in investing activities
    
    
    (2,831
    )
    
    
    (11,561
    )
    
    
    (18,752
    )Cash flows from financing activitiesNet repayments (borrowings) on line of credit
    
    
    7,500
    
    
    
    (100,000
    )
    
    
    (16,000
    )Proceeds received in exchange for ownership interest in Successor company
    
    
    3,378
    
    
    
    
    
    
    
    Repayments of debt
    
    
    (1,303
    )
    
    
    (28
    )
    
    
    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
    
    
    
    1,930Net cash (used in) provided by financing activities
    
    
    (624,247
    )
    
    
    601,519
    
    
    
    (14,070
    )Net (decrease) increase in cash and cash equivalents
    
    
    (639,233
    )
    
    
    638,399
    
    
    
    1,461Cash and cash equivalents, beginning of period
    
    
    639,422
    
    
    
    1,023
    
    
    
    888Cash and cash equivalents, end of period
    
    $
    189
    
    
    $
    639,422
    
    
    $
    2,349Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    107
    
    
    $
    4,866
    
    
    $
    5,478Cash paid during the period for interest
    
    $
    5,284
    
    
    $
    2,663
    
    
    $
    3,512Supplemental schedule of non-cash activities:Accrual of deferred payments for acquisitions of businesses
    
    $
    
    
    
    $
    
    
    
    $
    9,500Restricted stock issued to employees
    
    $
    
    
    
    $
    
    
    
    $
    3,625Non-cash increases in assets from acquisitions:Intangible assets
    
    $
    72,419
    
    
    $
    
    
    
    $
    Goodwill
    
    $
    356,756
    
    
    $
    
    
    
    $
    
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iPAYMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Organization and Business and Basis of Presentation
 Organization and Business
     Basis of Presentation
   Use of Estimates
  Page 6 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Share-based Compensation
 Share-Based Payment, Accounting for Share-based Compensation
     Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2005Net income, as reported
    
    $
    7,729
    
    
    $
    14,601Deduct: Total stock-based employee compensation expense
determined under fair-value-based method, net of tax
    
    
    (590
    )
    
    
    (1,165
    )Pro forma net income
    
    $
    7,139
    
    
    $
    13,436
  Page 7 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 (2) Going Private and Financing Transactions
  3 4
 Page 8 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  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
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Gross revenues
    
    
    189,162
    
    
    
    181,138
    
    
    
    360,063
    
    
    
    344,501Income from operations
    
    
    18,251
    
    
    
    15,556
    
    
    
    33,964
    
    
    
    29,354Interest
expense
    
    
    15,685
    
    
    
    15,685
    
    
    
    31,370
    
    
    
    31,370Net income
    
    
    8,222
    
    
    
    6,279
    
    
    
    14,534
    
    
    
    10,872
   (3) Acquisitions
  Page 9 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Other Acquisitions
  (4) Long-Term Debt
  Accounting for Derivative Instruments and Hedging
Activities
 3 4
  (5) Segment Information and Geographical Information
  Page 10 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (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 28




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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.
  Page 12 of 28




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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Fogazzo Wood Fired Ovens and Barbecues, LLC v. iPayment, Inc . Los Angeles County Superior
Court, State of California, Case No. BC342878
    In re iPayment, Inc. Shareholders Litigation , Chancery Court for Davidson County, 20th
Judicial District, State of Tennessee, Lead Case No. 05-1250-I
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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   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)
    Other
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iPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (8) Significant Developments and Subsequent Events
 In re iPayment, Inc.
Shareholders Litigation
 3 4
  Page 15 of 28




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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 16 of 28




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Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
   Share-Based Compensation. Share-Based
Payment, Accounting for Share-based Compensation Accounting for Stock
Issued to Employees
  Page 17 of 28




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Reserve for Merchant Losses
 Income Taxes. Accounting for Income Taxes.
 Minority Interest.
 Consolidation of Variable Interest Entities
 Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging
Activities
 Merger
Transaction. Business Combinations, Basis in Leveraged Buyout
Transactions.
 Components of Revenues and Expenses
  Page 18 of 28




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Reporting Revenue Gross as a Principal Versus Net as
an Agent,
     Seasonality Trend
  Off-Balance Sheet Arrangements
  Page 19 of 28




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Results of Operations
 Three Months Ended June 30, 2006 (2006) Compared to Three Months Ended June 30, 2005 (2005)
 Three
    
    
    
    
    
    
    Threemonths ended
    
    
    % of Total
    
    
    months ended
    
    
    % of Total
    
    
    ChangeJune 30, 2006
    
    
    Revenue
    
    
    June 30, 2005
    
    
    Revenue
    
    
    Amount
    
    
    %Combined
    
    
    
    
    
    PredecessorRevenues
    
    $
    189,162
    
    
    
    100.0
    %
    
    $
    181,138
    
    
    
    100.0
    %
    
    $
    8,024
    
    
    
    4.4
    %Operating ExpensesInterchange
    
    
    109,735
    
    
    
    58.0
    
    
    
    106,031
    
    
    
    58.5
    
    
    
    3,704
    
    
    
    3.5Other costs of services
    
    
    57,080
    
    
    
    30.2
    
    
    
    55,091
    
    
    
    30.4
    
    
    
    1,989
    
    
    
    3.6Selling, general and administrative
    
    
    11,122
    
    
    
    5.9
    
    
    
    4,676
    
    
    
    2.6
    
    
    
    6,446
    
    
    
    137.9Total operating expenses
    
    
    177,937
    
    
    
    94.1
    
    
    
    165,798
    
    
    
    91.5
    
    
    
    12,139
    
    
    
    7.3Income from operations
    
    
    11,225
    
    
    
    5.9
    
    
    
    15,340
    
    
    
    8.5
    
    
    
    (4,115
    )
    
    
    (26.8
    )Other expenseInterest expense
    
    
    11,982
    
    
    
    6.3
    
    
    
    2,281
    
    
    
    1.3
    
    
    
    9,701
    
    
    
    425.3Other
    
    
    7,807
    
    
    
    4.1
    
    
    
    496
    
    
    
    0.3
    
    
    
    7,311
    
    
    
    NMTotal other expense
    
    
    19,789
    
    
    
    10.4
    
    
    
    2,777
    
    
    
    1.5
    
    
    
    17,012
    
    
    
    612.6(Loss) income before income taxes and minority
interest in losses of subsidiary
    
    
    (8,564
    )
    
    
    (4.5
    )
    
    
    12,563
    
    
    
    6.9
    
    
    
    (21,127
    )
    
    
    (168.2
    )Income tax (benefit) provision
    
    
    (1,553
    )
    
    
    (0.8
    )
    
    
    4,900
    
    
    
    2.7
    
    
    
    (6,453
    )
    
    
    (131.7
    )Minority
interest in losses of subsidiary
    
    
    366
    
    
    
    0.2
    
    
    
    66
    
    
    
    0.0
    
    
    
    300
    
    
    
    NMNet (loss) income
    
    $
    (6,645
    )
    
    
    (3.5
    )
    
    $
    7,729
    
    
    
    4.3
    
    
    $
    (14,374
    )
    
    
    (186.0
    )NM = Not meaningfulOther Data:Cash
Flows from:Operating
activities
    
    $
    17,992
    
    
    
    
    
    
    $
    19,765Investing
activities
    
    $
    (4,916
    )
    
    
    
    
    
    $
    (2,469
    )Financing
activities
    
    $
    (13,097
    )
    
    
    
    
    
    $
    (15,971
    )EBITDA (a)
    
    $
    13,738
    
    
    
    
    
    
    $
    25,096Adjusted EBITDA (a)
    
    $
    28,682
    
    
    
    
    
    
    $
    25,592
 
 (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): Three months ended June 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net (loss) income
    
    $
    (6,645
    )
    
    $
    7,729Interest expense, net
    
    
    11,982
    
    
    
    2,281Income tax (benefit) provision
    
    
    (1,553
    )
    
    
    4,900Depreciation and amortization
    
    
    9,954
    
    
    
    10,186EBITDA
    
    
    13,738
    
    
    
    25,096Share-based compensation (a)
    
    
    7,140
    
    
    
    Other expense (b)
    
    
    7,807
    
    
    
    496Adjusted EBITDA
    
    $
    28,685
    
    
    $
    25,592
 
 (a)
    
    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.(b)
    
    Represents certain expenses of the Company primarily related to the Transaction which
closed on May 10, 2006. Page 20 of 28




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Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other
Expense.
 Income
Tax
 Minority Interest.
 EBITDA
and Adjusted EBITDA
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Six Months Ended June 30, 2006 (2006) Compared to Six Months Ended June 30, 2005 (2005)
 In thousands (Unaudited)
 Six
    
    
    
    
    
    
    Sixmonths ended
    
    
    % of Total
    
    
    months ended
    
    
    % of Total
    
    
    ChangeJune 30, 2006
    
    
    Revenue
    
    
    June 30, 2005
    
    
    Revenue
    
    
    Amount
    
    
    %Combined
    
    
    
    
    
    PredecessorRevenues
    
    $
    360,063
    
    
    
    100.0
    %
    
    $
    344,501
    
    
    
    100.0
    %
    
    $
    15,562
    
    
    
    4.5
    %Operating ExpensesInterchange
    
    
    207,848
    
    
    
    57.7
    
    
    
    203,452
    
    
    
    59.1
    
    
    
    4,396
    
    
    
    2.2Other costs of services
    
    
    110,430
    
    
    
    30.7
    
    
    
    103,866
    
    
    
    30.1
    
    
    
    6,564
    
    
    
    6.3Selling, general and administrative
    
    
    15,742
    
    
    
    4.4
    
    
    
    8,200
    
    
    
    2.4
    
    
    
    7,542
    
    
    
    92.0Total operating expenses
    
    
    334,020
    
    
    
    92.8
    
    
    
    315,518
    
    
    
    91.6
    
    
    
    18,502
    
    
    
    5.9Income from operations
    
    
    26,043
    
    
    
    7.2
    
    
    
    28,983
    
    
    
    8.4
    
    
    
    (2,940
    )
    
    
    (10.1
    )Other expenseInterest expense
    
    
    13,831
    
    
    
    3.8
    
    
    
    4,578
    
    
    
    1.3
    
    
    
    9,253
    
    
    
    202.1Other expense
    
    
    8,685
    
    
    
    2.4
    
    
    
    577
    
    
    
    0.2
    
    
    
    8,108
    
    
    
    NMTotal other expense
    
    
    22,516
    
    
    
    6.2
    
    
    
    5,155
    
    
    
    1.5
    
    
    
    17,361
    
    
    
    336.8Income before income taxes and minority
interest in losses of subsidiary
    
    
    3,527
    
    
    
    1.0
    
    
    
    23,828
    
    
    
    6.9
    
    
    
    (20,301
    )
    
    
    (85.2
    )Income tax provision
    
    
    3,266
    
    
    
    0.9
    
    
    
    9,293
    
    
    
    2.7
    
    
    
    (6,027
    )
    
    
    (64.9
    )Minority
interest in losses of subsidiary
    
    
    715
    
    
    
    0.2
    
    
    
    66
    
    
    
    0.0
    
    
    
    649
    
    
    
    100.0Net income
    
    $
    976
    
    
    
    0.3
    
    
    $
    14,601
    
    
    
    4.2
    
    
    $
    (13,625
    )
    
    
    (93.3
    )NM = Not meaningfulOther Data:Cash flows from:Operating activities
    
    $
    36,286
    
    
    
    
    
    
    $
    34,283Investing activities
    
    $
    (14,392
    )
    
    
    
    
    
    $
    (18,752
    )Financing
activities
    
    $
    (22,728
    )
    
    
    
    
    
    $
    (14,070
    )EBITDA (a)
    
    $
    37,730
    
    
    
    
    
    
    $
    48,744Adjusted EBITDA (a)
    
    $
    54,134
    
    
    
    
    
    
    $
    49,321
 
 (a)
    
    EBITDA is defined as net income (loss) before (i) depreciation and amortization, (ii)
interest expense, and (iii) provision for income taxes (benefit). 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): Six months ended June 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net Income
    
    $
    976
    
    
    $
    14,601Interest expense, net
    
    
    13,831
    
    
    
    4,578Income tax provision
    
    
    3,266
    
    
    
    9,293Depreciation and amortization
    
    
    19,657
    
    
    
    20,272EBITDA
    
    
    37,730
    
    
    
    48,744Stock-based compensation (a)
    
    
    7,719
    
    
    
    Other expense (b)
    
    
    8,685
    
    
    
    577Adjusted EBITDA
    
    $
    54,134
    
    
    $
    49,321
 
 (a)
    
    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.(b)
    
    Represents certain expenses of the Company primarily related to the Transaction which closed on May 10, 2006. Page 22 of 28




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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 23 of 28




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Investing activities
   Financing activities
    Accounting for Derivative Instruments and Hedging
Activities
 3 4
   Page 24 of 28




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Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsCredit facility
    
    $
    521,213
    
    
    $
    5,150
    
    
    $
    11,300
    
    
    $
    11,300
    
    
    $
    493,463Senior Notes
    
    
    205,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205,000Interest (1)
    
    
    417,070
    
    
    
    59,681
    
    
    
    118,183
    
    
    
    116,611
    
    
    
    122,595Capital lease obligations
    
    
    276
    
    
    
    91
    
    
    
    158
    
    
    
    27
    
    
    
    Operating lease obligations
    
    
    4,392
    
    
    
    1,571
    
    
    
    2,041
    
    
    
    780
    
    
    
    Purchase
obligations (2)(3)(4)
    
    
    43,194
    
    
    
    14,507
    
    
    
    18,488
    
    
    
    6,845
    
    
    
    3,354Total contractual obligations
    
    $
    1,191,145
    
    
    $
    81,000
    
    
    $
    150,170
    
    
    $
    133,563
    
    
    $
    824,412
 
 (1)
    
    Future interest obligations are calculated using current
interest rates on existing debt balances as of June 30, 2006, and
assumes no principal reduction other than mandatory principal
payments 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 June 30, 2006, and
are excluded from this table.  Effects of Inflation
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
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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
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (a)
    
    To adopt the Agreement and Plan of Merger, dated as of December 27, 2005, among
iPayment Holdings, Inc., iPayment MergerCo, Inc. and iPayment, Inc., pursuant to which
iPayment MergerCo, Inc. would be merged with and into iPayment, Inc., with iPayment, Inc.as
the surviving corporation.(b)
    
    To vote in their discretion, upon such other business as may properly come before the
meeting and any and all adjournments or postponements thereof, including, without
limitation, a proposal to adjourn to provide additional time to solicit votes to adopt the
merger agreement.
  BrokerFor
    
    Against
    
    Abstain
    
    Non-VotesAdoption of the Agreement
and Plan of Merger
    
    
    9,465,341
    
    
    
    37,787
    
    
    
    3,454
    
    
    
    Approval to vote on other business
    
    
    4,386,796
    
    
    
    5,074,230
    
    
    
    45,556
    
    
    
    
 
 Item 5. Other Information
  
 Item 6. Exhibits
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##### Table of Contents



SIGNATURES
  iPayment, Inc.Date:
August 21, 2006
    
    By: /s/ Gregrory S. DailyGregory S. DailyChief Executive Officer(Principal Executive Officer)Date:
August 21, 2006
    
    By: /s/ Clay M. WhitsonClay M. WhitsonChief Financial Officer(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Certificate of Incorporation of iPayment, Inc., attached as
Exhibit A to the Certificate of Merger of iPayment Merger Co, Inc.
into iPayment, Inc. (incorporated by reference to Exhibit 3.1 of the
Registrants Registration Statement on Form S-4 filed on July 21,
2006).3.2
    
    Bylaws of iPayment MergerCo, Inc., as adopted by iPayment, Inc.
(incorporated by reference to Exhibit 3.2 of the Registrants
Registration Statement on Form S-4 filed on July 21, 2006).4.1
    
    Indenture, dated as of May 10, 2006, among iPayment, Inc., the
Subsidiary Guarantors named therein and Wells Fargo Bank, N.A. as
Trustee (incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form S-4 filed on July 21, 2006).4.2
    
    Registration Rights Agreement, dated as of May 10, 2006, among
iPayment, Inc., the Subsidiary Guarantors named therein, Banc of
America Securities LLC and J.P. Morgan Securities Inc., filed on
herewith (incorporated by reference to Exhibit 4.2 of the
Registrants Registration Statement on Form S-4 filed on July 21,
2006).4.3
    
    Form of Note (included as Exhibit A to Exhibit 4.1 hereto).10.1
    
    Credit Agreement, dated May 10, 2006, among iPayment, Inc., as
Borrower, iPayment Holdings, Inc. the Subsidiary Guarantors named
therein, Bank of America, N.A., as Administrative Agent, JPMorgan
Chase Bank, N.A., as Syndication Agent and Banc of America Securities
LLC, as Sole Lead Arranger (incorporated by reference to Exhibit 10.1
of the Registrants Registration Statement on Form S-4 filed on July
21, 2006).10.2
    
    Security Agreement, dated May 10, 2006, among iPayment, Inc.,
iPayment Holdings, Inc., the Subsidiary Guarantors named therein and
Bank of America N.A. (incorporated by reference to Exhibit 10.2 of
the Registrants Registration Statement on Form S-4 filed on July 21,
2006).10.3
    
    Pledge Agreement, dated May 10, 2006, among the Pledgors named
therein and Bank of America N.A. (incorporated by reference to
Exhibit 10.3 of the Registrants Registration Statement on Form S-4
filed on July 21, 2006).10.4
    
    Purchase Agreement, dated as of May 3, 2006, among iPayment,
Inc., the Subsidiary Guarantors named therein, Banc of America
Securities LLC and J.P. Morgan Securities Inc., (incorporated by
reference to Exhibit 4.2 of the Registrants Registration Statement
on Form S-4 filed on July 21, 2006).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.99.1
    
    Stipulation of Settlement, In re
iPayment, Inc. Stockholders Litigation,Civil Action No. 05-1250-I (Chancery Court
for Davidson County, 20th Judicial District, Tennessee) (incorporated by
reference to Exhibit 99.1 of the Registrants Form 8-K filed on May 5,
2006).
 Page 28 of 28