##### 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 o
  Large accelerated filero
    
    Accelerated filer oNon-accelerated filerx (Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o x
  Title of each class
    
    Shares Outstanding at March 31, 2008(Common stock, $0.01 par value)
    
    100




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1Financial StatementsConsolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
    
    
    14Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    22Item 1ARisk Factors
    
    
    22Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3Defaults Upon Senior Securities
    
    
    22Item 4Submission of Matters to a Vote of Security Holders
    
    
    22Item 5Other Information
    
    
    22Item 6Exhibits and Reports on Form 8-K
    
    
    22SIGNATURES
    
    
    23EXHIBITS
    
    
    24EX-31.1 Section 302 Certification of the CEO.EX-31.2 Section 302 Certification of the CFO.EX-32.1 Section 906 Certification of the CEO.EX-32.2 Section 906 Certification of the CFO.
  2




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##### Table of Contents



Part 1.
 
 Item 1. Financial Statements
 iPAYMENT, INC.
 
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11
    
    
    $
    33Accounts receivable, net of allowance for doubtful accounts of $761 and $768 at
March 31, 2008 and December 31, 2007, respectively
    
    
    22,695
    
    
    
    24,726Prepaid expenses and other current assets
    
    
    1,783
    
    
    
    2,864Investment in merchant advances, net of allowance for doubtful accounts of $243
and $0 at March 31, 2008 and December 31, 2007, respectively
    
    
    4,935
    
    
    
    116Deferred tax assets
    
    
    1,004
    
    
    
    1,004Total current assets
    
    
    30,428
    
    
    
    28,743Restricted cash
    
    
    1,308
    
    
    
    1,266Property and equipment, net
    
    
    3,958
    
    
    
    3,753Intangible assets and other, net of accumulated amortization of $67,298 and $59,109
at March 31, 2008 and December 31, 2007, respectively
    
    
    193,511
    
    
    
    198,003Goodwill
    
    
    518,639
    
    
    
    518,639Other assets, net
    
    
    16,231
    
    
    
    17,141Total assets
    
    $
    764,075
    
    
    $
    767,545LIABILITIES and STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,393
    
    
    $
    6,005Income taxes payable
    
    
    374
    
    
    
    6,301Accrued liabilities and other
    
    
    22,490
    
    
    
    19,406Current portion of long-term debt
    
    
    5,215
    
    
    
    6,899Total current liabilities
    
    
    30,472
    
    
    
    38,611Minority interest in equity of consolidated subsidiaries
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    2,679
    
    
    
    6,602Long-term debt
    
    
    694,154
    
    
    
    690,458Other liabilities
    
    
    23,689
    
    
    
    14,658Total liabilities
    
    
    750,994
    
    
    
    750,329Commitments and contingencies (Note 8)Stockholders equityCommon stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at March 31, 2008, and December 31, 2007
    
    
    20,055
    
    
    
    20,055Accumulated other comprehensive loss, net of tax benefits of $3,645 and $2,522 at
March 31, 2008, and December 31, 2007, respectively
    
    
    (12,822
    )
    
    
    (7,354
    )Retained earnings
    
    
    5,848
    
    
    
    4,515Total stockholders equity
    
    
    13,081
    
    
    
    17,216Total liabilities and stockholders equity
    
    $
    764,075
    
    
    $
    767,545
  3




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Revenues
    
    $
    185,455
    
    
    $
    177,740Operating expenses:Interchange
    
    
    108,381
    
    
    
    103,620Other costs of services
    
    
    55,773
    
    
    
    54,284Selling, general and administrative
    
    
    4,818
    
    
    
    6,549Total operating expenses
    
    
    168,972
    
    
    
    164,453Income from operations
    
    
    16,483
    
    
    
    13,287Other expense:Interest expense, net
    
    
    14,311
    
    
    
    15,268Other expense, net
    
    
    3
    
    
    
    18Income (loss) before income taxes and minority interest
in earnings of consolidated subsidiary
    
    
    2,169
    
    
    
    (1,999
    )Income tax provision (benefit)
    
    
    838
    
    
    
    (129
    )Minority interest in losses of consolidated subsidiaries
    
    
    
    
    
    
    155Net income (loss)
    
    $
    1,331
    
    
    $
    (1,715
    )
  4




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iPAYMENT, INC.
 
 CONSOLIDATED STATEMENTS of CASH FLOWS
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    1,331
    
    
    $
    (1,715
    )Adjustments to reconcile net income (loss) to net cash provided by operating activitiesDepreciation and amortization
    
    
    8,563
    
    
    
    9,401Noncash interest expense
    
    
    646
    
    
    
    644Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable
    
    
    2,031
    
    
    
    1,406Prepaid expenses and other current assets
    
    
    1,081
    
    
    
    (235
    )Other assets
    
    
    (110
    )
    
    
    (1,433
    )Accounts payable and income taxes payable
    
    
    (9,539
    )
    
    
    (4,274
    )Accrued liabilities and other
    
    
    3,004
    
    
    
    3,955Net cash provided by operating activities
    
    
    7,007
    
    
    
    7,749Cash flows from investing activitiesChange in restricted cash
    
    
    (42
    )
    
    
    (9
    )Expenditures for property and equipment
    
    
    (559
    )
    
    
    (463
    )Investment in merchant advances, net
    
    
    (4,819
    )
    
    
    Acquisitions of businesses & portfolios, net of cash acquired, and
payments related to businesses previously acquired
    
    
    
    
    
    
    (8,668
    )Payments for prepaid residual expenses
    
    
    (3,534
    )
    
    
    (361
    )Net cash used in investing activities
    
    
    (8,954
    )
    
    
    (9,501
    )Cash flows from financing activitiesNet borrowings on line of credit
    
    
    4,950
    
    
    
    4,050Repayments of debt
    
    
    (3,025
    )
    
    
    (2,312
    )Net cash provided by financing activities
    
    
    1,925
    
    
    
    1,738Net decrease in cash and cash equivalents
    
    
    (22
    )
    
    
    (14
    )Cash and cash equivalents, beginning of period
    
    
    33
    
    
    
    96Cash and cash equivalents, end of period
    
    $
    11
    
    
    $
    82Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    $
    6,748
    
    
    $
    2,211Cash paid during the period for interest
    
    $
    9,410
    
    
    $
    9,718
  5




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




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Derivative Financial Instruments
   Accounting for Derivative Instruments and Hedging Activities
 Amortization of Intangible Assets
    Common Stock
  7




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




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




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(7) Comprehensive Income (Loss)
  (8) Commitments and Contingencies
 Litigation
 Robert Aguilard, et al., on behalf of themselves and all persons similarly situated v.
E-Commerce Exchange, Inc., A-1 Leasing LLC, and Duvera Billing Services, et al , Civil Action
No. 05CC02794  State of California, Superior Court of Orange County.
   Bruns v. E-Commerce Exchange Inc., et al, Orange County Superior Court, State of California,
Case No. 00CC02450 (coordinated under the caption TCPA Cases, Los Angeles County Superior
Court, State of California, Case No. JCCO 43500)
    NPMG Acquisition Sub / American Arbitration Association Demand for Arbitration, Case Number:
Re: 76 489 Y 00188 07 WYGI).
   10




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Colin Hill v. CardPayment Solutions, L.L.C. and Zachary Daniels, Circuit Court in and for the
Sixth Judicial Circuit, in and for Pinellas County, Florida
   Sharyns
Jewelers, LLC v. iPayment, Inc., iPayment of Valencia, Vericomm and JP Morgan Chase
Bank , General Court of Justice , Superior Court Division, County of Carteret, State of North
Carolina, File No.: 05-CVS-92 / and related case Judgment Recovery Group, LLC, as assignee of
Sharyns Jewelers, LLC, v. iPayment, Inc., iPayment of Valencia, Vericomm, and JP Morgan Chase
Bank, Superior Court of the State of California, County of Los Angeles, Case No.: PS 009919
  GMPN, INC and LANCE O. MORRIS v. BRIAN PETERSON et al, and related Counterclaim and
Intervention Complaint, SUPERIOR COURT OF ARIZONA, MARICOPA COUNTY, Case No: CV2007-006404
   11




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Employment Development Department of the State of California, Notice of Assessment No. 00008
  Other  Merrick Bank
   (9) Restructuring
  12




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Accounting for Costs Associated with Exit or
Disposal Activities,
 One-Time Termination Benefits.
 Contract
Termination Costs.
 Other Associated Costs.
  Charged toJanuary 1,
    
    
    Costs or
    
    
    
    
    
    
    March 31,2008
    
    
    Expenses
    
    
    Deductions
    
    
    2008One-time termination benefits
    
    $
    1
    
    
    $
    
    
    
    $
    1
    
    
    $
    Contract termination costs
    
    
    11
    
    
    
    
    
    
    
    11
    (1)
    
    
    Other associated costs
    
    
    11
    
    
    
    
    
    
    
    11
    (2)
    
    
    $
    23
    
    
    $
    
    
    
    $
    23
    
    
    $
    
 
 (1)
    
    Payments of contract termination costs(2)
    
    Payments of other associated costs (10) Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157,
 The Fair Value Option for Financial Assets and
Liabilities  Including an amendment of FASB Statement No. 115,
 13




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(11) Significant Developments
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
 Forward-Looking Statements May Prove Inaccurate
  Executive Overview
   Critical Accounting Policies
  Accounting for Goodwill and Intangible Assets. Goodwill and Other Intangible Assets,
 14




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Reserve for Merchant Losses
 Income Taxes. Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109
  Minority Interest.
 15




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Consolidation of Variable Interest Entities
 Derivative Financial Instruments. Accounting for Derivative Instruments and Hedging Activities
 Components of Revenues and Expenses
  Reporting Revenue Gross as a Principal Versus Net as
an Agent,
   16




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Seasonality Trend
  Off-Balance Sheet Arrangements
  17




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Results of Operations
 Three Months Ended March 31, 2008 (2008) Compared to Three Months Ended March 31, 2007 (2007)
 ChangeThree months ended
    
    
    % of Total
    
    
    Three months ended
    
    
    % of TotalMarch 31, 2008
    
    
    Revenue
    
    
    March 31, 2007
    
    
    Revenue
    
    
    Amount
    
    
    %Revenues
    
    $
    185,455
    
    
    
    100.0
    %
    
    $
    177,740
    
    
    
    100.0
    %
    
    $
    7,715
    
    
    
    4.3Operating ExpensesInterchange
    
    
    108,381
    
    
    
    58.4
    
    
    
    103,620
    
    
    
    58.3
    
    
    
    4,761
    
    
    
    4.6Other costs of services
    
    
    55,773
    
    
    
    30.1
    
    
    
    54,284
    
    
    
    30.5
    
    
    
    1,489
    
    
    
    2.7Selling, general and administrative
    
    
    4,818
    
    
    
    2.6
    
    
    
    6,549
    
    
    
    3.7
    
    
    
    (1,731
    )
    
    
    (26.4
    )Total operating expenses
    
    
    168,972
    
    
    
    91.1
    
    
    
    164,453
    
    
    
    92.5
    
    
    
    4,519
    
    
    
    2.7Income from operations
    
    
    16,483
    
    
    
    8.9
    
    
    
    13,287
    
    
    
    7.5
    
    
    
    3,196
    
    
    
    24.1Other expenseInterest expense, net
    
    
    14,311
    
    
    
    7.7
    
    
    
    15,268
    
    
    
    8.6
    
    
    
    (957
    )
    
    
    (6.3
    )Other (income) expense, net
    
    
    3
    
    
    
    0.1
    
    
    
    18
    
    
    
    0.0
    
    
    
    (15
    )
    
    
    (83.3
    )Total other expense
    
    
    14,314
    
    
    
    7.7
    
    
    
    15,286
    
    
    
    8.6
    
    
    
    (972
    )
    
    
    (6.4
    )Income (loss) before income taxes
    
    
    2,169
    
    
    
    1.2
    
    
    
    (1,999
    )
    
    
    (1.1
    )
    
    
    4,168
    
    
    
    (208.5
    )Income tax provision (benefit)
    
    
    833
    
    
    
    0.4
    
    
    
    (129
    )
    
    
    (0.1
    )
    
    
    962
    
    
    
    (745.7
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    0.1
    
    
    
    (155
    )
    
    
    (100.00
    )Net income (loss)
    
    $
    1,336
    
    
    
    0.7
    
    
    $
    (1,715
    )
    
    
    (1.0
    )
    
    $
    3,051
    
    
    
    (177.9
    )
 Revenues.
 Interchange Expenses
 Other Costs of Services.
 Selling, General and Administrative.
 Other Expense.
 Income Tax
 Minority Interest.
 18




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Liquidity and Capital Resources
  Operating activities
   Investing activities
   Financing activities
     19




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Accounting for Derivative Instruments and Hedging Activities
  Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities
  Contractual Obligations
  Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsNew Facility
    
    $
    498,500
    
    
    $
    5,150
    
    
    $
    10,300
    
    
    $
    483,050
    
    
    $
    Senior subordinated notes
    
    
    195,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,750Interest (1)
    
    
    272,440
    
    
    
    52,759
    
    
    
    100,741
    
    
    
    89,890
    
    
    
    29,050Capital lease obligations
    
    
    66
    
    
    
    24
    
    
    
    2
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    3,082
    
    
    
    1,486
    
    
    
    1,572
    
    
    
    24
    
    
    
    Purchase obligations (2)(3)(4)
    
    
    20,778
    
    
    
    9,570
    
    
    
    8,700
    
    
    
    2,508
    
    
    
    Total contractual obligations
    
    $
    990,616
    
    
    $
    68,989
    
    
    $
    121,315
    
    
    $
    575,472
    
    
    $
    224,800
 
 (1)
    
    Future interest obligations are calculated using current interest rates on existing debt balances as of March 31, 2008, 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 First Data an annual processing fee related to our previously purchased FDMS Merchant Portfolio and the FDMS Agent Bank
Portfolio of at least $10.3 million in fiscal 2008, and for each subsequent year through 2011 of at least 70% of the amount of the processing fee
paid during the immediately preceding year. The minimum commitments for years after 2008, 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 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, 2008, and are excluded from this table. 20




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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
 21




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits and Reports on Form 8-K
  22




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SIGNATURES
  iPayment, Inc.Date: May 9, 2008
    By:
    /s/  Gregrory S. DailyGregory S. DailyChief Executive Officer
(Principal Executive Officer) Date: May 9, 2008
    By:
    /s/  Clay M. WhitsonClay M. WhitsonChief Financial Officer
(Principal Financial and Accounting Officer) 23




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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a  14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002), filed herewith.31.2
    
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a  14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002), filed herewith.32.1
    
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a  14(a) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.32.2
    
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rule 13a  14(a) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002), filed herewith.
 24