##### 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
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
   
 iPayment, Inc.
 (Exact name of registrant as specified in its charter)
 www.ipaymentinc.com
 DELAWARE
    
    62-1847043(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)40 Burton Hills Boulevard, Suite 415Nashville, Tennessee
    
    37215(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (615) 665-1858
 x  ̈
   ̈   ̈ x
  ̈ x
  Title of each class
    
    Shares Outstanding at May 9, 2006(Common stock, $0.01 par value)
    
    17,741,689




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1Financial StatementsConsolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    3Unaudited Consolidated Income Statements for the three months ended March 31, 2006 and 2005
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    16Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    23Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3Defaults Upon Senior Securities
    
    
    23Item 4Submission of Matters to a Vote of Security Holders
    
    
    23Item 5Other Information
    
    
    23Item 6Exhibits and Reports on Form 8-K
    
    
    23SIGNATURES
    
    
    24EXHIBITS
    
    
    24EX-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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Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    210
    
    
    $
    1,023Accounts receivable, net of allowance for doubtful accounts of $305 and $508 at
March 31, 2006 and December 31, 2005, respectively
    
    
    19,961
    
    
    
    22,718Prepaid expenses and other current assets
    
    
    2,965
    
    
    
    2,549Total current assets
    
    
    23,136
    
    
    
    26,290Restricted cash
    
    
    2,047
    
    
    
    3,090Property and equipment, net
    
    
    3,164
    
    
    
    2,907Intangible assets and other, net of accumulated amortization of $74,511 and $65,199
at March 31, 2006 and December 31, 2005, respectively.
    
    
    183,555
    
    
    
    192,343Goodwill, net
    
    
    105,584
    
    
    
    105,178Deferred tax asset, net
    
    
    7,243
    
    
    
    5,757Other assets, net
    
    
    5,189
    
    
    
    5,416Total assets
    
    $
    329,918
    
    
    $
    340,981LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,179
    
    
    $
    1,697Income taxes payable
    
    
    4,248
    
    
    
    4,697Accrued liabilities and other
    
    
    11,772
    
    
    
    24,575Total current liabilities
    
    
    21,199
    
    
    
    30,969Minority interest in equity of consolidated subsidiaries
    
    
    250
    
    
    
    431Long-term debt
    
    
    90,308
    
    
    
    100,228Total liabilities
    
    
    111,757
    
    
    
    131,628Commitments
and contingencies (Note 7)Stockholders equityPreferred stock, $0.01 par value; 17,422,800 shares authorized, no shares
issued or outstanding at March 31, 2006, and December 31, 2005
    
    
    
    
    
    
    Common stock, $0.01 par value; 180,000,000 shares authorized, 17,737,162
shares issued and outstanding at March 31, 2006; 180,000,000 shares
authorized, 16,757,891 shares issued and outstanding at December 31, 2005
    
    
    156,936
    
    
    
    155,870Deferred compensation
    
    
    (3,293
    )
    
    
    (3,413
    )Retained earnings
    
    
    64,518
    
    
    
    56,896Total stockholders equity
    
    
    218,161
    
    
    
    209,353Total liabilities and stockholders equity
    
    $
    329,918
    
    
    $
    340,981




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iPAYMENT, INC.
 
 CONSOLIDATED INCOME STATEMENTS
   Three Months Ended March 31,2006
    
    
    2005Revenues
    
    $
    170,901
    
    
    $
    163,363Operating expenses:Interchange
    
    
    98,113
    
    
    
    96,854Other costs of services
    
    
    53,350
    
    
    
    49,342Selling, general and administrative
    
    
    4,620
    
    
    
    3,524Total operating expenses
    
    
    156,083
    
    
    
    149,720Income from operations
    
    
    14,818
    
    
    
    13,643Other expense:Interest expense
    
    
    2,013
    
    
    
    2,348Interest income
    
    
    (165
    )
    
    
    (51
    )Other
    
    
    878
    
    
    
    81Income before income taxes and minority interest
in earnings of consolidated subsidiary
    
    
    12,092
    
    
    
    11,265Income tax provision
    
    
    4,818
    
    
    
    4,393Minority interest in earnings of consolidated subsidiaries
    
    
    348
    
    
    
    Net income
    
    $
    7,622
    
    
    $
    6,872Basic and diluted earnings per common share:Earnings per shareBasic
    
    $
    0.43
    
    
    $
    0.41Diluted
    
    $
    0.42
    
    
    $
    0.38Weighted average shares outstandingBasic
    
    
    17,630
    
    
    
    16,721Diluted
    
    
    18,330
    
    
    
    18,230




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
   Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    7,622
    
    
    $
    6,872Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    9,703
    
    
    
    10,086Stock-based compensation
    
    
    579
    
    
    
    Noncash interest expense
    
    
    252
    
    
    
    249Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    2,757
    
    
    
    (299
    )Prepaid expenses and other current assets
    
    
    (422
    )
    
    
    (556
    )Other assets
    
    
    (1,508
    )
    
    
    (395
    )Accounts payable and income taxes payable
    
    
    3,195
    
    
    
    1,137Accrued liabilities and other
    
    
    (3,884
    )
    
    
    (2,576
    )Net cash provided by operating activities
    
    
    18,294
    
    
    
    14,518Cash flows from investing activitiesChange in restricted cash
    
    
    1,043
    
    
    
    716Expenditures for property and equipment
    
    
    (495
    )
    
    
    (443
    )Acquisitions of businesses, portfolios and other intangibles, net of cash acquired
    
    
    (524
    )
    
    
    (16,556
    )Payments related to businesses previously acquired
    
    
    (9,500
    )
    
    
    Net cash used in investing activities
    
    
    (9,476
    )
    
    
    (16,283
    )Cash flows from financing activitiesNet (repayments) borrowings on line of credit
    
    
    (9,900
    )
    
    
    1,000Repayments of debt
    
    
    (20
    )
    
    
    Proceeds from issuance of common stock and exercise of options
    
    
    289
    
    
    
    901Net cash (used in) provided by financing activities
    
    
    (9,631
    )
    
    
    1,901Net (decrease) increase in cash and cash equivalents
    
    
    (813
    )
    
    
    136Cash and cash equivalents, beginning of period
    
    
    1,023
    
    
    
    888Cash and cash equivalents, end of period
    
    $
    210
    
    
    $
    1,024Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    6,815
    
    
    $
    4,734Cash paid during the period for interest
    
    $
    1,736
    
    
    $
    1,484Non-cash increases in assets (liabilities) from acquisitions:Increase in goodwill
    
    $
    407
    
    
    $
    
 See accompanying notes to consolidated financial statements.




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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
  Share-Based Compensation
 Share-Based Payment,




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IPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    Three MonthsEnded March 31,2005Net income, as reported
    
    $
    6,872Deduct: Total stock-based employee compensation expense
determined under fair-value-based method
    
    
    (575
    )Pro forma net income
    
    $
    6,297Earnings per share:As reported:Basic
    
    $
    0.41Diluted
    
    $
    0.38Pro Forma:Basic
    
    $
    0.38Diluted
    
    $
    0.35




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IPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (2) Acquisitions
  Other Acquisitions
  (3) Long-Term Debt




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IPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (4) Stockholders Equity
 Earnings Per Share
 Earnings per Share
   Three Months Ended March 31,2006
    
    
    2005Income
    
    
    Common
    
    
    Per Share
    
    
    Income
    
    
    Common
    
    
    Per ShareAvailable
    
    
    Shares
    
    
    Amount
    
    
    Available
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    $
    7,622
    
    
    
    17,630
    
    
    $
    0.43
    
    
    $
    6,872
    
    
    
    16,721
    
    
    $
    0.41Effects of dilutive securities:Stock options
    
    
    
    
    
    
    647
    
    
    
    (0.01
    )
    
    
    
    
    
    
    815
    
    
    
    (0.02
    )Convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    662
    
    
    
    (0.01
    )Restricted stock
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    Diluted earnings per share
    
    $
    7,622
    
    
    
    18,330
    
    
    $
    0.42
    
    
    $
    6,972
    
    
    
    18,230
    
    
    $
    0.38
 (5) Segment Information and Geographical Information
  (6) Income Taxes
 Accounting for Income
Taxes




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IPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (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.




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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.




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IPAYMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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
   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
    Business
Combinations Basis in
Leveraged Buyout Transactions.




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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




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Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
   Share-Based Compensation. Share-Based Payment,




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Reserve for Merchant Losses
 Income Taxes. Accounting for Income Taxes.
 Minority Interest.
 Consolidation of Variable Interest Entities
 Components of Revenues and Expenses
  Reporting Revenue Gross as a Principal Versus Net as
an Agent,




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Seasonality Trend
  Off-Balance Sheet Arrangements




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Results of Operations
  Three months ended
    
    
    % of Total
    
    
    Three months ended
    
    
    % of Total
    
    
    ChangeMarch 31, 2006
    
    
    Revenue
    
    
    March 31, 2005
    
    
    Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    170,901
    
    
    
    100.0
    %
    
    $
    163,363
    
    
    
    100.0
    %
    
    $
    7,538
    
    
    
    4.6Operating ExpensesInterchange
    
    
    98,113
    
    
    
    57.4
    
    
    
    96,854
    
    
    
    59.3
    
    
    
    1,259
    
    
    
    1.3Other costs of services
    
    
    53,350
    
    
    
    31.2
    
    
    
    49,342
    
    
    
    30.2
    
    
    
    4,008
    
    
    
    8.1Selling, general and administrative
    
    
    4,620
    
    
    
    2.7
    
    
    
    3,524
    
    
    
    2.2
    
    
    
    1,096
    
    
    
    31.1Total operating expenses
    
    
    156,083
    
    
    
    91.3
    
    
    
    149,720
    
    
    
    91.6
    
    
    
    6,363
    
    
    
    4.2Income from operations
    
    
    14,818
    
    
    
    8.7
    
    
    
    13,643
    
    
    
    8.4
    
    
    
    1,175
    
    
    
    8.6Other expenseInterest expense
    
    
    2,013
    
    
    
    1.2
    
    
    
    2,348
    
    
    
    1.5
    
    
    
    (335
    )
    
    
    (14.3
    )Interest income
    
    
    (165
    )
    
    
    (0.1
    )
    
    
    (51
    )
    
    
    0.0
    
    
    
    (114
    )
    
    
    223.5Other
    
    
    878
    
    
    
    0.5
    
    
    
    81
    
    
    
    0.0
    
    
    
    797
    
    
    NMTotal other expense
    
    
    2,726
    
    
    
    1.6
    
    
    
    2,378
    
    
    
    1.5
    
    
    
    348
    
    
    
    14.6Income before income taxes
    
    
    12,092
    
    
    
    7.1
    
    
    
    11,265
    
    
    
    6.9
    
    
    
    827
    
    
    
    7.3Income tax provision
    
    
    4,818
    
    
    
    2.8
    
    
    
    4,393
    
    
    
    2.7
    
    
    
    425
    
    
    
    9.7Minority interest
    
    
    348
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    348
    
    
    NMNet income
    
    $
    7,622
    
    
    
    4.5
    
    
    $
    6,872
    
    
    
    4.2
    
    
    $
    750
    
    
    
    10.9NM = Not meaningfulOther
Data:EBITDA(a)
    
    
    23,991
    
    
    
    
    
    
    
    23,648Adjusted
EBITDA(a)
    
    
    25,448
    
    
    
    
    
    
    
    23,729
 
 (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): Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005(Unaudited)
    
    
    (Unaudited)Net Income
    
    $
    7,622
    
    
    $
    6,872Interest expense, net
    
    
    1,848
    
    
    
    2,297Income tax provision
    
    
    4,818
    
    
    
    4,393Depreciation and amortization
    
    
    9,703
    
    
    
    10,086EBITDA
    
    
    23,991
    
    
    
    23,648Stock-based compensation(a)
    
    
    579
    
    
    
    Other expense(b)
    
    
    878
    
    
    
    81Adjusted EBITDA
    
    
    25,448
    
    
    
    23,729
 
 (a)
    
    Represents compensation expense related to stock options granted to employees recognized due
to the adoption of FAS 123R on January 1, 2006.(b)
    
    Represents certain expenses of the company primarily related to the merger transaction. Three Months Ended March 31, 2006 (2006) Compared to Three Months Ended March 31, 2005
(2005)
 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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Liquidity and Capital Resources
  Operating activities
   Investing activities
   Financing activities




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Payments due by periodMore than 5Contractual Obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsCredit facility
    
    $
    90,100
    
    
    $
    
    
    
    $
    90,100
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    5,309
    
    
    
    1,819
    
    
    
    2,458
    
    
    
    1,032
    
    
    
    Purchase obligations (1)(2)(3)
    
    
    45,681
    
    
    
    16,241
    
    
    
    19,241
    
    
    
    6,845
    
    
    
    3,354Total contractual obligations
    
    $
    141,090
    
    
    $
    18,060
    
    
    $
    111,799
    
    
    $
    7,877
    
    
    $
    3,354
 
 (1)
    
    Purchase obligations represent costs of contractually
guaranteed minimum processing volumes with certain of
our third-party transaction processors.(2)
    
    We are required to pay FDMS an annual processing fee
related to the FDMS Merchant Portfolio and the FDMS
Agent Bank Portfolio of at least $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.(3)
    
    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 March 31, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Item 3. Defaults Upon Senior Securities
 Item 4. Submission of Matters to a Vote of Security Holders
 Item 5. Other Information
 Item 6. Exhibits




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SIGNATURES
  iPayment, Inc.Date: May 10, 2006
    
    By: /s/ Gregrory S. Daily

Gregory S. DailyChief Executive Officer(Principal Executive Officer)Date: May 10, 2006
    
    By: /s/ Clay M. Whitson

Clay M. WhitsonChief Financial Officer(Principal Financial and Accounting Officer)




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EXHIBIT INDEX


Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange
Act Rule 13a  14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002), filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rule 13a  14(a) (as adopted 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.