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EX-32.2 - EX-32.2 - iPayment, Inc. | g22653exv32w2.htm |
EX-31.2 - EX-31.2 - iPayment, Inc. | g22653exv31w2.htm |
EX-32.1 - EX-32.1 - iPayment, Inc. | g22653exv32w1.htm |
EX-31.1 - EX-31.1 - iPayment, Inc. | g22653exv31w1.htm |
EX-21.1 - EX-21.1 - iPayment, Inc. | g22653exv21w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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)
Delaware | 62-1847043 | |
(State or other jurisdiction | (IRS Employer | |
of incorporation or organization) | Identification No.) | |
40 Burton Hills Boulevard, Suite 415 | ||
Nashville, Tennessee | 37215 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (615) 665-1858
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes þ No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No
þ (Note: The registrant, as a voluntary filer, is not subject to the filing
requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, but has been filing
all reports required to be filed by those sections for the preceding 12 months.)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
( Do not check if a Smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes o No þ
Aggregate market value of registrants common stock held by non-affiliates of the registrant as of
June 30, 2009, was NONE. There is no trading market for the common stock of the Registrant.
Number of
shares of the registrants common stock outstanding as of March 26, 2010, was 100.
Documents incorporated by reference: NONE
Documents incorporated by reference: NONE
TABLE OF CONTENTS
Caution Regarding Forward-Looking Statements
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Caution Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements about iPayment, Inc. within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. For example, statements in the future tense, words such as anticipates, estimates,
expects, intends, plans, believes, and words and terms of similar substance used in
connection with any discussion of future results, performance or achievements identify such
forward-looking statements. Those forward-looking statements involve risks and uncertainties and
are not guarantees of future results, performance or achievements, and actual results, performance
or achievements could differ materially from the Companys current expectations as a result of
numerous factors, including those discussed in the Risk Factors section in Item 1 of this Form
10-K and elsewhere in this Form 10-K and the documents incorporated by reference in this Form 10-K.
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially including but not limited to
the following: acquisitions; liability for merchant chargebacks; reserve for merchant advance
losses; violations of covenants governing the Companys indebtedness; weakening consumer spending
and a generally weak economy; actions taken by its bank sponsors; migration of merchant portfolios
to new bank sponsors; the Companys reliance on card payment processors and on independent sales
groups; changes in interchange fees; risks associated with the unauthorized disclosure of data;
imposition of taxes on Internet transactions; actions by the Companys competitors; and risks
related to the integration of companies and merchant portfolios the Company has acquired or may
acquire. Any forward-looking statements contained in this Form 10-K or in the documents
incorporated herein by reference reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to our operations, results
of operations, growth strategy and liquidity. We have no intention, and disclaim any obligation,
to update or revise any forward-looking statements, whether as a result of new information, future
results or otherwise. Readers should not place undue reliance on forward-looking statements, which
reflect our view only as of the date of this Form 10-K.
Throughout this document, the terms iPayment, the Company, we, us, our and similar
terms refer to iPayment, Inc., and, unless the context indicates otherwise, its consolidated
subsidiaries.
PART I
ITEM 1 Business
We are a provider of credit and debit card-based payment processing services focused on small
merchants across the United States. As of December 31, 2009, we provided our services to
approximately 140,000 active small merchants. We define a merchant as active if the merchant
processes at least one Visa or MasterCard transaction in a given month. The small merchants we
serve have an average charge volume of approximately $170,000 per year and typically have an
average transaction value of approximately $67. These merchants have traditionally been underserved
by larger payment processors due to the difficulty in identifying, servicing and managing the risks
associated with them. As a result, these merchants have historically paid higher fees per
transaction than larger merchants.
Our payment processing services enable merchants to process both traditional card-present, or
swipe, transactions, as well as card-not-present transactions. A traditional card-present
transaction occurs whenever a cardholder physically presents a credit or debit card to a merchant
at the point-of-sale. A card-not-present transaction occurs whenever the customer does not
physically present a payment card at the point-of-sale and may occur over the Internet, mail, fax
or telephone.
We believe our experience and knowledge in providing payment processing services to small
merchants gives us the ability to effectively evaluate and manage the payment processing needs and
risks that are unique to small businesses. In order to identify small merchants, we market and
sell our services primarily through independent sales groups, which gives us a non-employee,
external sales force, as well as a direct sales force. Our relationships with the independent
sales groups allow us to access a large and experienced sales force with a local presence providing
access to small merchants over a broad geographic area without incurring the additional overhead
costs associated with an internal sales force. Independent sales groups and sales agents may
market and sell our services to merchants under their own brand name and directly approach
merchants and enroll them for our services. We enable merchants to accept credit and debit cards
as payment for their merchandise and services by providing processing, risk management, fraud
detection, merchant assistance and support and chargeback services in connection with disputes with
cardholders. In addition, we rely on third-party processors to provide card authorization and data
capture, and banks to sponsor us for membership in the Visa and MasterCard associations and to
settle transactions with merchants. We believe that this structure allows us to maintain an
efficient operating structure, and enables us to easily expand our operations without significantly
increasing our fixed costs.
The Nilson Report, a publication specializing in consumer payment systems worldwide, listed us
in its 2008 ranking of the top bank card acquirers, or owners of merchant card processing
contracts, as one of the largest providers of card-based payment processing services in the United
States. Due to the challenging economic environment, our merchant processing volume, which
represents the total value of transactions processed by us, declined to $23,526 million in 2009
compared to $26,783 million in 2008. Corresponding to the decrease in charge volume, our revenues
also decreased. We currently expect this trend to moderate in 2010. However, we believe our
ability to recruit and retain independent sales groups, combined with our experience in
identifying, completing and integrating acquisitions, provides us with significant opportunities
for future growth in an economic recovery.
Historical Developments
In December 2004, we entered into an Asset Purchase Agreement with First Data Merchant
Services Corporation (FDMS), a subsidiary of First Data Corporation, pursuant to which we
acquired a portfolio of merchant contracts (the FDMS Merchant Portfolio) from FDMS for a price of
$130.0 million in cash. The portfolio had over 25,000 small merchant accounts representing
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approximately $9 to $10 billion in annual bankcard volume. The transaction strengthened our
existing strategic relationship with First Datas merchant services unit.
Pursuant to the Asset Purchase Agreement and one in 2003, we also entered into service
agreements (the Service Agreements) with FDMS pursuant to which FDMS agreed to perform certain
data processing and related services with respect to the merchant contracts acquired through 2011.
In consideration for entering into the Service Agreements, we were required to pay FDMS an annual
processing fee related to the acquired merchant contracts of at least $5.5 million in 2009, and for
subsequent years, at least 70% of the amount of the actual processing fees paid during the
immediately preceding year. We are also required to pay FDMS certain additional amounts in
accordance with the terms of the Service Agreements, including certain special fees for amounts
paid to third-party providers. We also have agreed to utilize FDMS to process at least 75% of our
consolidated transaction sales volume in any calendar year for the term of the Service Agreements
and are required to pay FDMS an amount representing the fees that it would have received if we had
submitted the required minimum number of transactions. We do not currently expect that we will be
required to pay such a fee based on our present business plan.
Industry Overview
The use of card-based forms of payment, such as credit and debit cards, by consumers in the
United States has increased steadily over the past ten years and is expected to continue to
increase. According to The Nilson Report, in 2008, merchant locations in the United States
generated approximately $3.1 trillion of total purchases by U.S. consumers using Visa and
MasterCard card-based systems compared to approximately $2.7 trillion in 2007. According to this
report, total purchases are expected to grow to approximately $3.5 trillion by 2013, representing a
compound annual growth rate of approximately 2.7% from 2008 to 2013. The proliferation of credit
and debit cards has made the acceptance of card-based payment a necessity for businesses, both
large and small, in order to remain competitive.
We focus exclusively on the small merchant segment, which we believe generates a
disproportionate amount of the payment processing industrys net revenue. Based on estimates from
First Annapolis, while small merchants (defined by First Annapolis to be merchants with less than
$10 million of annual charge volume) generate only approximately 40% of Visa and MasterCard annual
charge volume, they account for approximately 80% of annual revenue (net of interchange and
assessment fees) generated from payment processing services.
The
weakened economy affected the card-based payment industry. Visa and MasterCard noted
that both charge volumes and purchase transactions declined in 2009 when compared to 2008. In a
generally weak economy, continued decreases in consumer spending could affect the performance and
growth of the card-based payment industry.
Services
We provide a comprehensive solution for merchants accepting card-based payments, including the
various services described below:
Application Evaluation Underwriting. We recognize that there are varying degrees of risk
associated with different merchants based on the nature of their businesses, processing volume and
average transaction amounts. We apply varying levels of scrutiny in our application evaluation and
underwriting of prospective merchant accounts, ranging from basic due diligence for merchants with
a low risk profile to a more thorough and detailed review for higher risk merchants. The results
of this review serve as the basis for our decision whether to accept or reject a merchant account
and also provide the criteria for establishing reserve requirements, processing limits, average
transaction amounts and pricing, which assist us in monitoring merchant transactions for those
accounts that exceed pre-determined criteria.
Merchant Set-up and Training. After we establish a contract with a merchant, we create the
software configuration that is downloaded to the merchants payment card terminal or computer.
This configuration includes the merchant identification number, which allows the merchant to accept
Visa and MasterCard as well as debit cards and any other payment cards, such as American Express,
Discover and Diners Club, provided for in the contract. The configuration might also accommodate
check verification and gift and loyalty programs. If a merchant requires a pin-pad to accept debit
cards, the configuration allows for the terminal or computer to communicate with the peripheral
device. After the download has been completed, we conduct a training session on use of the
products.
Transaction Processing. A transaction begins with authorization of the customers credit or
debit card. The transaction data is captured by the processor and electronically transmitted to
the issuer of the card, which then determines availability of credit or debit funds. The issuer
then communicates an approval decision back to the merchant through the processor. This process
typically takes less than five seconds. After the transaction is completed, the processor
transmits the final transaction data to the card issuer for settlement of funds. Generally, we
outsource these services to third-party processors.
Risk Management/ Detection of Fraudulent Transactions. Our risk management staff relies on
the criteria set by the underwriting department to assist merchants in identifying and avoiding
fraudulent transactions by monitoring exceptions and providing access to other resources for fraud
detection. By employing these and other risk management procedures, we enable our merchants to
balance the risk of fraud against the loss of a valid transaction.
Merchant Service and Support. We provide merchants with ongoing service and support.
Customer service and support includes answering billing questions, responding to requests for
supplies, resolving failed payment transactions, troubleshooting and repair of equipment, educating
merchants on general industry compliance, and assisting merchants with pricing changes and
purchases of additional products and services. We maintain a toll-free help-line, which is staffed
by our customer service representatives. The information access and retrieval capabilities of our
proprietary decision support systems provide our customer service representatives prompt access to
merchant account information and customer call history. This data allows them to quickly
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respond to inquiries relating to fees, charges and funding of accounts as well as technical
issues.
Chargeback Service. In the event of a billing dispute between a cardholder and a merchant, we
assist the merchant in investigating and resolving the dispute as quickly and as accurately as
possible. Before instructing the cardholders bank to debit the merchants account for the
chargeback, we provide the merchant with the opportunity to demonstrate that the transaction was
valid. If the merchant is unable to demonstrate that the transaction was valid and the dispute is
resolved in favor of the cardholder, the transaction is charged back to the merchant, and that
amount is credited to the cardholder. For the year ended December 31, 2009, chargeback losses as a
percentage of our total charge volume were approximately 2.1 basis points.
Merchant Reporting. We organize our merchants transaction data into various files for
merchant accounting purposes. We use this data to provide merchants with information, such as
charge volume, discounts, fees and funds held for reserves to help them track their account
activity. Merchants may access this archived information through our customer service
representatives or online through our Internet-based customer service system.
The transactions for which we provide processing services involve the following third parties:
| Merchants. Merchants are the businesses that accept payment cards, including Visa and MasterCard, as payment for their merchandise and services. | ||
| Sponsoring Banks. Sponsoring banks are financial institutions that are Visa and MasterCard card association members and provide the funds on behalf of the card user, enabling merchants to accept payment cards. | ||
| Processing Vendors. Processing vendors, which may include banks, gather sales information from merchants, obtain authorization for merchants transactions from card issuers, facilitate the collection of funds from sponsoring banks for payment to merchants and provide merchant accounting and settlement services on our behalf. |
The following diagram illustrates the relationship between a merchant, a processing vendor, a
sponsoring bank and us
We derive the majority of our revenues from fee income related to transaction processing,
which is primarily comprised of a percentage of the dollar amount of each transaction we process,
as well as a flat fee per transaction. The percentage we charge varies upon several factors,
including the transaction amount, as well as whether the transaction process is a swipe transaction
or a non-swipe transaction. On average, the gross revenue we generate from processing transactions
equals approximately $3.00 for every $100 transaction we process, excluding costs and expenses. The
following diagram illustrates the percentage of a typical transaction amount paid to the processing
bank, the Visa and MasterCard card associations and us:
An Example of Typical $100 Transaction
Purchase amount |
$ | 100.00 | ||
Less cash to merchant |
97.00 | |||
Average iPayment gross revenue |
3.00 | |||
Average iPayment processing margin |
0.40 |
Distribution of $3.00 Revenue
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Visa and MasterCard card-based payment transactions represent substantially all of the total
card transaction volume generated by all of our merchant accounts.
Marketing and Sales
We market and sell our services to merchants throughout the United States primarily through a
network of independent sales groups, a non-employee, external sales force with which we have
contractual relationships. These relationships are typically mutually non-exclusive, permitting us
to establish relationships with multiple independent sales groups and permitting our groups to
enter into relationships with other providers of payment processing services. We believe that this
sales approach provides us with access to an experienced sales force to market our services with
limited investment in sales infrastructure and management time. We believe our focus on the unique
needs of small merchants allows us to develop compelling offerings for our independent sales groups
to bring to prospective merchants and provides us with a competitive advantage in our target
market. Among the services and capabilities we provide are rapid application response time,
merchant application acceptance by fax or on-line submission, superior customer service and
merchant reporting. We keep an open dialogue with our independent sales groups to address their
concerns as quickly as possible and to work with them in investigating chargebacks or potentially
suspicious activity with the aim of ensuring their merchants do not unduly suffer downtime or the
unnecessary withholding of funds.
As compensation for their referral of merchant accounts, we pay our independent sales groups
an agreed-upon residual, or percentage of the profits we derive from the transactions we process
from the merchants they refer to us. The amount of the residuals we pay to our independent sales
groups varies on a case-by-case basis and depends on several factors, including the number of
merchants each group refers to us. We provide additional incentives to our independent sales
groups, including, from time to time, loans that are secured by and repayable from future
compensation that may be earned by the groups in respect of the merchants they have referred to us.
As of December 31, 2009, we had outstanding loans to independent sales groups in an aggregate
amount of $0.9 million, and we may decide to loan additional amounts in the future. We have a
limit of $20.0 million on the amount of loans we may make to independent sales groups in accordance
with the terms of our senior secured credit facility. The notes representing these loans bear
interest in amounts ranging from 6% to 13% and are due through 2011. We secure the loans by
attaching the independent sales groups assets, including the rights they have to receive residuals
and fees generated by the merchants they refer to us and any other accounts receivable and
typically by obtaining personal guarantees from the individuals who operate the independent sales
groups. In addition, we offer the independent sales groups more rapid and consistent review and
acceptance of merchant applications than may be available from other service providers.
Relationships with Sponsors and Processors
In order to provide payment processing services for Visa and MasterCard transactions, we must
be sponsored by a financial institution that is a principal member of the Visa and MasterCard card
associations. Additionally, we must be registered with Visa as an independent sales organization
and with MasterCard as a member service provider.
Sponsoring Banks. We have agreements with several banks that sponsor us for membership in the
Visa and MasterCard card associations and settle card transactions for our merchants. The
principal sponsoring bank through which we process the significant majority of our transactions is
Wells Fargo, and other sponsoring banks include HSBC Bank USA. The initial term of our agreement
with Wells Fargo lasts through December 2014 and will thereafter automatically continue unless
either party provides the other at least six months notice of its intent to terminate. These
sponsoring banks may terminate their agreements with us if we materially breach the agreements and
do not cure the breach within an established cure period, if our membership with Visa or MasterCard
terminates, if we enter bankruptcy or file for bankruptcy, or if applicable laws or regulations,
including Visa and MasterCard regulations, change to prevent either the applicable bank or us from
performing its services under the agreement. The agreements generally define a material breach as
a failure to perform a material obligation under the agreement, specifically any breach of any
warranty, representation or covenant or condition or term of the agreement, such as noncompliance
with applicable laws, failure to provide relevant documentation as to certain account related data,
failure to provide a marketing plan upon request, failure to maintain a transfer account or failure
to pay for services. From time to time, we may enter into agreements with additional banks. If
these sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able
to process bankcard transactions. Furthermore, our agreements with our sponsoring banks provide
the sponsoring banks with substantial discretion in approving certain elements of our business
practices, including our solicitation, application and qualification procedures for merchants, the
terms of our agreements with merchants, the processing fees that we charge, our customer service
levels and our use of independent sales groups. We cannot guarantee that our sponsoring banks
actions under these agreements will not be detrimental to us, nor can we guarantee that any of our
sponsoring banks will not terminate their sponsorship of us in the future.
Processing Vendors. We have agreements with several processing vendors to provide to us, on a
non-exclusive basis,
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transaction processing and transmittal, transaction authorization and data capture, and access
to various reporting tools. Our primary processing vendor is FDMS through which we have undertaken
to process 75% of our annual transactions. We also use the services of TSYS Acquiring Solutions
and Global Payments Direct, Inc., and certain of our agreements with these processing vendors
include minimum commitments for transaction processing. If we submit a number of transactions that
is lower than the minimum, we are required to pay to the processing vendor the fees that it would
have received if we had submitted the required minimum number of transactions. The FDMS, TSYS
Acquiring Solutions and Global Payments Direct agreements may be terminated by the processing
vendor if we materially breach certain sections of the agreements and we do not cure the breach
within 30 days, if our membership with Visa or MasterCard terminates, if we enter bankruptcy or
file for bankruptcy, or if applicable laws or regulations, including Visa and MasterCard
regulations, change to prevent either the applicable processing vendor or us from performing its
services under these agreements. In addition, Global Payments Direct may terminate upon 60 days
notice prior to the end of the current term.
Our Merchant Base
We serve a diverse portfolio of small merchants. As of December 31, 2009, we provided
processing services to approximately 140,000 active small merchants located across the United
States and engaged in a wide variety of businesses. We define a merchant as active if the
merchant processes at least one Visa or MasterCard transaction in a given month.
Primary Merchant Categories Based on Our Historical Charge Volume
No single merchant accounted for more than 3% of our aggregate transaction volume for 2009.
We believe that this merchant diversification makes us less sensitive to shifting economic
conditions in the industries or regions in which our merchants operate. We believe that the loss
of any single merchant would not have a material adverse effect on our financial condition or
results of operations.
Generally, our agreements with merchants are for one to three years and automatically renew
for additional one year periods unless otherwise terminated. Our sponsoring banks are also a party
to these agreements. The merchants are obligated to pay for all chargebacks, fines, assessments,
and fees associated with their merchant account, and in some cases, annual fees and early
termination fees. Generally, the sponsoring bank may terminate the agreement for any reason on 30
days notice, and the merchant may terminate the agreement on 30 days notice, subject to the payment
of any applicable early termination fees. Typically, the agreement may also be terminated by the
sponsoring bank immediately upon a breach by the merchant of any of its terms. Generally, the
agreement may not be assigned by the merchant without the prior written consent of the sponsoring
bank.
Merchant attrition is expected in the payment processing industry in the ordinary course of
business; however, we believe the low average transaction volume of the merchants whose accounts we
service makes them less likely to change providers because of the inconvenience associated with a
transfer. During 2009, we experienced monthly volume attrition ranging from 1.0% to 3.0% of our
total charge volume on our various merchant portfolios. Declining merchant charge volume due to
weakening general economic conditions may increase attrition. Much of our attrition is related to
newly-formed small businesses that ultimately fail. Because the transaction volumes of these
unsuccessful businesses typically never reach meaningful levels, they do not significantly
contribute to the profitability of our business. Accordingly, our merchant attrition related to
newly-formed failed businesses does not significantly reduce our revenues.
We believe that we have extensive experience and resources which allow us to assess the risks
associated with providing payment processing services to small merchants. These risks include the
limited operating history of many of the small merchants we serve and the risk that these merchants
could be subject to a higher rate of insolvency, which could adversely affect us financially.
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In addition, because a larger portion of their sales are card-not-present transactions in
relation to transactions of larger merchants, small merchants are more vulnerable to customer
fraud.
Risk Management
As a result of our exposure to potential liability for merchant fraud, chargebacks, and other
losses created by our merchant services business, we view our risk management and fraud avoidance
practices as integral to our operations and overall success.
We currently have a staff of approximately 34 employees dedicated to risk management
operations, which encompasses underwriting new accounts, monitoring and investigating merchant
account activity for suspicious transactions or trends and avoiding or recovering losses.
Effective risk management helps us minimize merchant losses for the mutual benefit of our merchant
customers and ourselves. Our risk management procedures also help protect us from fraud perpetrated
by our merchants. We believe our knowledge and experience in dealing with attempted fraud,
established as a result of our managements extensive experience with higher risk market segments,
has resulted in our development and implementation of highly effective risk management and fraud
prevention systems and procedures.
We employ the following systems and procedures to minimize our exposure to merchant fraud and
card-not-present transaction fraud:
| Underwriting. Our sales agents send new applications to our underwriting department for their review and screening. All of our underwriters have previous industry underwriting experience and have the authority to render judgment on new applications or to take additional actions such as adjusting processing limits, average charge per transaction or reserve requirements for new and existing merchants. We obtain a personal guaranty from most of the owners of new merchants we enroll. | ||
| Proprietary Management Information Systems. Our proprietary systems automatically generate credit reports on new applicants, categorize risk based on all of the information provided and place the applications in a queue to be processed by our underwriting staff. The underwriting staff can access all of the collected information on a merchant online in order to render a decision on whether to approve or reject an application or whether to seek additional information. | ||
| Merchant Monitoring. We provide several levels of merchant account monitoring to help us identify suspicious transactions and trends. Daily merchant activity is downloaded to our iWorkflow system from our third-party processors such as FDMS and is sorted into a number of customized reports by our proprietary systems. Our risk management team also generates daily reports that highlight all exceptions to the established daily merchant parameters such as average ticket size, total processing volume or expected merchandise returns. Our risk management team also reviews daily reports regarding our merchant advances to monitor processing volume and expected return of capital. | ||
| Risk Review Department. We have established an in-house risk review department that monitors the sales activities of all of the merchants that we service. Our risk review department focuses particular attention on fewer than 2,000 merchants in our portfolio, measured by volume, average ticket and other criteria, which accounted for approximately 2% of our total charge volume in 2009, and which we believe represent a higher risk group of merchants. The risk review department conducts background checks on these merchants, interviews merchants, anonymously purchases products and services, reviews sales records and follows developments in risk management procedures and technology. | ||
| Investigation and Loss Prevention. If a merchant exceeds any approved parameter as established by our underwriting and/or risk management staff or violates regulations established by the applicable card association or the terms of our agreement with the merchant, an investigator will identify the incident and take appropriate action to reduce our exposure to loss, as well as the exposure of our merchants. This action may include requesting additional transaction information, instructing the merchant acquirer/processor to retrieve, withhold or divert funds, verifying delivery of merchandise or even deactivating the merchant account. |
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| Reserves. Some of our merchants are required to post reserves (cash deposits) that are used to offset chargebacks incurred. Our sponsoring banks hold such reserves related to our merchant accounts as long as we are exposed to loss resulting from a merchants processing activity. In the event that a small company finds it difficult to post a cash reserve upon opening an account with us, we may build the reserve by retaining a percentage of each transaction the merchant performs. This solution permits the merchant to fund our reserve requirements gradually as its business develops. As of December 31, 2009, these reserve cash deposits totaled approximately $44.2 million. We have no legal title to the cash accounts maintained at the sponsor bank in order to cover potential chargeback and related losses under the applicable merchant agreements. We also have no legal obligation to these merchants with respect to these reserve cash accounts, and accordingly, we do not include these accounts and the corresponding obligation to the merchants in our consolidated financial statements. If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is charged back to the merchants bank and credited to the account of the cardholder. After the chargeback occurs, we attempt to recover the chargeback either directly from the merchant or from the merchants reserve account. If we or our sponsoring banks are unable to collect the chargeback from the merchants account, or, if the merchant refuses or is financially unable due to bankruptcy or other reasons, to reimburse the merchants bank for the chargeback, we bear the loss for the amount of the refund paid to the cardholders bank. |
Technology
In the course of our operations, we solicit, compile and maintain a large database of
information relating to our merchants and their transactions. We place significant emphasis on
providing a high level of security in order to protect the information of our merchants and their
customers. We have complied with Visa and Mastercards security standards for the last five years.
We have deployed the latest generation of network intrusion detection technology and system
monitoring appliances to enhance our level of protection.
Our internal network configuration provides multiple layers of security to isolate our
databases from unauthorized access and implements detailed security rules to limit access to all
critical systems. We cannot be sure that these security measures will be sufficient to prevent
unauthorized access to our internal network. Application components communicate using
sophisticated security protocols and are directly accessible by a limited number of employees on a
need-only basis. Our operation and customer support systems are primarily located at our
facilities in Westlake Village, California.
We also rely on connections to the systems of our third-party processing providers. In all
cases, we install encrypted or tunneled communications circuits with backup connectivity to
withstand telecommunications problems.
Competition
The payment processing industry is highly competitive. We compete with other providers of
payment processing services on the basis of the following factors:
| quality of service; | ||
| reliability of service; | ||
| ability to evaluate, undertake and manage risk; | ||
| speed in approving merchant applications; and | ||
| price. |
Many small and large companies compete with us in providing payment processing services and
related services for card-not-present and card-present transactions to a wide range of merchants.
There are a number of large transaction processors, including FDMS, National Processing Company,
Global Payments, Inc. and Elavon, Inc., that serve a broad market spectrum from large to small
merchants and provide banking, ATM and other payment-related services and systems in addition to
card-based payment processing. There are also a large number of smaller transaction processors
that provide various services to small and medium sized merchants. Many of our competitors have
substantially greater capital resources than we have and operate as subsidiaries of financial
institutions or bank holding companies, which may allow them on a consolidated basis to own and
conduct depository and other banking activities that we do not have the regulatory authority to own
or conduct. This may allow our competitors to offer more attractive fees to our current and
prospective merchants, or other products or services that we do not offer. We believe that our
specific focus on smaller merchants, in addition to our understanding of the needs and risks
associated with providing payment processing services to small merchants and smaller independent
sales groups, gives us a competitive advantage over larger competitors, which have a broader market
perspective and over competitors of a similar or smaller size that may lack our extensive
experience and resources.
Segment Information and Geographical Information
We consider our business activities to be in a single reporting segment as we realize greater
than 90% of our revenue and results of operations from one business segment representing processing
revenues and other fees from card-based payments. During 2009, 2008 and 2007, no single merchant
represented 3% or more of our revenues. All revenues are generated and all of our long-lived
assets are located in the United States. See Managements Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of the impact of seasonality on our business.
Our History
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iPayment Technologies, Inc., (Technologies) was formed in 1992 as a California corporation.
In February 2001, we were formed by the majority stockholders of Technologies, as a Tennessee
corporation, under the name iPayment Holdings, Inc. as a holding company for Technologies and other
card processing businesses. We then appointed Gregory S. Daily as our Chief Executive Officer and
Chairman of the Board.
In August 2002, we were reincorporated in Delaware under the name iPayment, Inc. and in May
2003 we completed an initial public offering of 5,625,000 shares of common stock raising net
proceeds of approximately $75.6 million. Immediately prior to the offering we effected a reverse
split of our outstanding common stock of 0.4627 shares for each share outstanding.
On May 10, 2006, pursuant to an Agreement and Plan of Merger dated as of December 27, 2005, by
and among two new entities, iPayment, MergerCo and iPayment Holdings, MergerCo was merged with and
into iPayment, Inc., with iPayment, Inc. remaining as the surviving corporation and a wholly-owned
subsidiary of iPayment Holdings. Holdings is a wholly-owned subsidiary of iPayment Investors,
which is a Delaware limited partnership formed by Gregory S. Daily, the Chairman and Chief
Executive Officer of iPayment, Carl M. Grimstad, the President of iPayment, and certain parties
related to them.
The total amount of consideration required to consummate the merger and the related
transactions was approximately $895.4 million, consisting of (1) approximately $800.0 million to
fund the payment of the merger consideration and payments in respect of the cancellation of
outstanding stock options, (2) approximately $70.0 million to repay certain existing indebtedness
of iPayment and (3) approximately $25.4 million to pay transaction fees and expenses. These funds
were obtained from equity and debt financings as follows:
| equity financing in an aggregate amount of $170.0 million provided through (1) the delivery of an aggregate of $166.6 million of iPayment common stock by Mr. Daily, on his own behalf and on behalf of certain related parties, and by Mr. Grimstad, on his own behalf and on behalf of certain related parties, and (2) approximately $3.4 million of cash provided by Mr. Daily; | ||
| a term loan of $515.0 million pursuant to a credit facility entered into between iPayment and a syndicate of lenders, which also included a $60.0 million revolving credit facility; | ||
| approximately $202.2 million raised through the private issuance by iPayment of senior subordinated notes; and | ||
| approximately $8.2 million funded by cash on hand and borrowings under the revolving credit facility described above. |
Employees
As of December 31, 2009, we and our wholly-owned subsidiaries employed 330 full-time
personnel, including 18 information systems and technology employees, 34 risk management employees,
206 in operations and 72 in sales and administration. Many of our employees are highly skilled,
and we believe our future success will depend in large part on our ability to attract and retain
such employees. None of our employees are represented by a labor union, and we have experienced no
work stoppages. We believe that our employee relations are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and all amendments to those reports are available free of charge on our website at
www.ipaymentinc.com as soon as reasonably practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission.
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ITEM 1A. | Risk Factors |
Risks Relating to our Indebtedness
Our substantial debt could adversely affect our financial condition and prevent us from fulfilling
our obligations to our debtholders.
As of December 31, 2009, we had consolidated debt of $651.5 million, $458.5 million of which
was senior indebtedness. Our substantial indebtedness could adversely affect our financial
condition and make it more difficult for us to satisfy our obligations with respect to the
debtholders. Our substantial indebtedness and significant reduction in available cash could also:
| increase our vulnerability to adverse general economic and industry conditions; | ||
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, investments, capital expenditures and other general corporate purposes; | ||
| limit our ability to make required payments under our existing contractual commitments (see Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources); | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| place us at a competitive disadvantage compared to our competitors that have less debt; | ||
| create a perception that we may not continue to support and develop certain services; | ||
| increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates; and | ||
| limit our ability to borrow additional funds on terms that are satisfactory to us or at all. |
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our
debt obligations will depend on our future financial performance, which will be affected by a range
of economic, competitive, regulatory, legislative and business factors, many of which are outside
of our control. For example, one factor impacting our cash flow is earnout payments owed under the
terms of our previously consummated acquisitions of businesses and portfolios of merchant accounts.
If we do not generate sufficient cash flow from operations to satisfy our debt obligations,
including payments on our senior subordinated notes, we may have to undertake alternative financing
plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital
investments or seeking to raise additional capital. We cannot be sure that any refinancing would
be possible or that any assets could be sold on acceptable terms or otherwise. Our inability to
generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on
commercially reasonable terms, would have an adverse effect on our business, financial condition
and results of operations, as well as on our ability to satisfy our obligations under our senior
secured credit facility and senior subordinated notes. In addition, any refinancing of our debt
could be at higher interest rates and may require us to comply with more onerous covenants, which
could further restrict our business operations.
Despite our level of indebtedness, our current credit arrangements allow us to incur substantially more debt. Incurring such debt could further exacerbate the risks to our financial condition.
Although the indenture governing our senior subordinated notes and the credit agreement
governing our senior secured credit facility each contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of qualifications and
exceptions, and the indebtedness incurred in compliance with these restrictions could be
substantial. For example, we are able to incur additional indebtedness if the fixed charge
coverage ratio, as defined in the indenture governing our senior subordinated notes is above 2 to
1 for the periods set forth in the indenture, and, under certain circumstances, if the indebtedness
is of a person acquired by us and we did not incur the indebtedness in contemplation of the
acquisition. In addition, we may also incur an aggregate principal amount of additional
indebtedness not to exceed $50.0 million. As of December 31, 2009, we would have been able to
borrow an additional $49.1 million under our senior secured credit facility, and we and the
subsidiary guarantors may be able to incur additional senior debt in the future, including under
the senior secured credit facility. To the extent new debt is added to our current debt levels,
our substantial leverage risks would increase.
The indenture governing our senior subordinated notes and the credit agreement governing the senior secured credit facility contain covenants that limit our flexibility and prevent us from taking
certain actions.
The indenture governing our senior subordinated notes and the credit agreement governing our
senior secured credit facility include a number of significant restrictive covenants. These
covenants could adversely affect us by limiting our ability to plan for or react to market
conditions, meet our capital needs and execute our business strategy. These covenants, among other
things, limit our ability and the ability of our restricted subsidiaries to:
| incur additional debt; | ||
| pay dividends on, redeem or repurchase capital stock; | ||
| issue capital stock of restricted subsidiaries; |
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| make certain investments; | ||
| sell assets; | ||
| enter into certain types of transactions with affiliates; | ||
| engage in material unrelated businesses; | ||
| incur certain liens; and | ||
| consolidate, merge or sell all or substantially all of our assets. |
In addition, the credit agreements restrictions on us and the subsidiary guarantors are
stricter than the indenture governing our senior subordinated notes. Examples of such restrictions
are as follows:
| The scope of permitted liens under the credit agreement is narrower than under the indenture. For example, the indenture permits us to incur liens to secure up to $5.0 million of additional permitted indebtedness, while the credit agreement permits us to incur liens to secure only up to $1.0 million of additional permitted indebtedness. | ||
| The credit agreement contains a general prohibition on restricted payments subject to certain exceptions, while the indenture permits us to make restricted payments up to an amount that is based, in part, on our cumulative consolidated net income since the date of the indenture. | ||
| The credit agreement generally prohibits the incurrence of additional indebtedness subject to certain exceptions, while the indenture permits us to incur additional indebtedness provided we maintain a fixed charge coverage ratio of 2:1. | ||
| The credit agreement requires us to maintain an agreed consolidated interest coverage ratio and consolidated leverage ratio at the end of each fiscal quarter. There is no comparable requirement in the indenture. | ||
| The credit agreement prohibits us from making dispositions of our property other than for cash and not in excess of $2.0 million in net book value in any fiscal year. The indenture does not prohibit such dispositions, but requires us to apply the net proceeds therefrom to repay senior debt, make certain investments or expenditures, and otherwise repay our senior subordinated notes. | ||
| The credit agreement prohibits us from prepaying our other debt, including our senior subordinated notes, while borrowings under our senior secured credit facility are outstanding. |
Our failure to comply with any of these covenants could result in an event of default, which,
if not cured or waived, could result in our being required to repay these borrowings before their
scheduled due date. If we were unable to make this repayment or otherwise refinance these
borrowings, the lenders under the senior secured credit facility could elect to declare all amounts
borrowed under the senior secured credit facility, together with accrued interest, to be due and
payable, which would be an event of default under the indenture governing our senior subordinated
notes. In addition, these lenders could foreclose on our assets. Any future refinancing of the
senior secured credit facility is likely to contain similar restrictive covenants and financial
tests.
Substantially all of our operations are conducted at the subsidiary level, which may materially
adversely affect our ability to service our indebtedness.
The principal assets of iPayment, the issuer of our senior subordinated notes, are the equity
interests it holds, directly and indirectly, in its subsidiaries. Our subsidiaries are legally
distinct from us and have no obligation to pay amounts due on our debt or to make funds available
to us for such payment, other than through guarantees of our debt. Because much of our operations
are conducted through our subsidiaries, our ability to service our indebtedness depends upon the
earnings of our subsidiaries and the distribution of those earnings, or upon loans or other
payments of funds, by our subsidiaries to us. If our subsidiaries do not have sufficient earnings
or cannot distribute their earnings or other funds to us, our ability to service our indebtedness
may be materially adversely affected.
Our senior subordinated notes and the related guarantees are subordinated in right of payment to
all of our and the subsidiary guarantors existing and future senior debt, and are effectively
subordinated to all of our and the subsidiary guarantors existing and future secured debt.
Our senior subordinated notes and the related guarantees rank junior in right of payment to
all of our existing and future senior debt, including the borrowings under our senior secured
credit facility, and all existing creditors and future senior debt of our subsidiary guarantors,
respectively. As of December 31, 2009, we had approximately $447.6 million of debt that was senior
to our senior subordinated notes and $49.1 million of additional borrowing available under our
senior secured credit facility. We may also incur additional senior or secured debt in the future,
consistent with the terms of the indenture governing our senior subordinated notes and our other
debt agreements.
As a result of the subordination, upon any distribution to creditors in a bankruptcy,
liquidation or reorganization or similar proceeding, the holders of our senior debt or senior debt
of any of our subsidiary guarantors will be entitled to be paid in full before we or our subsidiary
guarantors make any payment on our senior subordinated notes or related guarantees. Holders of our
secured debt and the secured debt of any of our subsidiary guarantors similarly will have claims
that are prior to claims of holders of our
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senior subordinated notes to the extent of the value of the assets securing such debt. The
indenture governing the senior subordinated notes requires that amounts otherwise payable to
holders of the notes in a bankruptcy or similar proceeding be paid to holders of senior debt
instead. As a result, holders of our senior subordinated notes may receive less, ratably, than
other creditors. We cannot be sure that sufficient assets will remain after making payments on our
senior or secured debt to allow us to make any payments on our senior subordinated notes.
We may not pay principal, premium, if any, interest or other amounts on account of our senior
subordinated notes in the event of a payment default or other defaults permitting the acceleration
of our designated senior indebtedness, including debt under the senior secured credit facility,
unless the designated senior indebtedness has been paid in full, the default has been cured or, in
the case of any such nonpayment defaults, a designated period of time has passed.
Fraudulent conveyance laws could void the guarantees of our senior subordinated notes.
Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a
guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other
debts of that guarantor if, among other things, the subsidiary guarantor, at the time it incurred
the indebtedness evidenced by its guarantee either (i) intended to hinder, delay or defraud any
present or future creditor; or (ii) received less than reasonably equivalent value or fair
consideration for the incurrence of the guarantee and (a) was insolvent or rendered insolvent by
reason of the incurrence of the guarantee; (b) was engaged in a business or transaction for which
the subsidiary guarantors remaining assets constituted unreasonably small capital; or (c) intended
to incur, or believed that it would incur, debts beyond its ability to pay such debts as they
mature.
Moreover, any payments made by a subsidiary guarantor pursuant to its guarantee could be
voided and required to be returned to the subsidiary guarantor, or to a fund for the benefit of the
creditors of the subsidiary guarantor. To the extent that any guarantee is voided as a fraudulent
conveyance, the claims of holders of our senior subordinated notes with respect to such guarantee
would be materially adversely affected.
In addition, a legal challenge of a guarantee on fraudulent transfer grounds will focus on,
among other things, the benefits, if any, realized by the relevant subsidiary guarantor as a result
of the issuance of our senior subordinated notes. The measures of insolvency for purposes of these
fraudulent transfer laws will vary depending upon the governing law. Generally, however, a
subsidiary guarantor would be considered insolvent if:
| the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or | ||
| if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or | ||
| it could not pay its debts as they become due. |
On the basis of historical financial information, recent operating history and other factors,
we believe that the subsidiary guarantees have been incurred for proper purposes and in good faith
and that each subsidiary guarantor, after giving effect to its guarantee of our senior subordinated
notes, is not insolvent, does not have unreasonably small capital for the business in which it is
engaged and has not incurred debts beyond its ability to pay such debts as they mature. There can
be no assurance, however, as to what standard a court would apply in making such determinations or
that a court would agree with our conclusions in this regard.
The interests of our stockholders may not be aligned with the interests of the holders of our
senior subordinated notes.
All of our issued and outstanding equity interests are held indirectly by iPayment Investors,
a limited partnership controlled jointly by Gregory S. Daily, our Chairman and Chief Executive
Officer, and Carl A. Grimstad, our President. Messrs. Daily and Grimstad own substantially all of
the economic interests in iPayment Investors, and are the sole members of the board of directors of
its general partner and are the sole members of our board of directors. Circumstances may occur in
which the interests of iPayment Investors and its equity holders could be in conflict with the
interests of the holders of our senior subordinated notes. Moreover, iPayment Investors equity
holders may have interests in their other respective investments that could also be in conflict
with the interests of the holders of our senior subordinated notes. In addition, iPayment
Investors may have an interest in pursuing acquisitions, divestitures or other transactions that,
in its judgment, could enhance its equity investment, even though such transactions might involve
risks to holders of our senior subordinated notes. For example, iPayment Investors and its equity
holders may cause us to pursue a growth strategy (including acquisitions which are not accretive to
earnings), which could impact our ability to make payments under the indenture governing our senior
subordinated notes and the senior secured credit facility or cause a change of control. In July
2006, iPayment Investors issued $75.0 million of notes payable in 2014, which are subordinated to
all debt issued by us, and the net proceeds of which were used by iPayment Investors to pay a
dividend to its equity holders. To the extent permitted by the indenture governing our senior
subordinated notes and the senior secured credit facility, iPayment Investors may cause us to pay
dividends rather than make capital expenditures.
In the event of a change of control, we may not be able to repurchase our senior subordinated notes
as required by the indenture, which would result in a default under our indenture.
Upon a change of control under the indenture, we will be required to offer to repurchase all
of our senior subordinated notes then outstanding at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest, if any, up to but excluding the repurchase
date. Our senior secured credit facility provides that certain change of control events will be an
event of default that will permit the required lenders to accelerate the maturity of all borrowings
thereunder and terminate commitments to lend thereunder. An acceleration of the maturity of our
senior secured credit facility would result in an event of default under our indenture. Any of our
future debt agreements may contain similar provisions. We cannot be sure that we will have the
financial resources to repurchase the senior subordinated notes, particularly if that change of
control event triggers a similar repurchase
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requirement for, or results in the acceleration of other indebtedness. Our senior secured
credit facility also prohibits us from redeeming or repurchasing our senior subordinated notes if a
default exists under the senior secured credit facility and if we do not meet specified leverage
ratios.
See risk factors A
change of control under our senior secured credit facility could cause a material adverse effect on our liquidity,
financial condition or results of operations and A change of control under the indenture governing our
senior subordinated notes could cause a
material adverse effect on our liquidity, financial condition or results of operations below.
A change of control under our senior secured credit facility could cause a material adverse effect
on our liquidity, financial condition or results of operations.
Our senior secured credit facility provides that certain change of control events will result
in an event of default, including the following:
| 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 50% 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). |
In May 2009, a jury in the Superior Court of the State of California for the County of Los
Angeles handed down a verdict in the amount of $300 million, plus punitive damages in the amount of
$50 million, against Mr. Daily in connection with litigation over Mr. Dailys beneficial ownership
in us (the Daily Litigation). In response to the verdict, Mr. Daily filed for personal
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in Nashville,
Tennessee. The plaintiff has filed a motion with the bankruptcy court in order to have a trustee
appointed to administer the estate of Mr. Daily. The bankruptcy court has not yet ruled on the
motion. The enforcement or settlement of any judgment against Mr. Daily, or the appointment of a
trustee by the bankruptcy court, could lead to one or more of the change of control events
described above, which would constitute an event of default under our senior secured credit
facility.
An event of default resulting from a change of control permits the required lenders to
accelerate the maturity of our borrowings and terminate commitments to lend. An acceleration of
our senior secured credit facility would constitute an event of default under the indenture
governing our senior subordinated notes and could result in the acceleration of the senior
subordinated notes. If an event of default under our senior secured credit facility were to occur,
we could seek the consent of the required lenders to waive the event of default or attempt to
refinance such facility, but there can be no assurance that we would be able to do so. The credit
crisis may make it particularly difficult and expensive to obtain any such waiver or refinancing
debt and, if we were able to do so, our indebtedness may subject us to more onerous terms. These
consequences of a change of control could have a material adverse effect on our liquidity,
financial condition or results of operations.
The preceding description only purports to summarize the change of control provisions and
the consequences of a change of control under our senior secured credit facility. This
description is qualified in its entirety by reference to our senior secured credit facility, which
was filed with the Commission as Exhibit 10.1 to our Form S-4 on July 21, 2006.
A change of control under the indenture governing our senior subordinated notes could cause a
material adverse effect on our liquidity, financial condition or results of operations.
A change of control under the indenture governing our senior subordinated notes requires us
to offer to repurchase all of our senior subordinated notes then outstanding at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, up to but
excluding the repurchase date. A change of control includes the following events:
| 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; |
The Daily Litigation, or the appointment of a trustee by the bankruptcy court, described above
under the risk factor A change of control under our senior secured credit facility could cause a
material adverse effect on our liquidity, financial condition or results of operations, could
result in one or more of the change of control events described above. Upon the occurrence of a
change of control, our senior secured credit facility will, subject to certain exceptions, prohibit
us from purchasing our senior subordinated notes. In the event a change of control occurs at a
time when we are prohibited from purchasing our senior subordinated notes, we could attempt to seek
the consent of the required lenders under our senior secured credit facility to such purchase or
could attempt to refinance our senior secured credit facility. If we do not obtain such a consent
or are unable to refinance our senior secured credit facility, we will remain prohibited from
purchasing our senior subordinated notes. This would result in an event of default under the
indenture governing our senior subordinated notes, which would, in turn, constitute an event of
default under our senior secured credit facility. In such circumstances, the subordination
provisions in the indenture governing our senior subordinated notes would likely restrict payments
to holders of our senior subordinated notes. The credit crisis may make it difficult or expensive
to obtain consents or waivers with respect to our senior secured credit facility or indenture
governing our senior subordinated notes, refinance our debt or raise the funds necessary to
purchase tendered senior subordinated notes. If we are able to do so, the cost of our financing
could materially increase and our indebtedness may subject us to more onerous terms. These
consequences of a change of control under the indenture governing our senior subordinated notes
could have a material adverse effect on our liquidity, financial condition or results of
operations.
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The preceding description only purports to summarize the change of control provisions and
the consequences of a change of control under the indenture governing our senior subordinated
notes. This description is qualified in its entirety by reference to the indenture governing our
senior subordinated notes, which was filed with the Commission as Exhibit 4.1 to our Form S-4 on
July 21, 2006.
Changes in the financial and credit markets or in our credit ratings could adversely affect the
market prices of our senior secured credit facility and our senior subordinated notes.
The future market prices of our senior secured credit facility and our senior subordinated
notes depend on a number of factors, including:
| the prevailing interest rates being paid by companies similar to us; | ||
| our ratings with major credit rating agencies; and | ||
| the overall condition of the financial and credit markets. |
The condition of the financial and credit markets and prevailing interest rates have
fluctuated in the past and are likely to fluctuate in the future. Fluctuations in these factors
have had adverse effects on the market prices of our senior secured credit facility and our senior
subordinated notes, and further fluctuation may continue these adverse effects. In addition,
credit rating agencies continually revise their ratings for companies that they follow, including
us. We cannot be sure that any credit rating agencies that rate the senior secured credit facility
and senior subordinated notes will maintain their ratings on our credit instruments. A negative
change in our rating could have an adverse effect on the market price of the senior secured credit
facility and the senior subordinated notes.
Historically, the market for non-investment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of securities similar to the senior subordinated
notes. The market for the senior subordinated notes, if any, may be subject to similar
disruptions. Any such disruptions may adversely affect the value of the senior subordinated notes.
We cannot be sure that an active trading market will be maintained for our senior subordinated
notes.
While the senior subordinated notes are eligible for trading in The PORTAL Market, a
screen-based automated market for trading securities for qualified institutional buyers, there is
no public market for the senior subordinated notes. We do not intend to apply for a listing of any
of the senior subordinated notes on any securities exchange. We do not know if an active market
will develop for the senior subordinated notes, or if developed, will continue. If an active
market is not developed or maintained, the market price and the liquidity of the senior
subordinated notes may be adversely affected. In addition, the liquidity and the market price of
the senior subordinated notes may be adversely affected by changes in the overall market for high
yield securities and by changes in our financial performance or prospects, or in the prospects of
the companies in our industry.
Risks Relating to Our Business
We have faced, and may face in the future, significant chargeback liability if our merchants refuse
or cannot reimburse chargebacks resolved in favor of their customers, and we face potential
liability for merchant or customer fraud; we may not accurately anticipate these liabilities.
We have potential liability for chargebacks associated with the transactions we process. If a
billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the
merchant, the disputed transaction is charged back to the merchants bank and credited to the
account of the cardholder. If we or our sponsoring banks are unable to collect the chargeback from
the merchants account, or, if the merchant refuses or is financially unable, due to bankruptcy or
other reasons, to reimburse the merchants bank for the chargeback, we bear the loss for the amount
of the refund paid to the cardholders bank. For example, our largest chargeback loss resulted in
2001 and 2002 from the substantial non-compliance by a merchant with the Visa and MasterCard card
association rules. We were obligated to pay the resulting chargebacks and losses that the merchant
was unable to fund, which totaled $4.7 million.
We also have potential liability for losses caused by fraudulent card-based payment
transactions. Card fraud occurs when a merchants customer uses a stolen card (or a stolen card
number in a card-not-present transaction) to purchase merchandise or services. In a traditional
card-present transaction, if the merchant swipes the card, receives authorization for the
transaction from the card issuing bank and verifies the signature on the back of the card against
the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a
fraudulent card-not-present transaction, even if the merchant receives authorization for the
transaction, the merchant is liable for any loss arising from the transaction. Many of the small
merchants that we serve are small businesses that transact a substantial percentage of their sales
over the Internet or in response to telephone or mail orders. Because their sales are
card-not-present transactions, these merchants are more vulnerable to customer fraud than larger
merchants. Because we target these merchants, we experience chargebacks arising from cardholder
fraud more frequently than providers of payment processing services that service larger merchants.
Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or
counterfeit card or card number to record a false sales transaction, or intentionally fails to
deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is
unable to satisfy a chargeback, we are responsible for that chargeback. We have established
systems and procedures to detect and reduce the impact of merchant fraud, but we cannot be sure
that these measures are or will be effective. It is possible that incidents of fraud could
increase in the future. Failure to effectively manage risk and prevent fraud could increase our
chargeback liability.
Charges incurred by us relating to chargebacks were $4.9 million, or 0.7% of revenues in 2009,
and were $4.2 million, or 0.5%
of revenues, in 2008.
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We rely on bank sponsors, which have substantial discretion with respect to certain elements of our
business practices, in order to process bankcard transactions; if these sponsorships are terminated
and we are not able to secure or successfully migrate merchant portfolios to new bank sponsors, we
will not be able to conduct our business.
Because we are not a bank, we are unable to belong to and directly access the Visa and
MasterCard bankcard associations. Visa and MasterCard operating regulations require us to be
sponsored by a bank in order to process bankcard transactions. We are currently registered with
Visa and MasterCard through the sponsorship of banks that are members of the card associations.
The principal sponsoring bank through which we process the significant majority of our transactions
is Wells Fargo, and our other sponsoring banks include HSBC Bank USA.
The initial term of our agreement with Wells Fargo lasts through December 2014 and will
thereafter automatically continue unless either party provides the other at least six months notice
of its intent to terminate. Our sponsoring banks may terminate their agreements with us if we
materially breach the agreements and do not cure the breach within an established cure period, if
our membership with Visa or MasterCard terminates, if we enter bankruptcy or file for bankruptcy,
or if applicable laws or regulations, including Visa and MasterCard regulations, change to prevent
either the applicable bank or us from performing services under the agreement. If these
sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able to
process bankcard transactions. Furthermore, our agreements with our sponsoring banks provide the
sponsoring banks with substantial discretion in approving certain elements of our business
practices, including our solicitation, application and qualification procedures for merchants, the
terms of our agreements with merchants, the processing fees that we charge, our customer service
levels and our use of independent sales groups. We cannot guarantee that our sponsoring banks
actions under these agreements will not be detrimental to us, nor can we guarantee that any of our
sponsoring banks will not terminate their sponsorship of us in the future.
If we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard payment card
associations, our registrations with these associations could be terminated and we could be
required to stop providing payment processing services for Visa and MasterCard.
Substantially all of the transactions we process involve Visa or MasterCard. If we or our
bank sponsors fail to comply with the applicable requirements of the Visa and MasterCard payment
card associations, Visa or MasterCard could suspend or terminate our registration. The termination
of our registration or any changes in the Visa or MasterCard rules that would impair our
registration could require us to stop providing payment processing services.
We rely on card payment processors and service providers; if they fail or no longer agree to
provide their services, our merchant relationships could be adversely affected and we could lose
business.
We rely on agreements with several large payment processing organizations to enable us to
provide card authorization, data capture, settlement and merchant accounting services and access to
various reporting tools for the merchants we serve. In particular, we rely on FDMS through which
we have undertaken to process 75% of our annual transactions. We are required to pay FDMS an
annual processing fee through 2011 related to the FDMS Merchant Portfolio and the FDMS Bank
Portfolio which fee will be at least $4.3 million in fiscal 2010, and at least 70% of such fee paid
to FDMS in 2010 in fiscal 2011. Our gross margins would be adversely affected if we were required
to pay these minimum fees as a result of insufficient transactions processed by FDMS.
We also rely on third parties to whom we outsource specific services, such as reorganizing and
accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis
and forwarding the accumulated data to the relevant bankcard associations. Many of these
organizations and service providers are our competitors and we do not have long-term contracts with
most of them. Typically, our contracts with these third parties are for one-year terms and are
subject to cancellation upon limited notice by either party. The termination by our service
providers of their arrangements with us or their failure to perform their services efficiently and
effectively may adversely affect our relationships with the merchants whose accounts we serve and
may cause those merchants to terminate their processing agreements with us.
To acquire and retain merchant accounts, we depend on independent sales groups that do not serve us
exclusively.
We rely primarily on the efforts of independent sales groups to market our services to
merchants seeking to establish an account with a payment processor. Independent sales groups are
companies that seek to introduce both newly-established and existing small merchants, including
retailers, restaurants and service providers, such as physicians, to providers of transaction
payment processing services like us. Generally, our agreements with independent sales groups that
refer merchants to us are not exclusive to us and they have the right to refer merchants to other
service providers. Our failure to maintain our relationships with our existing independent sales
groups and those serving other service providers that we may acquire, and to recruit and establish
new relationships with other groups, could adversely affect our revenues and internal growth and
increase our merchant attrition.
On occasion, we experience increases in interchange costs; if we cannot pass these increases along
to our merchants, our profit margins will be reduced.
We pay interchange fees or assessments to card associations for each transaction we process
using their credit and debit cards. From time to time, the card associations increase the
interchange fees that they charge processors and the sponsoring banks. At their sole discretion,
our sponsoring banks have the right to pass any increases in interchange fees on to us. In
addition, our sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees to
us, all of which are based upon the dollar amount of the payment transactions we process. If we
are not able to pass these fee increases along to merchants through corresponding increases in our
processing fees, our profit margins will be reduced.
Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer
systems or otherwise, could expose us to protracted and costly litigation.
We collect and store sensitive data about merchants and cardholders, including names,
addresses, social security numbers, drivers
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license numbers, checking and savings account numbers and payment history records, such as account
closures and returned checks. In addition, we maintain a database of cardholder data relating to
specific transactions, including payment card numbers and cardholder addresses, in order to process
the transactions and for fraud prevention and other internal processes. If a person penetrates our
network security or otherwise misappropriates sensitive merchant or cardholder data, we could be
subject to liability or business interruption.
Although we generally require that our agreements with our ISGs and service providers who have
access to merchant and customer data include confidentiality obligations that restrict these
parties from using or disclosing any customer or merchant data except as necessary to perform their
services under the applicable agreements, we cannot be sure that these contractual measures will
prevent the unauthorized disclosure of merchant or customer data. In addition, our agreements with
financial institutions require us to take certain protective measures to ensure the confidentiality
of merchant and consumer data. Any failure to adequately take these protective measures could
result in protracted and costly litigation.
The loss of key personnel or damage to their reputations could adversely affect our relationships
with independent sales groups, card associations, bank sponsors and our other service providers,
which would adversely affect our business.
Our success depends upon the continued services of our senior management and other key
employees, all of whom have substantial experience in the payment processing industry and the small
merchant markets in which we offer our services. In addition, our success depends in large part
upon the reputation and influence within the industry of our senior managers who have, over the
years, developed long standing and highly favorable relationships with independent sales groups,
card associations, bank sponsors and other payment processing and service providers. We would
expect that the loss of the services of one or more of our senior managers or other key employees
or damage to their reputations and influence within the industry would have an adverse effect on
our business, financial condition and results of operations.
In May 2009, a jury in the Superior Court of the State of California for the County of Los
Angeles handed down a verdict in the amount of $300 million, plus punitive damages in the amount of
$50 million, against Gregory Daily, our Chairman and Chief Executive Officer, in connection with
litigation over Mr. Dailys beneficial ownership in us. In response to the verdict, Mr. Daily
filed for personal bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.
Any adverse effect on our relationship with independent sales groups, card associations, bank
sponsors and other payment processing and service providers resulting from damage to Mr. Dailys
reputation, as well as any ongoing diversion of Mr. Dailys attention from the day to day
operations of our business could materially and adversely affect our business, financial condition
and results of operations.
We do not maintain any key person life insurance on any of our employees other than a $25.0
million policy on Mr. Daily, as required by our senior secured credit facility.
The payment processing industry is highly competitive and such competition is likely to increase,
which may further adversely influence our prices to merchants, and as a result, our profit margins.
The market for credit and debit card processing services is highly competitive. The level of
competition has increased in recent years, and other providers of processing services have
established a sizable market share in the small merchant processing sector. Some of our
competitors are financial institutions, subsidiaries of financial institutions or well-established
payment processing companies that have substantially greater capital and technological, management
and marketing resources than we have. There are also a large number of small providers of
processing services that provide various ranges of services to small and medium sized merchants.
This competition may influence the prices we can charge and requires us to control costs
aggressively in order to maintain acceptable profit margins. Further, if the use of cards other
than Visa or MasterCard, such as American Express, grows, or if there is increased use of debit
cards this could reduce our average profit per transaction. In addition, our competitors continue
to consolidate as large banks merge and combine their networks. This consolidation may also
require that we increase the consideration we pay for future acquisitions and could adversely
affect the number of attractive acquisition opportunities presented to us. The barriers to entry
into our business are relatively low. Our future competitors may develop or offer services that
have price or other advantages over the services we provide. If they do so and we are unable to
respond satisfactorily, our business and financial condition could be adversely affected.
Increased attrition in merchant charge volume due to an increase in closed merchant accounts that
we cannot anticipate or offset with new accounts may reduce our revenues.
We experience attrition in merchant charge volume in the ordinary course of business resulting
from several factors, including business closures, transfers of merchants accounts to our
competitors and account closures that we initiate due to heightened credit risks relating to, and
contract breaches by, a merchant. We target small merchants that generally have a higher rate of
insolvency than larger businesses. During 2009, we experienced attrition ranging from 1.0% to 3.0%
per month on our various merchant portfolios. Declining merchant charge volume due to weakening
general economic conditions may increase attrition. In addition, substantially all of our
processing contracts with merchants may be terminated by either party on relatively short notice,
allowing merchants to move their processing accounts to other providers with minimal financial
liability and cost. We cannot predict the level of attrition in the future, particularly in
connection with our acquisitions of portfolios of merchant accounts. Increased attrition in
merchant charge volume may have a material adverse effect on our financial condition and results of
operations.
Our operating results are subject to seasonality, and, if our revenues are below our seasonal norms
during our historically stronger second, third, and fourth quarters, our net income and cash flow
could be lower than expected.
We have experienced in the past, and expect to continue to experience, seasonal fluctuations
in our revenues as a result of consumer spending patterns. Historically, revenues have been weaker
during the first quarter of the calendar year and stronger during the second, third and fourth
quarters. If, for any reason, our revenues are below seasonal norms during the second, third or
fourth quarter, our net income and cash flow could be lower than expected.
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Our systems may fail due to factors beyond our control, which could interrupt our business or cause
us to lose business and would likely increase our costs.
We depend on the efficient and uninterrupted operations of our computer network systems,
software and data centers. We do not presently have fully redundant systems. Our systems and
operations could be exposed to damage or interruption from fire, natural disaster, power loss,
telecommunications failure, unauthorized entry and computer viruses. Our property and business
interruption insurance may not be adequate to compensate us for all losses or failures that may
occur. Defects in our systems, errors or delays in the processing of payment transactions or other
difficulties could result in:
| additional development costs; | ||
| diversion of technical and other resources; | ||
| loss of merchants; | ||
| loss of merchant and cardholder data; | ||
| negative publicity; | ||
| harm to our business or reputation; or | ||
| exposure to fraud losses or other liability. |
Material breaches in security of our systems may have a significant effect on our business.
The uninterrupted operation of our information systems and the confidentiality of the
customer/consumer information that resides on such systems are critical to the successful
operations of our business. We have security, backup and recovery systems in place, as well as a
business continuity plan to ensure the system will not be inoperable. We also have what we deem
sufficient security around the system to prevent unauthorized access to the system. However, our
visibility in the United States payment industry may attract hackers to conduct attacks on our
systems that could compromise the security of our data. An information breach in the system and
loss of confidential information such as credit or debit card numbers and related information could
have a longer and more significant impact on the business operations than a hardware failure. The
loss of confidential information could result in losing our customers confidence and thus the loss
of their business, as well as imposition of fines and damages.
If our merchants experience adverse business conditions, they may generate fewer transactions for
us to process or become insolvent, increasing our exposure to chargeback liabilities.
Generally weak economic conditions have caused some of the merchants we serve to experience
difficulty in supporting their current operations and implementing their business plans. If these
merchants make fewer sales of their products and services, we will have fewer transactions to
process, resulting in lower revenues. In addition, in the current recessionary environment, the
merchants we serve could be subject to a higher rate of insolvency which could adversely affect us
financially. We bear credit risk for chargebacks related to billing disputes between credit or
debit card holders and bankrupt merchants. If a merchant seeks relief under bankruptcy laws or is
otherwise unable or unwilling to pay, we may be liable for the full transaction amount of a
chargeback.
If our merchant advance customers stop processing or become insolvent, our merchant advance loss
exposure could increase.
The weakened economy has caused some of our merchant advance customers to fail or close their
businesses. In the current recessionary environment, the merchant advance customers we serve are
subject to a higher rate of insolvency, which could adversely affect us financially. If a merchant
seeks relief under bankruptcy laws or is otherwise unable or unwilling to pay, we will experience
losses for the remaining balance of the merchant advance. We no longer offer new merchant advances
to our customers, and we will seek to recover any potential losses through other collection
efforts.
New and potential governmental regulations designed to protect or limit access to consumer
information could adversely affect our ability to provide the services we provide our merchants.
Due to the increasing public concern over consumer privacy rights, governmental bodies in the
United States and abroad have adopted, and are considering adopting additional laws and regulations
restricting the purchase, sale and sharing of personal information about customers. For example,
the Gramm-Leach-Bliley Act requires non-affiliated third-party service providers to financial
institutions to take certain steps to ensure the privacy and security of consumer financial
information. We believe our present activities fall under exceptions to the consumer notice and
opt-out requirements contained in this law for third-party service providers to financial
institutions. We believe that current legislation permits us to access and use this information as
we do now. The laws governing privacy generally remain unsettled, however, even in areas where
there has been some legislative action, such as the Gramm-Leach-Bliley Act and other consumer
statutes, it is difficult to determine whether and how existing and proposed privacy laws or
changes to existing privacy laws will apply to our business. Limitations on our ability to access
and use customer information could adversely affect our ability to provide the services we offer to
our merchants or could impair the value of these services.
Several states have proposed legislation that would limit the uses of personal information
gathered using the Internet. Some proposals would require proprietary online service providers and
website owners to establish privacy policies. Congress has also considered privacy legislation
that could further regulate use of consumer information obtained over the Internet or in other
ways. Our compliance with these privacy laws and related regulations could materially affect our
operations.
Changes to existing laws or the passage of new laws could, among other things:
| create uncertainty in the marketplace that could reduce demand for our services; |
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| limit our ability to collect and to use merchant and cardholder data; | ||
| increase the cost of doing business as a result of litigation costs or increased operating costs; or | ||
| in some other manner have a material adverse effect on our business, results of operations and financial condition. |
If we are required to pay state taxes on transaction processing, it could negatively impact our
profitability.
Transaction processing companies may become subject to state taxation of certain portions of
their fees charged to merchants for their services. If we are required to pay such taxes and are
unable to pass this tax expense through to our merchant clients, or produce increased cash flow to
offset the taxes, these taxes would negatively impact our profitability.
The markets for the services that we offer may fail to expand or may contract and this could
negatively impact our growth and profitability.
Our growth and continued profitability depend on acceptance of the services that we offer. If
demand for our services decreases, our profitability would be negatively impacted. Changes in
technology may enable merchants and retail companies to directly process transactions in a
cost-efficient manner without the use of our services. Additionally, downturns in the economy or
the performance of retailers may result in a decrease in the demand for our services. Further, if
our customers make fewer sales of their products and services, we will have fewer transactions to
process, resulting in lower revenue. Any decrease in the demand for our services for the reasons
discussed above or other reasons could have a material adverse effect on our growth and revenue.
The effect of climate changes on the Company cannot be predicted with certainty.
The Company is not directly affected by environmental legislation, regulation or international
treaties. The Company is not involved in an industry which is significantly impacted by climate
changes except as such changes may generally affect the economy and consumer spending in the United
States. A significant change in the global climate could affect the general growth in the economy,
population growth and create other issues which will over time affect the card-based payment
industry in general. However, it is impossible to predict such effects on the Companys business
and operations.
Risks Relating to Acquisitions
We have previously acquired, and expect to continue to acquire, other providers of payment
processing services and portfolios of merchant processing accounts. These acquisitions entail
risks in addition to those incidental to the normal conduct of our business.
Revenues generated by acquired businesses or account portfolios may be less than anticipated,
resulting in losses or a decline in profits, as well as potential impairment charges.
In evaluating and determining the purchase price for a prospective acquisition, we estimate
the future revenues from that acquisition based on the historical transaction volume of the
acquired provider of payment processing services or portfolio of merchant accounts. Following an
acquisition, it is customary to experience some attrition in the number of merchants serviced by an
acquired provider of payment processing services or included in an acquired portfolio of merchant
accounts. Should the rate of post-acquisition merchant attrition exceed the rate we have
forecasted, the revenues generated by the acquired providers of payment processing services or
portfolio of accounts may be less than we estimated, which could result in losses or a decline in
profits, as well as potential impairment charges.
We may fail to uncover all liabilities of acquisition targets through the due diligence process
prior to an acquisition, exposing us to potentially large, unanticipated costs.
Prior to the consummation of any acquisition, we perform a due diligence review of the
provider of payment processing services or portfolio of merchant accounts that we propose to
acquire. Our due diligence review, however, may not adequately uncover all of the contingent or
undisclosed liabilities we may incur as a consequence of the proposed acquisition. For example, in
the past we were obligated to fund certain credits and chargebacks after discovering that a
merchant account from an acquired merchant processing portfolio was in substantial violation of the
Visa and MasterCard card association rules. In the future we may make acquisitions that may
obligate us to make similar payments resulting in potentially significant, unanticipated costs.
We may encounter delays and operational difficulties in completing the necessary transfer of data
processing functions and connecting systems links required by an acquisition, resulting in
increased costs for, and a delay in the realization of revenues from, that acquisition.
The acquisition of a provider of payment processing services, as well as a portfolio of
merchant processing accounts, requires the transfer of various data processing functions and
connecting links to our systems and those of our own third-party service providers. If the
transfer of these functions and links does not occur rapidly and smoothly, payment processing
delays and errors may occur, resulting in a loss of revenues, increased merchant attrition and
increased expenditures to correct the transitional problems, which could preclude our attainment
of, or reduce, our profits.
Special non-recurring and integration costs associated with acquisitions could adversely affect our
operating results in the periods following these acquisitions.
In connection with some acquisitions, we may incur non-recurring severance expenses,
restructuring charges and change of control payments. These expenses, charges and payments, as
well as the initial costs of integrating the personnel and facilities of an acquired business with
those of our existing operations, may adversely affect our operating results during the initial
financial periods following an acquisition. In addition, the integration of newly acquired
companies may lead to diversion of management attention from other ongoing business concerns.
Our facilities, personnel and financial and management systems may not be adequate to effectively
manage the future expansion we believe necessary to increase our revenues and remain competitive.
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We anticipate that future expansion will be necessary in order to increase our revenues. In
order to effectively manage our expansion, we may need to attract and hire additional sales,
administrative, operations and management personnel. We cannot be sure that our facilities,
personnel and financial and management systems and controls will be adequate to support the
expansion of our operations, and provide adequate levels of service to our merchants and
independent sales groups. If we fail to effectively manage our growth, our business could be
harmed.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal executive offices are located in approximately 4,700 square feet of leased
office space in Nashville, Tennessee. We also lease approximately 32,000 square feet in Westlake
Village, California, approximately 6,300 square feet in Santa Barbara, California, approximately
9,600 square feet in Minden, Nevada, approximately 16,000 square feet in Phoenix, Arizona,
approximately 2,300 square feet in Novi, Michigan, and approximately 13,500 square feet in Akron,
Ohio. We believe that these facilities are adequate for our current operations and, if necessary,
can be replaced with little disruption to our business.
ITEM 3. | Legal Proceedings |
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, Civil Action No.
05CC02794 State of California, Superior Court of Orange County.
This matter, was initially reported in our Annual Report for the year ended December 31, 2004,
previously filed on Form 10-K with the Securities and Exchange Commission on February 24, 2005 and
was last updated in our Quarterly Report for the second quarter ended June 30, 2009, filed on Form
10-Q with the Securities and Exchange Commission on August 14, 2009. As we previously reported, on
June 4, 2009, the Court issued a Final Order Approving Settlement and Final Judgment of Dismissal
(Final Judgment) of this matter. The Final Judgment became final on August 4, 2009, and all
claims against us in the subject litigation have been fully settled, released and all claims have
been dismissed. The terms of the settlement did not have a material adverse effect on our
business, financial condition or results of operations. All matters related to the Litigation were
concluded in December 2009.
Equal Employment Opportunity Commission, Plaintiff, v. iPayment, Inc. ,and NPMG Acquisition
Sub, LLC, a Delaware corporation, United States District Court for the District of Arizona,
Case No.: CV 08-1790-PHX-SRB
This matter was previously reported in our Quarterly Report for the second quarter ended June
30, 2009, filed on Form 10-Q with the Securities and Exchange Commission on August 14, 2009 and was
last updated in our Quarterly Report for the third quarter ended September 30, 2009, filed on Form
10-Q with the Securities and Exchange Commission on November 13, 2009. As we last reported on this
matter, the parties agreed to terms of a Consent Decree for the settlement of the claims asserted
against us and our subsidiary, NPMG Acquisition Sub, LLC, in the subject litigation and the
litigation was concluded in September 2009. The total amount payable pursuant to the Consent
Decree did not have a material adverse effect on our business, financial condition or results of
operations.
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)
The Bruns lawsuit was previously reported in our Annual Report for the year ended December 31,
2007, previously filed on Form 10-K with the Securities and Exchange Commission on March 14, 2008,
and was last updated in our Quarterly Report for the third quarter ended September 30, 2009, filed
on Form 10-Q with the Securities and Exchange Commission on November 13, 2009. As previously
reported, this matter arises from a lawsuit filed in February 2000 by plaintiff Dana Bruns on her
own behalf and on behalf of a purported class of persons in California who, during the five years
prior to filing the lawsuit, allegedly received fax transmissions from third-party defendant
Fax.Com and its advertisers, including our subsidiary, E-Commerce Exchange, Inc. (ECX). The
complaint, as amended, alleges that the defendants sent fax blast transmissions to telephone
facsimile machines in violation of the provisions of the Telephone Consumer Protection Act of 1991
(TCPA) and seeks relief under the TCPA and/or under Californias Unfair Competition Act, Business
& Professions Code and for negligence, including for injunctive relief, damages and monetary
relief, attorneys fees and costs of suit and other relief deemed proper. In December 2006, ECX
and other defendants filed a Motion for Mandatory Dismissal of this lawsuit which the Court granted
and subsequently issued an Order of Final Judgment dismissing the litigation with prejudice, which
the plaintiff subsequently appealed. In March 2009, the Appellate Court reversed the Order of
Final Judgment issued by the Trial Court and we and other defendants filed a petition for review
with the California Supreme Court, seeking a review of the Appellate Court decision. Since we last
reported on this matter, briefing on the merits review with the California Supreme Court was
completed on January 21, 2010. The California Supreme Court has not set a date for oral argument,
but our current understanding is that oral argument will likely be scheduled for either sometime
later this year or for sometime in the first half of 2011.
We continue to believe that the claims asserted against us in the Bruns lawsuit are without
merit and that the Trial Court properly granted our Motion for Mandatory Dismissal and that
dismissal of the case was mandated. At this time, we cannot predict with any certainty how the
California Supreme Court might rule, nor can we predict, in the event appellate relief is ordered,
the likely outcome it may have on the lawsuit and the claims asserted against us. In the event the
Appellate Court is affirmed, we currently intend to continue to vigorously defend ourselves in this
matter. However, there can be no assurance that we will be successful or prevail in
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our defense, or in the event we are not successful and judgment is awarded against us, that
the Bruns lawsuit claims will be covered by insurance or that any amounts that may be due from
insurance coverage will be available for payment of claims, or sufficient to fully satisfy a
judgment awarded against us (ECX), and, therefore, there can be no assurance that a failure to
prevail will not have a material adverse effect on our business, financial condition or results of
operations. Since we last reported on the Bruns lawsuit, on or about January 29, 2010, a related
declaratory judgment action was filed by Truck Insurance Exchange against ECX and Dana Bruns
(individually and as alleged class representative of all others similarly situated) (the TIC
Declaratory Action). As we earlier reported in the underlying Bruns lawsuit, ECX tendered the
Bruns lawsuit claim in early 2000 to Truck Insurance Exchange, a member of Farmers Insurance Group
of Companies (TIC) under a policy then in effect that provides up to $2,000,000 for covered
claims and claim defense, and in April 2000, TIC agreed, subject to a reservation of rights, to
assume the defense of ECX in the litigation and has paid all costs of defense since April 2000. In
the TIC Declaratory Action, TIC asserts that the insurance policies issued to ECX did not cover the
claims alleged in the underlying Bruns lawsuit, and it therefore seeks judicial determinations that
(a) it does not have a duty to defend ECX in the underlying Bruns lawsuit; (b) that it may withdraw
from the defense of ECX in the underlying Bruns Lawsuit; and (c) that it owes no duty to indemnify
ECX for any settlement reached or judgment entered in the underlying Bruns Lawsuit. TIC also seeks
to recover against ECX a monetary judgment in an amount to be determined at trial that is equal to
the costs and expenses incurred by TIC in defending ECX in the Bruns lawsuit.
We only recently engaged legal counsel to represent ECX in the TIC Declaratory Action and we
have not had the opportunity to fully consult with our attorneys on this matter. Our response to
the complaint is currently required to be filed on or before March 19, 2010. Based on our current
understanding of the matter, we expect to timely respond to the complaint filed by TIC and to
vigorously defend ourselves. At this time the ultimate outcome of this TIC Declaratory Action and
our potential liability associated with such, or the likely effect it may have on our defense of
the underlying Bruns lawsuit and the claims asserted against us cannot be predicted with certainty,
and there can be no assurance that we will be successful or prevail in our defenses, or in the
event that we are not successful, that a failure to prevail will not have a material adverse effect
on our business, financial condition or results of operations.
Sharyns 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
Sharyns 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
These related matters were initially reported in our Quarterly Report for the third quarter
ended September 30, 2007, filed on Form 10-Q with the Securities and Exchange Commission on
November 13, 2007 and was last updated in our Quarterly Report for the third quarter ended
September 30, 2009, filed on Form 10-Q with the Securities and Exchange Commission on November 13,
2009. As previously reported, these matters relate to a lawsuit filed in January 2005 in North
Carolina by plaintiff Sharyns Jewelers, LLC, a merchant, naming as defendants, iPayment, Inc. and
iPayment of Valencia (the iPayment Defendants) and third parties Vericomm, an independent outside
sales organization, and JPMorgan Chase Bank (Chase). In April 2006, plaintiff obtained a
default judgment against us (and Vericomm) awarding compensatory damages of $74,600 , attorneys
fees of $35,100, and punitive damages of $250,000, imposing joint and several liability, for a
total judgment amount of $359,700 (the North Carolina Judgment). Plaintiff then assigned its
judgment to Judgment Recovery Group, LLC (JRG) and, on or about August 9, 2007, JRG commenced an
action in California state court (the California Action) for entry of sister state judgment (the
Sister State Judgment) in the amount of $404,200. We timely filed a motion to vacate the
California-issued Sister State Judgment and filed an application to stay enforcement of the
judgment, pending a December 18, 2007 hearing on our motion to vacate. The court granted our
application and stayed enforcement of the judgment, pending the hearing set for December 18,
2007. Prior to the December hearing date, the parties entered into a stipulation, to stay the
California proceedings pending the final outcome of all challenges filed in North Carolina on the
underlying North Carolina Judgment. Vericomm filed an appeal in North Carolina of the North
Carolina Judgment and in April 2009, the North Carolina Court of Appeals vacated the default
judgment imposing liability on Vericomm for punitive damages, unfair and deceptive trade practices,
attorneys fees and injunctive relief and affirmed the judgments award of compensatory damages
against Vericomm. On June 12, 2009, JRG filed in the California Action a proposed Amended Judgment
against Vericomm in the amount of $93,500 and against the iPayment Defendants, jointly and
severally, in the amount of $452,800, which the Court signed and entered on June 12, 2009 (the
California Amended Judgment). We and Vericomm each filed a Motion to Vacate the California
Amended Judgment.
Since we last reported on these related matters, on or about December 14, 2009, the North
Carolina trial court entered the Amended Judgment. On January 19, 2010, the California court set
March 15, 2010 as the hearing date for any motions to vacate. On February 19, 2010, we and
Vericomm each timely filed a motion to vacate the California-issued Sister State Judgment, as
amended. At the March 15, 2010 hearing on the motions to vacate the California-issued Sister State
Judgment, as amended the Court ruled that JRG needs to domesticate the latest amended judgment
issued by the trial court in North Carolina before the California court can do anything, and
therefore JRG must file a new application for entry of sister state judgment and, if that is
completed, we will have 30 days to file our motion to vacate. We currently intend to continue to
vigorously defend ourselves in the California court matter. If JRG files for entry of sister state
judgment based on the latest amended judgment issued by the trial court in North Carolina, we
currently intend to file a motion to vacate and we continue to believe that we have grounds to have
any California-issued Sister State Judgment vacated or modified or to obtain substantial relief
from enforcement in California of any such Sister State Judgment entered against us on the amended
North Carolina Judgment. There can be no assurance that we will be successful or prevail in our
defense, or that a failure to prevail will not have a material adverse effect on our business,
financial condition or results of operations.
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Employment Development Department of the State of California, Notice of Assessment No. 00008
This matter was initially reported in our Quarterly Report for the third quarter ended
September 30, 2007, filed on Form 10-Q with the Securities and Exchange Commission on November 13,
2007, and was last updated in our Quarterly Report for the third quarter ended September 30, 2009,
filed on Form 10-Q with the Securities and Exchange Commission on November 13, 2009. As previously
reported, this matter relates to a Notice of Assessment No. 00008 (dated July 10, 2007) sent to our
wholly-owned subsidiary, iPayment of California, LLC (iPOC) by the Employment Development
Department of the State of California (EDD) for amounts claimed to be due arising during the
period starting April 1, 2004 and ending March 31, 2007. The Notice of Assessment stated that we
had been assessed approximately $1.4 million, plus an additional $0.1 million for accrued interest
billed to the date assessed (the Assessment) due to a determination by the EDD, following an
audit, that during the covered period we improperly classified and treated certain individuals as
independent contractors rather than as employees, and therefore, failed to properly report amounts
paid as wages, failed to withhold (and deposit) amounts for certain employee contributions on
said wages, including withholdings for California personal income tax, and failed to remit amounts
for employer contributions otherwise due on these unreported wages.
As we have previously reported, we have been working with the EDD auditor that issued the
Assessment to resolve the Assessment. In August 2009, the EDD auditor that issued the Assessment
conducted a voluntary tax audit review conference with our representative and based on the records
and information examined during the conference, the Auditor requested that we submit certain
additional records and information relating to 2007 that would further support our position for the
abatement of the Assessment. Since we last reported on this matter, we submitted the additional
requested records and information to the EDD auditor and have continued to communicate with the EDD
auditor as well as with the EDD employee assigned to our account by the EDD Sacramento collections
division.
Based upon our February 2010 communications and correspondence with the EDD Auditor, we
currently expect to have another voluntary tax audit review conference with the EDD Auditor during
the month of April 2010. Although we are still currently subject to the Assessment, based upon our
most recent communication and correspondence with the EDD, we currently believe that the EDD has,
for the present time, deferred taking any further collection action, in order to provide us and
the EDD auditor additional time to resolve the Assessment. Although the results cannot be
predicted with certainty, we believe, based on information currently available, that the ultimate
outcome of this matter and our liability associated therewith should not have a material adverse
effect on our business, financial condition, or results of operations. However, the results cannot
be predicted with certainty and in the event of unexpected future developments or additional
information, it is possible that this matter could be unfavorable to us, and there can be no
assurance that a failure to prevail will not have a material adverse effect on our business,
financial condition or results of operations.
Other- Merrick Bank
This matter was initially reported in our Annual Report for the year ended December 31, 2006,
filed on Form 10-K with the Securities and Exchange Commission on March 8, 2007, and was last
updated in our Quarterly Report for the third quarter ended September 30, 2009, filed on Form 10-Q
with the Securities and Exchange Commission on November 13, 2009. As previously reported, Merrick
Bank, one of our sponsor banks, incurred certain Visa/MasterCard fines related to a third party
processor in 2005. Merrick withheld certain funds from us related to the Visa/MasterCard fines,
and we have been in a dispute with Merrick since 2005 regarding our liability to them for such
fines.
In a separate and unrelated claim, Merrick advised us of a certain loss liability totaling
less than $0.5 million. Merrick deducted the amount of such loss from the withheld funds, and we
submitted a claim to our insurance carrier seeking coverage under our then current policy. As of
September 30, 2007, we had reserved half of the
$0.5 million in our Consolidated Income Statements. Since we last reported on this matter, the settlement agreement with our insurance
carrier was finalized and we received payment of the settlement funds.
We intend to continue to investigate our responsibility to Merrick with regards to the
Visa/MasterCard fines. However, there can be no assurance that we will be successful in defending
our claim that we are not responsible for such fines. As of December 31, 2008, we had reserved
$0.3 million, or 50% of the net amount of our funds held by Merrick Bank, in our Consolidated
Income Statements. As of December 31, 2009 we have reserved the remaining $0.3 million. There
are no other updates at this time on the status of this matter. Although the ultimate outcome of
this disputed matter and our liability associated with such cannot be predicted with certainty,
based on information currently available, in our opinion, the outcome is not expected to have a
material adverse effect on our business, financial condition or results of operations.
Other Contract Related
During the past several months we have received a series of settlement communications from
counsel for one of our Independent Sales Groups (ISGs). This ISG claims that since October
2006, we have not correctly calculated, reported and paid certain residual compensation in
accordance with the terms of our contract, and that, we, directly or indirectly, engaged in certain
activities, such as purportedly terminating merchants, in a manner that the ISG believes
wrongfully interfered with some merchant relationships which deprived it from being paid residual
compensation for such merchants in violation of the terms of our contract. We have also advised
this ISG that we are currently investigating whether the ISG is in breach of its contractual
obligations to us. The ISG asserting these disputed claims has been an ISG of ours for over eight
years, and continues to use our services and continues to submit new merchant applications to us
for processing.
Although we have not completed our investigation of the facts or our review of all relevant
information, records and documents
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that may be associated with these disputed matters, based on our present understanding of the
factual and legal matters related to these disputed claims, we currently believe that the claim
that we violated the ISGs contractual rights by purportedly terminating various merchants in a
manner that interfered with these merchant relationships lacks merit and we currently believe
that, with respect to the claim that we have not correctly calculated, reported and paid residual
compensation, any such errors that may be conclusively established will be limited in nature, and
any potential underpayment is not expected to have a material adverse effect on our business,
financial condition or results of operations.
These disputed claims and matters are currently not in litigation; however, the communications
made to us have included threats of litigation. This ISG has proposed terms for an amicable
resolution of these disputed claims which include terms that would require us to purchase the
future residual income rights that may become due to the ISG under the contract. Although we
disagree with the assertions and claims made against us, we currently intend to continue our
efforts to reach an amicable resolution to these matters. Our contract with this ISG requires that
disputes be submitted first to non-binding mediation and, if not resolved, then to binding
arbitration with the American Arbitration Association. If an amicable resolution is not successful
and litigation is commenced, we currently intend to vigorously defend ourselves and we currently
believe that we will have meritorious defenses to these disputed claims. Based on information
currently available, in our opinion, the ultimate outcome of these disputed matters is not expected
to have a material adverse effect on our business, financial condition or results of operations.
However, the results cannot be predicted with certainty and in the event of unexpected future
developments, including if these claims are asserted in litigation, it is possible that this matter
could be adjudicated against us and there can be no assurance that failure to prevail would not
have a material adverse effect on our business, financial condition or results of operations.
We are also subject to certain other legal proceedings that have arisen in the ordinary course
of our business and have not been fully adjudicated. Although the ultimate outcome of these other
legal proceedings cannot be predicted with certainty, based on information currently available,
advice of counsel, and available insurance coverage, in our opinion, the outcome of such legal
proceedings is not expected to have a material adverse effect on our business, financial condition
or results of operations. However, the results of legal proceedings cannot be predicted with
certainty and in the event of unexpected future developments, it is possible that the ultimate
resolution of one or more of these matters could be unfavorable. Should we fail to prevail in any
of these legal matters or should several of these legal matters be resolved against us in the same
reporting period, our consolidated financial position or operating results could be materially
adversely affected. Regardless of the outcome, any litigation may require us to incur significant
litigation expenses and may result in significant diversion of managements attention. All
litigation settlements are recorded within other expense on our Consolidated Income Statements.
ITEM 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during the fourth quarter of fiscal
2009.
PART II
ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
There is no established public trading market for our common stock. On May 10, 2006, Holdings
acquired all of our issued and outstanding common stock. Holdings is a wholly-owned subsidiary of
iPayment Investors. Pursuant to the terms of our senior secured credit facility, we are limited
in the amount of dividends we can declare or pay on our outstanding shares of common stock. We did
not pay any cash dividends in 2009 or 2008. We intend to retain earnings for use in the operation
and expansion of our business, and, therefore, we do not anticipate declaring a cash dividend in
the foreseeable future.
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ITEM 6. Selected Financial Data
Period from | ||||||||||||||||||||||||
January 1 | May 11 | |||||||||||||||||||||||
Year Ended | through | through | Year Ended | Year Ended | Year Ended | |||||||||||||||||||
December 31, | May 10, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2005 | 2006 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Predecessor | Predecessor | Successor | Successor | Successor | Successor | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 702,712 | $ | 252,514 | $ | 481,474 | $ | 759,109 | $ | 794,825 | $ | 717,928 | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
407,736 | 145,459 | 279,653 | 437,955 | 450,570 | 397,530 | ||||||||||||||||||
Other cost of services |
213,138 | 76,994 | 147,055 | 228,537 | 241,532 | 229,071 | ||||||||||||||||||
Selling, general and administrative |
18,062 | 14,432 | 13,017 | 21,144 | 20,289 | 19,530 | ||||||||||||||||||
Total operating expenses |
638,936 | 236,885 | 439,725 | 687,636 | 712,391 | 646,131 | ||||||||||||||||||
Income from operations |
63,776 | 15,629 | 41,749 | 71,473 | 82,434 | 71,797 | ||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest expense, net |
(8,657 | ) | (5,229 | ) | (39,591 | ) | (60,216 | ) | (56,289 | ) | (46,488 | ) | ||||||||||||
Other |
(1,423 | ) | (6,729 | ) | (2,187 | ) | 179 | (750 | ) | (1,245 | ) | |||||||||||||
Total other expense |
(10,080 | ) | (11,958 | ) | (41,778 | ) | (60,037 | ) | (57,039 | ) | (47,733 | ) | ||||||||||||
Income (loss) before income taxes |
53,696 | 3,671 | (29 | ) | 11,436 | 25,395 | 24,064 | |||||||||||||||||
Income tax provision |
21,319 | 3,690 | 674 | 6,005 | 10,105 | 8,736 | ||||||||||||||||||
Net income (loss) |
32,377 | (19 | ) | (703 | ) | 5,431 | 15,290 | 15,328 | ||||||||||||||||
Less: Net income attributable to noncontrolling interests |
1,010 | 869 | (187 | ) | | (987 | ) | (3,588 | ) | |||||||||||||||
Net income (loss) attributable to iPayment, Inc. |
$ | 33,387 | $ | 850 | $ | (890 | ) | $ | 5,431 | $ | 14,303 | $ | 11,740 | |||||||||||
Balance Sheet Data (as of period end) |
||||||||||||||||||||||||
Cash and cash equivalents |
1,023 | N/A | 96 | 33 | 3,589 | 2 | ||||||||||||||||||
Working capital (deficit) |
(4,679 | ) | N/A | (9,279 | ) | (8,713 | ) | (10,591 | ) | (6,601 | ) | |||||||||||||
Total assets |
340,981 | N/A | 784,966 | 767,545 | 768,864 | 745,366 | ||||||||||||||||||
Total long-term debt, including current portion |
100,329 | N/A | 714,656 | 697,357 | 687,326 | 651,519 | ||||||||||||||||||
Stockholders equity |
209,353 | N/A | 16,890 | 17,216 | 26,605 | 43,138 | ||||||||||||||||||
Financial and Other Data: |
||||||||||||||||||||||||
Charge volume (in millions) (unaudited) (1) |
25,725 | 9,072 | 17,265 | 26,797 | 26,783 | 23,526 | ||||||||||||||||||
Capital expenditures |
1,133 | 587 | 1,510 | 1,110 | 2,374 | 2,304 | ||||||||||||||||||
Ratio of earnings to fixed charges (2) |
7.32 | 1.87 | 1.04 | 1.20 | 1.41 | 1.44 |
(1) | Represents the total dollar volume of all Visa and MasterCard transactions processed by our merchants, which is provided to us by our third-party processing vendors. | |
(2) | Computed in accordance with Item 503(d) of Regulation S-K. For purposes of computing the ratio of earnings to fixed charges, fixed charges consist of interest expense on long-term debt and capital leases, amortization of deferred financing costs and that portion of rental expense deemed to be representative of interest. Earnings consist of income (loss) before income taxes and minority interest, plus fixed charges and minority interest in pre-tax losses of subsidiaries that have not incurred fixed charges. The ratio of earnings to fixed charges differs from the fixed charge coverage ratio computed for the purposes of the indenture governing our senior subordinated notes and from the consolidated interest coverage ratio computed for the purpose of the credit agreement governing the senior secured credit facility. |
See Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements for information regarding
accounting changes, asset acquisitions and dispositions, litigation matters, and other costs and
other items affecting comparability.
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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with Item 6 Selected Financial Data and our consolidated
financial statements and related notes included elsewhere in this Form 10-K. References in this
section to iPayment, Inc., the Company, we, us, and our refer to iPayment, Inc. and our
direct and indirect subsidiaries on a consolidated basis unless the context indicates otherwise.
Executive Overview
We are a provider of credit and debit card-based payment processing services to small
merchants across the United States. As of December 31, 2009, we provided our services to
approximately 140,000 small merchants. Our payment processing services enable our merchants to
accept credit cards as well as other forms of card-based payment, including debit cards, checks,
gift cards and loyalty programs in both traditional card-present, or swipe transactions, as well as
card-not-present transactions. We market and sell our services primarily through independent sales
groups, which gives us a non-employee, external sales force. We outsource certain processing
functions such as card authorization, data capture and merchant accounting to third-party
processors such as FDMS and TSYS Acquiring Solutions, and we rely on banks such as Wells Fargo to
sponsor us for membership in the Visa and MasterCard associations and to settle transactions with
merchants. We perform core functions for small merchants such as processing, risk management,
fraud detection, merchant assistance and support and chargeback services, in our main operating
center in Westlake Village, California.
Our strategy has been to increase profits by increasing our penetration of the small merchant
marketplace for payment services. However, the deterioration in the United States economic
environment impacted the growth in charge volumes throughout the industry in 2009. Industry
sources indicated that charge volume for 2009 declined more than 10% when compared to the prior
year. We currently expect this trend to moderate in 2010. Due to the downturn in the economy, our
charge volume decreased to $23,526 million in 2009, from $26,783 million in 2008 and revenues
decreased to $717.9 million in 2009 from $794.8 million in 2008. Income from operations decreased
to $71.8 million in 2009, from $82.4 million in 2008.
Net interest expense decreased to $46.5 million in 2009 from $56.3 million in 2008, reflecting
a lower average interest rate and lower funded debt. Our effective income tax rate decreased to
approximately 36.3% in 2009, from approximately 39.8% in 2008, primarily because income tax
expenses do not include any tax expenses on the noncontrolling interests share of our joint
ventures earnings, which had greater pretax income during 2009 when compared to 2008.
Acquisition by iPayment Holdings
On May 10, 2006, pursuant to an Agreement and Plan of Merger dated as of December 27, 2005, by
and among two new entities, iPayment, MergerCo and iPayment Holdings, MergerCo was merged with and
into iPayment, Inc. (the Transaction), with iPayment, Inc. remaining as the surviving corporation
and a wholly-owned subsidiary of iPayment Holdings. Holdings is a wholly-owned subsidiary of
iPayment Investors, which is a Delaware limited partnership formed by Gregory Daily, the Chairman
and Chief Executive Officer of iPayment, Carl Grimstad, the President of iPayment, and certain
parties related to them.
The total amount of consideration required to consummate the merger and the related
transactions was approximately $895.4 million, consisting of (1) approximately $800.0 million to
fund the payment of the merger consideration and payments in respect of the cancellation of
outstanding stock options, (2) approximately $70.0 million to repay certain existing indebtedness
of iPayment and (3) approximately $25.4 million to pay transaction fees and expenses. These funds
were obtained from equity and debt financings as follows:
| equity financing in an aggregate amount of $170.0 million provided through (1) the delivery of an aggregate of $166.6 million of iPayment common stock by Mr. Daily, on his own behalf and on behalf of certain related parties, and by Mr. Grimstad, on his own behalf and on behalf of certain related parties, and (2) approximately $3.4 million of cash provided by Mr. Daily; | ||
| a term loan of $515.0 million pursuant to a credit facility entered into between iPayment and a syndicate of lenders, which also included a $60.0 million revolving credit facility; | ||
| approximately $202.2 million raised through the issuance by iPayment of private notes; and | ||
| approximately $8.2 million funded by cash on hand and borrowings under the revolving credit facility described above. |
Acquisitions
Since December 2003, we have expanded our card-based payment processing services through the
acquisition of five businesses, three significant portfolios and several smaller portfolios of
merchant accounts, as set forth below. These acquisitions have significantly impacted our
revenues, results of operations, and financial condition. Primarily due to these acquisitions, our
merchant portfolio base increased from approximately 56,000 active small merchants on January 1,
2003, to approximately 140,000 on December 31, 2009. In addition, primarily due to these
acquisitions, our revenues grew from $226.1 million in 2003 to $717.9 million in 2009, which
represents a 21.2% compound annual growth rate from 2003 to 2009.
The following table lists each of the acquisitions that we have made since December 2003:
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Acquired Business or Significant | ||
Portfolio of Merchant Accounts | Date of Acquisition | |
FDMS Bank Portfolio
|
December 2003 | |
Transaction Solutions
|
September 2004 | |
FDMS Merchant Portfolio
|
December 2004 | |
Petroleum Card Services
|
January 2005 | |
iPayment ICE of Utah, LLC
|
June 2005 | |
National Processing Management Group
|
October 2005 | |
Cambridge Payment Systems
|
December 2007 | |
Merchant Service Center
|
April 2008 | |
Central Payment Co Portfolio
|
November 2009 |
On December 19, 2003, we entered into an asset purchase agreement with FDMS pursuant to which
we acquired the FDMS Bank Portfolio for a price of $55.0 million in cash. Pursuant to the terms of
the asset purchase agreement, we commenced receiving revenue from these accounts on January 1,
2004. In order to finance the acquisition, we increased our borrowing capacity under our revolving
credit facility from $30.0 million to $65.0 million. We borrowed $45.0 million under our credit
facility and used available cash for the balance of the purchase price. We are currently a
customer of FDMS for merchant processing services.
On September 15, 2004, we entered into an agreement to purchase substantially all of the
assets of TS Black and Gold, LP (Transaction Solutions). Transaction Solutions is a provider of
card-based payment transaction processing services. Consideration included cash at closing and
contingent payments based upon future performance over two years, all of which was paid as of
December 31, 2006. The acquisition was recorded under the purchase method with the total
consideration allocated to the fair value of assets acquired and liabilities assumed. The
operating results of Transaction Solutions from September 1, 2004, were included in our
Consolidated Income Statements.
On December 27, 2004, we entered into an asset purchase agreement with FDMS, pursuant to which
we acquired the FDMS Merchant Portfolio for a price of $130.0 million in cash. Pursuant to the
terms of the asset purchase agreement, the acquisition became effective on December 31, 2004, and
we commenced receiving revenue from the merchant accounts on January 1, 2005. We expanded our
existing credit facility from $80.0 million to $180.0 million to finance the purchase. The
transaction also strengthened our existing strategic relationship with First Datas merchant
services unit. We will continue to utilize processing services from First Data for the acquired
portfolio.
In January 2005, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of Petroleum Card Services. Consideration included cash at closing
and a contingent payment based on performance over the first two years. Petroleum Card Services is
a provider of card-based payment transaction processing services. The acquisition was recorded
under the purchase method with the total consideration allocated to the fair value of assets
acquired and liabilities assumed. The operating results of Petroleum Card Services from January 1,
2005, were included in our Consolidated Income Statements.
In June 2005, we acquired a 51% interest in the joint venture iPayment ICE of Utah, LLC
(ICE), a provider of card-based payment transaction processing services. The acquisition was
recorded under the purchase method with the total consideration allocated to the fair value of
assets acquired and liabilities assumed. The operating results of ICE from June 1, 2005, were
included in our Consolidated Income Statements. During 2008, we acquired the remaining 49%
interest in this joint venture for less than $0.1 million, which caused this entity to be
wholly-owned. At that time, we legally dissolved the entity iPayment ICE of Utah, LLC and our
subsidiary iPayment ICE Holdings, Inc., which had previously held our 51% interest in ICE.
In October 2005, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of National Processing Management Group (NPMG). Consideration
included cash at closing and contingent payment based on performance in 2006 and 2007. NPMG is a
provider of card-based payment transaction processing services. The acquisition was recorded under
the purchase method with the total consideration allocated to the fair value of assets acquired and
liabilities assumed. The operating results of NPMG from October 1, 2005, were included in our
Consolidated Income Statements.
In December 2007, we entered into an agreement to purchase substantially all the assets and to
assume certain liabilities of Cambridge Payment Systems (Cambridge). Consideration included cash
at closing and contingent payment based on performance in 2008, 2009, and 2010. Cambridge is a
provider of card-based payment transaction processing services. The acquisition was recorded under
the purchase method with the total consideration allocated to the fair value of assets acquired and
liabilities assumed. The operating results of Cambridge from January 1, 2008, were included in our
Consolidated Income Statements.
In April 2008, we entered into an agreement to purchase substantially all of the assets and to
assume certain liabilities of Merchant Service Center, an independent sales group with a growing
portfolio of over 7,000 merchants. Consideration included cash at closing and contingent payments
based on performance in 2008, 2009, and 2010. Merchant Service Center is a provider of card-based
payment transaction processing services. The acquisition was recorded under the purchase method
with the total consideration allocated to the fair value of assets acquired and liabilities
assumed. The operating results of Merchant Service Center were included
in our Consolidated Income Statements beginning April 1, 2008 pursuant to the provisions of
the Asset Purchase Agreement.
In November 2009, iPayment, Inc. entered into a Purchase and Sale Agreement with the
shareholders of Central Payment Co., LLC (CPC), whereby iPayment acquired a merchant portfolio
consisting of approximately 8,000 merchants from CPC. The transaction was effective as of November
1, 2009. Consideration at closing was $23.8 million in cash. As a result of the portfolio
purchase, iPayment recorded $23.8 million of intangible assets.
We accounted for all of the acquisitions described above under the purchase method. For
acquisitions of a business, we allocate
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the purchase price based in part on valuations of the assets acquired and liabilities assumed. For
acquisitions of merchant portfolios, we allocate the purchase price to intangible assets. For
companies with modest growth prospects, our purchase prices primarily reflect the value of merchant
portfolios, which are classified as amortizable intangible assets. Acquisition targets we
identified as having entrepreneurial management teams, efficient operating platforms, proven
distribution capabilities, all of which contribute to higher growth prospects, commanded purchase
prices in excess of their merchant portfolio values. Consequently, purchase price allocations for
these targets reflect a greater proportion of goodwill.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with GAAP,
which require that management make numerous estimates and assumptions. Actual results could differ
from those estimates and assumptions, impacting our reported results of operations and financial
position. Our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements included in Item 8 of this Form 10-K. The critical accounting
policies described here are those that are most important to the depiction of our financial
condition and results of operations and their application requires managements most subjective
judgment in making estimates about the effect of matters that are inherently uncertain.
Accounting for Goodwill and Intangible Assets. We follow ASC 350 Intangibles Goodwill and
Other Topics (formerly known as Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets), which addresses financial accounting and reporting for acquired goodwill
and other intangible assets, and requires that goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at least an annual assessment for
impairment. If facts and circumstances indicate goodwill may be impaired, we perform a
recoverability evaluation. In accordance with ASC 350, the recoverability analysis is based on fair
value. The calculation of fair value includes a number of estimates and assumptions, including
projections of future income and cash flows, the identification of appropriate market multiples and
the choice of an appropriate discount rate.
We completed our most recent annual goodwill impairment review as of July 31, 2009, and
updated our review as of December 31, 2009, using the present value of future cash flows to
determine whether the fair value of the reporting unit exceeds the carrying amount of the net
assets, including goodwill. We determined that no impairment charge to goodwill was required.
We periodically evaluate the carrying value of long-lived assets, in relation to the
respective projected future undiscounted cash flows, to assess recoverability. An impairment loss
is recognized if the sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. The difference between the carrying amount of the long-lived
assets being evaluated and the fair value, calculated as the sum of the expected cash flows
discounted at a market rate, represents the impairment loss. We evaluated the carrying value of our
intangible assets as of December 31, 2009, and determined no impairment charge was required.
Purchased merchant processing portfolios are recorded at cost and are evaluated by management
for impairment at the end of each fiscal quarter through review of actual attrition and cash flows
generated by the portfolios in relation to the expected attrition and cash flows and the recorded
amortization expense. The estimated useful lives of our merchant processing portfolios are
assessed by evaluating each portfolio to ensure that the recognition of the costs of revenues,
represented by amortization of the intangible assets, approximate the distribution of the expected
revenues from each processing portfolio. If, upon review, actual attrition and cash flows indicate
impairment of the value of the merchant processing portfolios, an impairment loss would be
recognized. Historically, we have experienced monthly volume attrition ranging from 1.0% to 3.0% of
our total charge volume on our various merchant portfolios. We utilize an accelerated method of
amortization over a fifteen-year period, which we believe approximates the distribution of actual
cash flows generated by our merchant processing portfolios. All other intangible assets are
amortized using the straight-line method over an estimated life of three to seven years.
In addition, we have implemented both quarterly and annual procedures to determine whether a
significant change in the trend of the current attrition rates being used exists on a portfolio by
portfolio basis. In reviewing the current attrition rate trends, we consider relevant benchmarks
such as merchant processing volume, revenues, gross profit and future expectations of the
aforementioned factors versus historical amounts and rates. If we identify any significant changes
or trends in the attrition rate of any portfolio, we will adjust our current and prospective
estimated attrition rates so that the amortization expense would better approximate the
distribution of actual cash flows generated by the merchant processing portfolios. Any adjustments
made to the amortization schedules would be reported in the current Consolidated Income Statements
and on a prospective basis until further evidence becomes apparent. We identified an unfavorable
trend of the current attrition rates being used during the year ended December 31, 2008 on some of
our portfolios. Accordingly, we recorded an increase to amortization expense of approximately $2.4
million to better approximate the distribution of actual cash flows generated by the merchant
processing portfolios. This trend continued during the first half of 2009, during which we
recorded an increase to amortization expense of $2.1 million to better approximate the distribution
of cash flows generated by the merchant processing portfolios.
Revenue and Cost Recognition. Substantially all of our revenues are generated from fees
charged to merchants for card-based payment processing services. We typically charge these
merchants a bundled rate, primarily based upon each merchants monthly charge volume and risk
profile. Our fees principally consist of discount fees, which are a percentage of the dollar
amount of each credit or debit transaction. We charge all merchants higher discount rates for
card-not-present transactions than for card-present transactions in order to compensate ourselves
for the higher risk of underwriting these transactions. We derive the balance of our revenues from
a variety of fixed transaction or service fees, including fees for monthly minimum charge volume
requirements, statement fees, annual fees, discount income on merchant advances and fees for other
miscellaneous services, such as handling chargebacks. We recognize discounts and other fees
related to payment transactions at the time the merchants transactions are processed. We
recognize revenues derived from service fees at the time the service is performed. Related
interchange and
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assessment costs are also recognized at that time.
We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent, now included in the Revenue Recognition Topic of ASC Topic 605. Generally, where we have
merchant portability, credit risk and ultimate responsibility for the merchant, revenues are
reported at the time of sale on a gross basis equal to the full amount of the discount charged to
the merchant. This amount includes interchange paid to card issuing banks and assessments paid to
payment card associations pursuant to which such parties receive payments based primarily on
processing volume for particular groups of merchants. Interchange fees are set by Visa and
MasterCard and are based on transaction processing volume and are recognized at the time
transactions are processed. Revenues generated from certain bank portfolios acquired as part of
the FDMS acquisition are reported net of interchange, as required by EITF 99-19, where we may not
have credit risk, portability or the ultimate responsibility for the merchant accounts.
Other costs of services include costs directly attributable to processing and bank sponsorship
costs, which amounted to $30.9 million, $38.1 million, and $40.1 million in the years ended
December 31, 2009, 2008, and 2007, respectively. They also include related costs such as residual
payments to independent sales groups, which are commissions we pay to our independent sales groups
based upon a percentage of the net revenues we generate from their merchant referrals, and
assessment fees payable to card associations, which is a percentage of the charge volume we
generate from Visa and MasterCard. In addition, other costs of services include telecommunications
costs, personnel costs, occupancy costs, losses due to merchant defaults, other miscellaneous
merchant supplies and services expenses, bank sponsorship costs and other third-party processing
costs directly attributable to our provision of payment processing and related services to our
merchants.
Other costs of services include depreciation expense, which is recognized on a straight-line
basis over the estimated useful life of the assets, and amortization expense, which is recognized
using an accelerated method over a fifteen-year period. Amortization of intangible assets results
from our acquisitions of portfolios of merchant contracts or acquisitions of a business where we
allocated a portion of the purchase price to the existing merchant processing portfolios and other
intangible assets.
Selling, general and administrative expenses consist primarily of salaries and wages and other
administrative expenses such as professional fees.
Reserve for Merchant Losses. Disputes between a cardholder and a merchant periodically arise
as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant
services. Such disputes may not be resolved in the merchants favor. In these cases, the
transaction is charged back to the merchant, which means the purchase price is refunded to the
customer through the merchants acquiring bank and charged to the merchant. If the merchant has
inadequate funds, we or, under limited circumstances, the acquiring bank and us, must bear the
credit risk for the full amount of the transaction. We evaluate the merchants risk for such
transactions and estimate its potential loss for chargebacks based primarily on historical
experience and other relevant factors and record a loss reserve accordingly. At December 31, 2009
and 2008, our reserve for losses on merchant accounts included in accrued liabilities and other
totaled $1.5 million and $1.3 million, respectively. We believe our reserve for charge-back and
other similar processing-related merchant losses is adequate to cover both the known probable
losses but also the incurred but not yet reported losses at December 31, 2009 and 2008.
We also maintain a reserve for merchant advance losses. In 2007, we began, on a selective
basis, offering advances to prospective and current merchants based on expected future processing
volume. We stopped offering new merchant advances to our customers in 2008. During the term of
our existing advances, there is risk that an advance may be deemed uncollectible. We evaluate the
risk of potential loss for each advance and record a loss reserve accordingly. As of December 31,
2009, our reserve for merchant advances was $0.5 million and is included in investment in merchant
advances in our Consolidated Balance Sheets. Our receivable for merchant advances was fully
reserved for at December 31, 2009.
Income Taxes. We account for income taxes pursuant to the provisions of ASC 740 Income Taxes
(formerly known as SFAS No. 109, Accounting for Income Taxes). Under this method, deferred tax
assets and liabilities are recorded to reflect the future tax consequences attributable to the
effects of differences between the carrying amounts of existing assets and liabilities for
financial reporting and for income tax purposes.
Noncontrolling Interest. We previously owned a 20% interest in a joint venture, Central
Payment Co, LLC (CPC). However, during the fourth quarter of 2009, we sold our 20% interest in
CPC for $4.3 million. The sale of our equity caused us to deconsolidate CPC and to recognize a
deferred gain of $2.8 million that will be recognized as income over a three-year period. As of
December 31, 2009, we had $0.9 million of short-term deferred gain within Accrued liabilities and
other and $1.7 million of long-term deferred gain within Other liabilities on our Consolidated
Balance Sheets. We recognized $0.2 million of gain during the fourth quarter of 2009 within Other
income on our Consolidated Income Statements. Although the sale of our equity in CPC does not
require pro forma disclosure within our financial statements, within Note 14 of the Notes to the
Consolidated Financial Statements we have provided pro forma quarterly financial information for
2009 presenting the effect of CPC as a deconsolidated entity. The noncontrolling interest in CPC
was $1.0 million on December 31, 2008. There was no remaining noncontrolling interest at December
31, 2009 due to the sale of our equity interest in CPC. We also previously owned a 51% interest in
a second joint venture, iPayment ICE of Utah, LLC (ICE). However, during the third quarter of
2008, we acquired the remaining 49% of ICE for less than $0.1 million, which caused ICE to be
wholly-owned.
We accounted for our investments pursuant to the provisions of ASC 810 Consolidation
(formerly known as SFAS Interpretation No. 46R, Consolidation of Variable Interest Entities).
Under this method, if a business enterprise has a controlling financial interest in or is the
primary beneficiary of a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in consolidated financial statements
with those of the business enterprise. As a result, we
considered CPC a variable interest entity, and as the primary beneficiary during our time as
an equity holder, we consolidated CPC.
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During the quarter ended March 31, 2009 and the quarter ended September 30, 2009, CPC made
distributions of profits to the Company and the majority shareholders of CPC. The distributions to
the majority shareholders reduced our noncontrolling interest balance prior to the sale of our
equity.
Derivative Financial Instruments. We account for our derivative financial instruments in
accordance with ASC 815 Derivatives and Hedging (formerly known as SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities). Under ASC 815, we recognize all derivatives as
either other assets or other liabilities, measured at fair value. The fair value of these
instruments (all interest rate swaps) at December 31, 2009, was $12.5 million, and was included as
other liabilities in our Consolidated Balance Sheets. The underlying terms of the interest rate
swaps, including the notional amount, interest rate index, duration, and reset dates, are identical
to those of the associated debt instruments and therefore the hedging relationship results in no
ineffectiveness. Accordingly, such derivative instruments are classified as cash flow hedges. As
such, any changes in the fair market value of the derivative instruments are included in
accumulated other comprehensive gain in our Consolidated Balance Sheets.
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Components of Revenues and Expenses
Substantially all of our revenues are generated from fees charged to merchants for card-based
payment processing services. We typically charge these merchants a bundled rate, primarily based
upon the merchants monthly charge volume and risk profile. Our fees principally consist of
discount fees, which are a percentage of the dollar amount of each credit or debit transaction. We
charge all merchants higher discount rates for card-not-present transactions than for card-present
transactions in order to provide compensation for the higher risk of underwriting these
transactions. We derive the balance of our revenues from a variety of fixed transaction or service
fees, including fees for monthly minimum charge volume requirements, statement fees, annual fees,
discount income on merchant advances and fees for other miscellaneous services, such as handling
chargebacks. We recognize discounts and other fees related to payment transactions at the time the
merchants transactions are processed. We recognize revenues derived from service fees at the time
the service is performed. Related interchange and assessment costs are also recognized at that
time. In December 2007, we began, on a selective basis, offering advances to prospective and
current merchants based on expected future processing volume that will be collected through
reductions in amounts otherwise paid to them on future transactions processed by the Company.
These merchant advances are reflected in Investment in merchant advances in the Consolidated
Balance Sheets. The merchant advances are generally collected over periods from six months to one
year. Our discount income is recognized over the term of the agreement as Revenues in our
Consolidated Income Statements using the effective interest method. In connection with the
origination of certain of these advances, origination or other fees may be incurred by the Company.
The amounts paid are deferred and amortized as a reduction of deferred origination fees over the
life of the advance. The objective of the method of income and expense recognition is to record a
constant effective yield on the investment in the related advances.
We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent, included in the Revenue Recognition Topic of ASC Topic 605, in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and ultimate responsibility
for the merchant, revenues are reported at the time of sale on a gross basis equal to the full
amount of the discount charged to the merchant. This amount includes interchange paid to card
issuing banks and assessments paid to payment card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of merchants. Revenues
generated from certain agent bank portfolios acquired from First Data Merchant Services Corporation
(the FDMS Agent Bank Portfolio) are reported net of interchange, as required by EITF 99-19, where
we may not have credit risk, portability or the ultimate responsibility for the merchant accounts.
The most significant component of operating expenses is interchange fees, which are amounts we
pay to the card issuing banks. Interchange fees are based on transaction processing volume and are
recognized at the time transactions are processed.
Other costs of services include costs directly attributable to our provision of payment
processing and related services to our merchants and primarily includes residual payments to
independent sales groups, which are commissions we pay to our independent sales groups based upon a
percentage of the net revenues we generate from their merchant referrals, and assessment fees
payable to card associations, which is a percentage of the processing volume we generate from Visa
and MasterCard. Other costs of services include depreciation expense, which is recognized on a
straight-line basis over the estimated useful life of the assets, and amortization expense, which
is recognized using an accelerated method over a fifteen-year period. Amortization of intangible
assets results from our acquisitions of portfolios of merchant contracts or acquisitions of a
business where we allocated a portion of the purchase price to the existing merchant processing
portfolios and other intangible assets. In addition, other costs of services include
telecommunications costs, personnel costs, occupancy costs, losses due to merchant defaults, other
miscellaneous merchant supplies and services expenses, bank sponsorship costs and other third-party
processing costs.
Selling, general and administrative expenses consist primarily of salaries and wages, as well
as other general administrative expenses such as professional fees.
Seasonality
Our revenues and earnings are impacted by the volume of consumer usage of credit and debit
cards at the point of sale. For example, we experience increased point of sale activity during the
traditional holiday shopping period in the fourth quarter. Revenues during the first quarter tend
to decrease in comparison to the remaining three quarters of our fiscal year on a same store basis.
Off-Balance Sheet Arrangements
We do not have transactions, arrangements and other relationships with unconsolidated entities
that are reasonably likely to affect our liquidity or capital resources. We have no special purpose
or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit
risk support, engage in leasing, hedging, research and development services, or other relationships
that expose us to liability that is not reflected on the face of the financial statements.
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Results of Operations
Years ended December 31, 2009 and 2008 (in thousands, except percentages)
The following table sets forth our operating results for the periods indicated as a percentage
of our revenues:
% of | % of | |||||||||||||||||||||||
Total | Total | Change | ||||||||||||||||||||||
2009 | Revenue | 2008 | Revenue | Amount | % | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 717,928 | 100.0 | % | $ | 794,825 | 100.0 | % | $ | (76,897 | ) | -9.7 | % | |||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
397,530 | 55.4 | % | 450,570 | 56.7 | % | (53,040 | ) | -11.8 | % | ||||||||||||||
Other cost of services |
229,071 | 31.9 | % | 241,532 | 30.4 | % | (12,461 | ) | -5.2 | % | ||||||||||||||
Selling, general and administrative |
19,530 | 2.7 | % | 20,289 | 2.6 | % | (759 | ) | -3.7 | % | ||||||||||||||
Total operating expenses |
646,131 | 90.0 | % | 712,391 | 89.6 | % | (66,260 | ) | -9.3 | % | ||||||||||||||
Income from operations |
71,797 | 10.0 | % | 82,434 | 10.4 | % | (10,637 | ) | -12.9 | % | ||||||||||||||
Other expenses: |
||||||||||||||||||||||||
Interest expense, net |
(46,488 | ) | -6.5 | % | (56,289 | ) | -7.1 | % | 9,801 | -17.4 | % | |||||||||||||
Other, net |
(1,245 | ) | -0.2 | % | (750 | ) | -0.1 | % | (495 | ) | 66.0 | % | ||||||||||||
Total other expense, net |
(47,733 | ) | -6.6 | % | (57,039 | ) | -7.2 | % | 9,306 | -16.3 | % | |||||||||||||
Income before income taxes |
24,064 | 3.4 | % | 25,395 | 3.2 | % | (1,331 | ) | -5.2 | % | ||||||||||||||
Income tax provision |
8,736 | 1.2 | % | 10,105 | 1.3 | % | (1,369 | ) | -13.5 | % | ||||||||||||||
Net income |
15,328 | 2.1 | % | 15,290 | 1.9 | % | 38 | 0.2 | % | |||||||||||||||
Less: Net income attributable to
noncontrolling interests |
(3,588 | ) | -0.5 | % | (987 | ) | -0.1 | % | (2,601 | ) | 263.5 | % | ||||||||||||
Net income attributable to iPayment,
Inc. |
$ | 11,740 | 1.6 | % | $ | 14,303 | 1.8 | % | $ | (2,563 | ) | -17.9 | % | |||||||||||
Revenues. Revenues decreased 9.7% to $717.9 million in 2009 from $794.8 million in 2008.
The decrease resulted from the challenging economic environment, as our merchant processing volume,
which represents the total value of transactions processed by us, declined 12.2% to $23,526 million
during 2009 from $26,783 million during 2008, reflecting lower consumer spending. Revenues
decreased at a lower rate than charge volume due to increases in average fees charged to merchants.
Interchange. Interchange expenses decreased 11.8% to $397.5 million in 2009 from $450.6
million in 2008. Interchange expenses as a percentage of total revenues decreased to 55.4% in 2009
as compared to 56.7% in 2008. Average interchange costs increased in relation to charge volume,
but were offset by greater corresponding increases in average fees charged to merchants.
Other Costs of Services. Other costs of services decreased 5.2% to $229.1 million in 2009 from
$241.5 million in 2008. Other costs of services represented 31.9% of revenues in 2009 as compared
to 30.4% of revenues in 2008. The percentage increase was primarily attributable to increased
depreciation and amortization, partially offset by reductions in processing costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased
3.7% to $19.5 million in 2009 from $20.3 million in 2008. Selling, general and administrative
expenses as a percentage of revenues remained relatively consistent from 2008 to 2009.
Other Expense. Other expense decreased $9.3 million to $47.7 million in 2009 from $57.0
million in 2008. Other expense in 2009 primarily consisted of $46.5 million of net interest
expense. Interest expense in 2009 decreased $9.8 million from 2008, reflecting a lower average
interest rate and lower funded debt.
Income Tax. Income tax expenses decreased $1.4 million to $8.7 million in 2009 from $10.1
million in 2008. Income tax expenses as a percentage of income before taxes were 36.3% in 2009,
compared to 39.8% in 2008. The decline in the rate occurred in part due to our adoption of ASC 810
(formerly known as SFAS No. 160), under which our income before income taxes includes 100% of
earnings of our former consolidated joint venture, CPC, including earnings allocable to the
noncontrolling interests in CPC, but the income tax expenses do not include any tax expenses on the
noncontrolling interests share of earnings of CPC. CPC had greater pretax income during 2009 as
compared to 2008, which caused our effective income tax rate to decrease. The effective tax rate
in 2009 included an increase in the valuation allowances for net operating losses, which increased
the effective tax rate. The effective tax rate in 2008 included an increase in the valuation
allowance for certain state net operating losses and cancellation of debt income, both of which
increased the effective tax rate.
Noncontrolling Interests. Net income attributable to noncontrolling interests was $3.6 million
in 2009 compared to $1.0 million in 2008. CPC was formed in February 2006 and turned profitable in
the second half of 2007. In 2008, though CPC was profitable
throughout the year, we absorbed all of CPCs income to the extent that we had recognized
cumulative losses in CPC that exceeded our previous investments. After our initial investment
balance was restored, we began to recognize net income attributable to noncontrolling interests.
There will be no future income attributable to previously existing noncontrolling interests,
following the sale of our interest in CPC during the fourth quarter of 2009.
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Years ended December 31, 2008 and 2007 (in thousands, except percentages)
The following table sets forth our operating results for the periods indicated as a percentage
of our revenues:
% of | % of | |||||||||||||||||||||||
Total | Total | Change | ||||||||||||||||||||||
2008 | Revenue | 2007 | Revenue | Amount | % | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 794,825 | 100.0 | % | $ | 759,109 | 100.0 | % | $ | 35,716 | 4.7 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
450,570 | 56.7 | % | 437,955 | 57.7 | % | 12,615 | 2.9 | % | |||||||||||||||
Other cost of services |
241,532 | 30.4 | % | 228,537 | 30.1 | % | 12,995 | 5.7 | % | |||||||||||||||
Selling, general and administrative |
20,289 | 2.6 | % | 21,144 | 2.8 | % | (855 | ) | -4.0 | % | ||||||||||||||
Total operating expenses |
712,391 | 89.6 | % | 687,636 | 90.6 | % | 24,755 | 3.6 | % | |||||||||||||||
Income from operations |
82,434 | 10.4 | % | 71,473 | 9.4 | % | 10,961 | 15.3 | % | |||||||||||||||
Other (expenses) income: |
||||||||||||||||||||||||
Interest expense, net |
(56,289 | ) | -7.1 | % | (60,216 | ) | -7.9 | % | 3,927 | -6.5 | % | |||||||||||||
Other, net |
(750 | ) | -0.1 | % | 179 | 0.0 | % | (929 | ) | -519.0 | % | |||||||||||||
Total other expense, net |
(57,039 | ) | -7.2 | % | (60,037 | ) | -7.9 | % | 2,998 | -5.0 | % | |||||||||||||
Income before income taxes |
25,395 | 3.2 | % | 11,436 | 1.5 | % | 13,959 | 122.1 | % | |||||||||||||||
Income tax provision |
10,105 | 1.3 | % | 6,005 | 0.8 | % | 4,100 | 68.3 | % | |||||||||||||||
Net income |
15,290 | 1.9 | % | 5,431 | 0.7 | % | 9,859 | 181.5 | % | |||||||||||||||
Less: Income attributable to
noncontrolling interests |
(987 | ) | -0.1 | % | | 0.0 | % | (987 | ) | -100.0 | % | |||||||||||||
Net income attributable to iPayment,
Inc. |
$ | 14,303 | 1.8 | % | $ | 5,431 | 0.7 | % | $ | 8,872 | 163.4 | % | ||||||||||||
Revenues. Revenues increased 4.7% to $794.8 million in 2008 from $759.1 million in 2007.
Revenues increased primarily due to the acquisitions of businesses in December 2007 and April 2008.
Acquired revenues accounted for all of the growth in revenues for the year ended December 31,
2008, as compared to the same period ended December 31, 2007.
Interchange. Interchange expenses increased 2.9% to $450.6 million in 2008 from $438.0 million
in 2007. The increase was primarily attributable to increased charge volumes from the acquisitions
of businesses in December 2007 and April 2008. Interchange expenses as a percentage of total
revenues decreased to 56.7% in 2008 from 57.7% in 2007. Average interchange costs increased in
relation to charge volume, but were accompanied by greater corresponding increases in average fees
charged to merchants.
Other Costs of Services. Other costs of services increased 5.7% to $241.5 million in 2008 from
$228.5 million in 2007. Other costs of services represented 30.4% of revenues in 2008 as compared
to 30.1% of revenues in 2007. The increase was primarily attributable to increased expense for
merchant losses and merchant advance losses, partially offset by reductions in processing costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased
4.0% to $20.3 million in 2008 from $21.1 million in 2007, despite the acquisitions of two
businesses. The decrease was primarily attributable to the elimination of costs associated with the
closing of the Chicago operating center in early 2007 and reduced headcount at our other operating
centers.
Other Expense. Other expense decreased $3.0 million to $57.0 million in 2008 from $60.0
million in 2007. Other expense in 2008 primarily consisted of $56.3 million of net interest
expense. Interest expense in 2008 decreased $3.9 million from 2007, reflecting a lower average
interest rate and lower funded debt.
Income Tax. Income tax expenses increased $4.1 million to $10.1 million in 2008 from $6.0
million in 2007 due to an increase in taxable income. The increase was the result of increased
income from operations, driven by an increase in revenues, and a decrease in interest expense.
Income tax expenses as a percentage of income before taxes were 39.8% in 2008, compared to 52.5% in
2007. The effective tax rate in 2008 included an increase in the valuation allowance for deferred
taxes associated with certain state net operating losses and cancellation of debt income, both of
which increased the effective tax rate. The effective tax rate in 2007 included expenses incurred
through the adoption of FIN 48 and an increase in the valuation allowance for certain state net
operating losses, both of which increased the effective rate.
Noncontrolling Interests. Net income attributable to noncontrolling interests during 2008 was
$1.0 million as compared to no net income attributable to noncontrolling interests in 2007. These
noncontrolling interests relate to our acquisition of a 20% interest in a joint venture, CPC, that
was formed in February 2006 and turned profitable in the second half of 2007. During 2007, we
absorbed any additional losses after losses in this entity exceeded the minority partners
investments.
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Liquidity and Capital Resources
As of December 31, 2009, we had cash and cash equivalents of less than $0.1 million, compared
to $3.6 million as of December 31, 2008. We usually minimize cash balances in order to minimize
borrowings and, therefore, interest expense. We had a net working capital deficit (current
liabilities in excess of current assets) of $6.6 million at December 31, 2009, compared to a
deficit of $10.2 million as of December 31, 2008. The working capital increase consisted primarily
of a decrease in the current portion of long-term debt as a result of a $17.3 million debt
principal payment required by the excess cash flow sweep covenant within our senior secured credit
facility at the end of 2008. We paid the excess cash flow sweep covenant amount in February 2009.
This increase in working capital was partially offset by a decrease in merchant advances of $4.5
million, a decrease in cash of $3.6 million, and an increase in accounts payable of $2.1 million.
We consistently have positive cash flow provided by operations and expect that our cash flow
from operations and proceeds from borrowings under our revolving credit facility will be our
primary sources of liquidity and will be sufficient to cover our current obligations. See
Contractual Obligations below for a description of future required uses of cash.
We have significant outstanding long-term debt as of December 31, 2009. The terms of our
long-term debt contain various nonfinancial and financial covenants as further described in the
following paragraphs. If we do not comply with these covenants or cannot cure a noncompliance,
when the underlying debt agreement allows for a cure, our debt becomes due and payable. We
currently do not have available cash and similar liquid resources available to repay our debt
obligations if they were to become due and payable. Our debt to EBITDA covenant was very close to
the allowed maximum of 5.50 to 1.00 as of December 31, 2009 and is currently expected to remain
close to the allowed maximums throughout 2010. We believe we will continue to meet our debt
covenants in the foreseeable future and at least for the year ending December 31, 2010. The
recessionary environments and rising unemployment in 2009 affected cardholder spending behavior.
Industry charge volume and our charge volume weakened in 2009. During 2009, we also noted
decreases in average transaction values and increases in the attrition of our various merchant
portfolios. We expect these trends to moderate in 2010. There is a risk that these negative
trends will continue, which would lead to deterioration in our operating performance and cash flow,
and that our actual financial results during 2010 could be worse than currently expected. If such
deterioration were to occur, there is a possibility we may experience noncompliance with our debt
covenants. Any amendment to or waiver of our debt covenants would likely involve substantial
upfront fees, significantly higher annual interest costs and other terms significantly less
favorable to us than those contained in our current credit facilities.
Operating activities
Net cash provided by operating activities was $62.7 million in 2009, consisting of net income
of $15.3 million, adjusted for depreciation and amortization of $45.8 million, noncash interest
expense of $2.6 million and net favorable changes in operating assets and liabilities of $1.0
million. The net unfavorable change in operating assets and liabilities was primarily caused by
increases in deferred taxes and accounts receivable after the effects of the sale of our equity in
CPC, offset by increases in accounts payable, income taxes payable and accrued liabilities.
Net cash provided by operating activities was $46.4 million in 2008, consisting of net income
of $14.3 million, adjusted for depreciation and amortization of $38.0 million, noncash interest
expense of $2.4 million and net unfavorable changes in operating assets and liabilities of $8.3
million. The net unfavorable change in operating assets and liabilities was primarily caused by an
increase in deferred tax assets, an increase in income taxes payable, and an increase in accounts
receivable.
Net cash provided by operating activities was $41.4 million in 2007, consisting of net income
of $5.4 million, adjusted for depreciation and amortization of $35.9 million, noncash interest
expense of $2.2 million and net unfavorable changes in operating assets and liabilities of $2.2
million. The net unfavorable change in operating assets and liabilities was primarily caused by a
decrease in other assets, an increase in accounts receivable, and an increase in income taxes
payable.
Investing activities
Net cash used by investing activities was $27.6 million in 2009. Net cash used by investing
activities primarily consisted of $24.6 million for the acquisition of merchant portfolios, $2.7
million paid for earnout payments associated with acquisitions from a prior period, $5.1 million of
payments for contract modifications for prepaid residual expenses and $2.3 million of capital
expenditures, offset by a $4.5 million reduction in investments in merchant advances and $4.3
million received as consideration in our disposition of our noncontrolling interest in CPC, less
$1.5 million of cash disposed. Other than contingent earnout payments described under Contractual
Obligations, we currently have no significant capital spending or purchase commitments, but expect
to continue to engage in capital spending in the ordinary course of business.
Net cash used by investing activities was $32.7 million in 2008. Net cash used by investing
activities primarily consisted of $22.1 million for the acquisition of businesses, $4.3 million of
investments in merchant advances, $4.2 million of payments for contract modifications for prepaid
residual expenses and $2.4 million of capital expenditures.
Net cash used by investing activities was $24.2 million in 2007. Net cash used by investing
activities consisted of $13.5 million for the purchase of a business, $8.8 million paid for earnout
payments associated with acquisitions from a prior period, $0.7 million of payments for contract
modifications for prepaid residual expenses, $1.1 million of capital expenditures, and a $0.2
million increase in restricted cash.
Financing activities
Net cash used in financing activities was $38.7 million in 2009, primarily consisting of
repayments on our senior secured credit facility of $47.0 million and $2.6 million of distributions
made to the majority shareholders of our former joint venture, CPC, partially offset by $10.9
million of net borrowings under our revolving credit facility.
Net cash used in financing activities was $10.2 million in 2008, consisting primarily of
repayments on our senior secured credit facility of $6.9 million, $2.2 million of repayments on our
revolving credit facility, and repurchases of our senior subordinated
notes of $1.1 million.
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Net cash used in financing activities was $17.2 million in 2007, consisting primarily of
repayments on our senior secured credit facility of $9.7 million and repurchases of our senior
subordinated notes of $8.9 million, partially offset by $1.4 million of net borrowings under our
revolving credit facility.
On May 10, 2006, we replaced our existing credit facility with a new senior secured credit
facility with Bank of America as lead bank. The senior secured credit facility consists of $515.0
million of term loans and a $60.0 million revolving credit facility, further expandable to $100.0
million. The senior secured credit facility contains a $25.0 million letter of credit sublimit and
is secured by the Companys assets. Interest on outstanding borrowings under the term loans is
payable at a rate of LIBOR plus a margin of 2.00% to 2.25% (currently 2.00%). Interest on
outstanding borrowings under the revolving credit facility is payable at prime plus a margin of
0.50% to 1.25% (currently 1.25%) or at a rate of LIBOR plus a margin of 1.50% to 2.25% (currently
2.25%) depending on our ratio of consolidated debt to EBITDA, as defined in the agreement.
Additionally, the senior secured credit facility requires us to pay unused commitment fees of up to
0.50% (currently 0.50%) on any undrawn amounts under the revolving credit facility. The senior
secured credit facility contains customary affirmative and negative covenants, including financial
covenants requiring maintenance of a debt-to-EBITDA ratio (as defined therein), which is currently
5.50 to 1.00, but which decreases periodically over the life of the agreement to a ratio of 4.00 to
1.00 on December 31, 2011. The required debt-to-EBITDA covenant ratio at December 31, 2010 will be
4.75 to 1.00. The senior secured credit facility also contains an excess cash flow covenant (as
defined therein), which requires us to make additional principal payments after the end of every
fiscal year. At December 31, 2009, there was no additional payment attributable to this covenant.
At December 31, 2008, the payment attributable to this covenant was $12.2 million and was included
in the current portion of long-term debt. Principal repayments on the term loans were due quarterly
in the amount of $1.3 million which began on June 30, 2006, with any remaining unpaid balance due
on March 31, 2013. During 2009, the Company paid its excess cash flow amount, prepaid all of the
$1.3 million quarterly principal payments required by the senior secured credit facility through
its expiration on March 31, 2013, and repaid an additional $12.9 million of debt principal.
Outstanding principal balances on the revolving credit facility are due when the revolving credit
facility matures on May 10, 2012. At December 31, 2009, we had outstanding $447.6 million of term
loans at a weighted average interest rate of 5.23% and $10.9 million of borrowings outstanding
under the revolving credit facility at a weighted average interest rate of 3.20%.
Under the senior secured credit facility we were required to hedge at least 50% of the
outstanding balance through May 10, 2008. Accordingly, we entered into interest rate swap
agreements with a total notional amount of $260.0 million that expire on December 31, 2010. The
swap agreements effectively convert an equivalent portion of our outstanding borrowings to a fixed
rate of 5.39% (plus the applicable margin) over the entire term of the swaps. In September 2007,
we entered into two additional interest rate swap agreements. The first swap was for a notional
value of $100.0 million and expired on September 17, 2008. This swap effectively converted an
equivalent portion of our outstanding borrowings to a fixed rate of 4.80% (plus the applicable
margin) over the entire term of the swap. The second swap was for a notional value of $75.0
million and expired on September 28, 2008. This swap effectively converted an equivalent portion
of our outstanding borrowings to a fixed rate of 4.64% (plus the applicable margin) over the entire
term of the swap. The swap instruments qualify for hedge accounting treatment under ASC 815
Derivatives and Hedging (see Note 2 of Notes to Consolidated Financial Statements).
On May 10, 2006, we also issued senior subordinated notes in the aggregate principal amount of
$205.0 million. These senior subordinated notes were issued at a discount of 1.36%, with interest
payable semi-annually at 9.75% on May 15 and November 15 of each year. The senior subordinated
notes mature on May 15, 2014, but may be redeemed, in whole or in part, by the Company at any time
on or after May 15, 2010, at redemption prices specified in the indenture governing the senior
subordinated notes, plus accrued and unpaid interest. The senior subordinated notes contain
customary restrictive covenants, including restrictions on incurrence of additional indebtedness if
our fixed charge coverage ratio (as defined therein) is not at least 2.0 to 1.0.
During 2008, the Company spent $1.1 million on repurchases of senior subordinated notes. The
Company intends to hold the senior subordinated notes until maturity. In accordance with ASC 860
Transfers and Servicing, formerly known as SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, the repurchase was accounted for as an
extinguishment of debt. We reflected this transaction as a reduction in long-term debt within the
Consolidated Balance Sheets as of December 31, 2008. We amended our senior secured credit facility
to allow for repurchases of our senior subordinated notes up to $10.0 million, and have now
completed note repurchases in compliance with that amendment. At December 31, 2009, we had $194.5
million of outstanding senior subordinated notes and $1.5 million of remaining unamortized discount
on the senior subordinated notes.
We had net capitalized debt issuance costs related to the senior secured credit facility
totaling $3.7 million and net capitalized debt issuance costs related to the senior subordinated
notes totaling $4.7 million as of December 31, 2009, which is materially consistent with amounts
computed using an effective interest method. These costs are being amortized to interest expense on
a straight-line basis over the life of the related debt instruments. Amortization expense related
to the debt issuance costs was $2.2 million for the years ended December 31, 2009, 2008, and 2007
and is included within interest expense on the Consolidated Income Statements.
Contractual Obligations
The following table of our material contractual obligations as of December 31, 2009,
summarizes the aggregate effect that these obligations are expected to have on our cash flows in
the periods indicated. The table excludes contingent payments in connection with earnouts related
to completed acquisitions. We cannot quantify the exact amounts to be paid because they are based
on future EBITDA results. In 2008, we had no earnout payments. We had $2.7 million in earnout
payments in 2009. We currently estimate that the maximum we will pay in earnout payments will be
an aggregate of less than $3.0 million in 2010 and 2011 combined.
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Payments due by period | ||||||||||||||||||||
Less than 1 | ||||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Credit Facility |
$ | 458,538 | $ | | $ | 10,900 | $ | 447,638 | $ | | ||||||||||
Senior Subordinate Notes |
194,500 | | | 194,500 | | |||||||||||||||
Interest (1) |
132,018 | 43,332 | 59,050 | 29,636 | | |||||||||||||||
Operating lease obligations |
9,658 | 1,181 | 2,238 | 1,956 | 4,283 | |||||||||||||||
Purchase obligations (2)(3)(4) |
7,361 | 4,330 | 3,031 | | | |||||||||||||||
Total contractual obligations |
$ | 802,075 | $ | 48,843 | $ | 75,219 | $ | 673,730 | $ | 4,283 | ||||||||||
(1) | Future interest obligations are calculated using current interest rates on existing debt balances as of December 31, 2009, and assume no principal reduction other than mandatory principal repayments in accordance with the terms of the debt instruments as described in Note 7 to 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 through 2011 related to the 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 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 December 31, 2009, and are excluded from this table. |
We expect to be able to fund our operations, capital expenditures and the contractual
obligations above (other than repayment of our senior secured credit facility and revolving credit
facility) using our cash from operations. We intend to use our revolving credit facility primarily
to fund additional acquisition opportunities as they arise. To the extent we are unable to fund
our operations, capital expenditures and the contractual obligations above using cash from
operations, we intend to use borrowings under our revolving credit facility or future debt or
equity financings. In addition, we may seek to sell additional equity or arrange debt financing to
give us financial flexibility to pursue attractive funding opportunities that may arise in the
future. If we raise additional funds through the sale of equity or convertible debt securities,
these transactions may dilute the value of our outstanding common stock. We may also decide to
issue securities, including debt securities, which have rights, preferences and privileges senior
to our common stock. If future financing is not available or is not available on acceptable terms,
we may not be able to fund our future needs, which may prevent us from increasing our market share,
capitalizing on new business opportunities or remaining competitive in our industry.
Effects of Inflation
Our monetary assets, consisting primarily of cash and receivables, are not significantly
affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and
goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture
and leasehold improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, such as those for employee compensation and telecommunications,
which may not be readily recoverable in the price of services offered by us.
New Accounting Standards
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159), which permits
entities to choose to measure many financial instruments and certain other items at fair value. The
Company did not make this election. As such, the adoption of this statement did not have any impact
on its results of operations, financial position or cash flows. The guidance in SFAS No. 159 is
included in Financial Instruments Topic of FASB ASC Topic 825.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)),
which establishes a framework for the recognition and measurement of identifiable assets and
goodwill acquired in a business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. As applicable, the Company will continue
to apply the requirements of SFAS No. 141(R) to business combinations completed after January 1,
2009. The guidance in SFAS No. 141(R) is included in the Business Combinations Topic of FASB ASC
Topic 805.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160), which establishes a framework for the reporting of a parent
companys interests and noncontrolling interests in a subsidiary. SFAS No. 160 is effective as of
January 1, 2009, and has been applied prospectively except for the presentation and disclosure
requirements that applied retrospectively for all periods presented. The accompanying
financial statements, including those as of
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December 31, 2008, include the reclassification of
Minority interest in equity of consolidated subsidiary, and related taxes, as a noncontrolling
interest in equity, rather than as part of liabilities (as previously reported) as required by SFAS
No. 160. The guidance in SFAS No. 160 is included in the Consolidation Topic of FASB ASC Topic
810.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entitys results of operations, financial position and cash flows. SFAS No. 161 is effective for
all financial statements issued for fiscal years and interim periods beginning after November 15,
2008. For further detail on the Companys derivative instruments and hedging activities, see Note 2
to the Consolidated Financial Statements. The guidance in SFAS No. 161 is included in the
Derivatives and Hedging Topic of FASB ASC Topic 815.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value
of Financial Instruments, and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. This FSP is effective for interim reporting
periods ending after June 15, 2009. The adoption of this FSP resulted in additional interim
disclosures only. See Financial Instruments within Note 1. The guidance in this FSP is included in
the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC Topic 820.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which establishes
general standards of accounting for and disclosure of subsequent events that occur after the
balance sheet date. SFAS 165 is effective for financial statements for periods ending after June
15, 2009. The guidance in SFAS No. 165 is included in the Subsequent Events Topic of FASB ASC Topic
855.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value. This update
provides clarification for the fair value measurement of liabilities in circumstances in which a
quoted price in an active market for an identical liability is not available. This update is
effective for interim periods beginning after August 28, 2009. The adoption of this standard did
not have a material effect on our financial position or results of operations. The guidance in this
ASU is included in the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC
Topic 820.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Our monetary assets, consisting primarily of cash and receivables, are not significantly
affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and
goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture
and leasehold improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, such as those for employee compensation and telecommunications,
which may not be readily recoverable in the price of services offered by us.
We transact business with merchants exclusively in the United States and receive payment for
our services exclusively in United States dollars. As a result, our financial results are unlikely
to be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets.
Our interest expense is sensitive to changes in the general level of interest rates in the
United States because a majority of our indebtedness is at variable rates. As of December 31,
2009, $454.6 million of our outstanding indebtedness was at variable interest rates based on LIBOR.
Of this amount, $260.0 million was effectively fixed through the use of interest rate swaps. A
rise in LIBOR rates of one percentage point would result in net additional annual interest expense
of $1.9 million.
We hold certain derivative financial instruments for the sole purposes of hedging our exposure
to interest rate risk. We do not hold any other derivative financial or commodity instruments, nor
engage in any foreign currency denominated transactions, and all of our cash and cash equivalents
are held in money market and checking funds.
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ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of iPayment, Inc.
We have audited the accompanying consolidated balance sheets of iPayment, Inc. as of December 31,
2009 and 2008, and the related consolidated income statements, changes in stockholders equity and
comprehensive income (loss), and cash flows for each of the three years in the period ended
December 31, 2009. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of iPayment, Inc. at December 31, 2009 and 2008, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP | ||||
Los Angeles, California
March 26, 2010
March 26, 2010
37
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iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2 | $ | 3,589 | ||||
Accounts receivable, net of allowance for doubtful accounts of $857 and $998 at
December 31, 2009 and December 31, 2008, respectively |
25,077 | 25,693 | ||||||
Prepaid expenses and other current assets |
1,463 | 2,286 | ||||||
Investment in merchant advances, net of allowance for doubtful accounts of $527 and
$3,822 at December 31, 2009 and December 31, 2008, respectively |
| 4,460 | ||||||
Deferred tax assets |
2,353 | 3,442 | ||||||
Total current assets |
28,895 | 39,470 | ||||||
Restricted cash |
680 | 999 | ||||||
Property and equipment, net |
4,673 | 4,714 | ||||||
Intangible assets and other, net of accumulated amortization of $138,789 and $95,286
at December 31, 2009 and December 31, 2008, respectively. |
163,774 | 176,548 | ||||||
Goodwill |
527,978 | 527,912 | ||||||
Deferred tax asset |
8,219 | 4,991 | ||||||
Other assets, net |
11,147 | 14,230 | ||||||
Total assets |
$ | 745,366 | $ | 768,864 | ||||
LIABILITIES and STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,132 | $ | 2,012 | ||||
Income taxes payable |
8,529 | 7,941 | ||||||
Accrued liabilities and other |
22,835 | 22,366 | ||||||
Current portion of long-term debt |
| 17,347 | ||||||
Total current liabilities |
35,496 | 49,666 | ||||||
Long-term debt |
651,519 | 669,979 | ||||||
Other liabilities |
15,213 | 21,627 | ||||||
Total liabilities |
702,228 | 741,272 | ||||||
Commitments and contingencies (Note 5) |
||||||||
Stockholders equity |
||||||||
Common stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at December 31, 2009, and December 31, 2008 |
20,055 | 20,055 | ||||||
Accumulated other comprehensive loss, net of tax benefits of $4,984 and $8,178 at
December 31, 2009, and December 31, 2008, respectively. |
(7,475 | ) | (12,268 | ) | ||||
Retained earnings |
30,558 | 18,818 | ||||||
Total iPayment, Inc. stockholders equity |
43,138 | 26,605 | ||||||
Noncontrolling Interest |
| 987 | ||||||
Total equity |
43,138 | 27,592 | ||||||
Total liabilities and stockholders equity |
$ | 745,366 | $ | 768,864 | ||||
See accompanying notes to consolidated financial statements.
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iPAYMENT, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands)
CONSOLIDATED INCOME STATEMENTS
(In thousands)
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
$ | 717,928 | $ | 794,825 | $ | 759,109 | ||||||
Operating expenses: |
||||||||||||
Interchange |
397,530 | 450,570 | 437,955 | |||||||||
Other costs of services |
229,071 | 241,532 | 228,537 | |||||||||
Selling, general and administrative |
19,530 | 20,289 | 21,144 | |||||||||
Total operating expenses |
646,131 | 712,391 | 687,636 | |||||||||
Income from operations |
71,797 | 82,434 | 71,473 | |||||||||
Other expense: |
||||||||||||
Interest expense, net |
46,488 | 56,289 | 60,216 | |||||||||
Other expense (income), net |
1,245 | 750 | (179 | ) | ||||||||
Income before income taxes |
24,064 | 25,395 | 11,436 | |||||||||
Income tax provision |
8,736 | 10,105 | 6,005 | |||||||||
Net income |
15,328 | 15,290 | 5,431 | |||||||||
Less: Net income attributable to
noncontrolling interest |
(3,588 | ) | (987 | ) | | |||||||
Net income attributable to iPayment, Inc. |
$ | 11,740 | $ | 14,303 | $ | 5,431 | ||||||
See accompanying notes to consolidated financial statements.
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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS EQUITY and COMPREHENSIVE INCOME
(In thousands, except share data)
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS EQUITY and COMPREHENSIVE INCOME
(In thousands, except share data)
Stockholders Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Retained | Non- | ||||||||||||||||||||||
Common Stock | Comprehensive | Earnings | controlling | |||||||||||||||||||||
Shares | Loss | (Deficit) | Interest | Total | ||||||||||||||||||||
Balance at December 31, 2006 |
100 | $ | 20,055 | $ | (2,275 | ) | $ | (890 | ) | $ | | $ | 16,890 | |||||||||||
Unrealized
(loss) on fair value of derivatives, net of tax benefits of $3,386 |
| | (5,079 | ) | | | (5,079 | ) | ||||||||||||||||
Uncertain
tax positions initial adoption effects |
| | | (26 | ) | | (26 | ) | ||||||||||||||||
Net income |
| | | 5,431 | | 5,431 | ||||||||||||||||||
Balance at December 31, 2007 |
100 | $ | 20,055 | $ | (7,354 | ) | $ | 4,515 | $ | | $ | 17,216 | ||||||||||||
Unrealized (loss) on fair value of
derivatives, net of tax benefits of $3,276 |
| | (4,914 | ) | | | (4,914 | ) | ||||||||||||||||
Net income |
| | | 14,303 | 987 | 15,290 | ||||||||||||||||||
Balance at December 31, 2008 |
100 | $ | 20,055 | $ | (12,268 | ) | $ | 18,818 | $ | 987 | $ | 27,592 | ||||||||||||
Unrealized gain on fair value of
derivatives, net of tax expense of $3,195 |
| | 4,793 | | | 4,793 | ||||||||||||||||||
Distributions to noncontrolling
interest in equity of subsidiary |
| | | | (2,640 | ) | (2,640 | ) | ||||||||||||||||
Net income |
| | | 11,740 | 3,588 | 15,328 | ||||||||||||||||||
Sale of interest in equity of subsidiary |
| | | | (1,935 | ) | (1,935 | ) | ||||||||||||||||
Balance at December 31, 2009 |
100 | $ | 20,055 | $ | (7,475 | ) | $ | 30,558 | $ | | $ | 43,138 | ||||||||||||
See accompanying notes to consolidated financial statements.
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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 15,328 | $ | 15,290 | $ | 5,431 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities |
||||||||||||
Depreciation and amortization |
45,828 | 38,041 | 35,948 | |||||||||
Noncash interest expense and other |
2,584 | 2,433 | 2,203 | |||||||||
Changes in assets and liabilities, excluding effects of
acquisitions: |
||||||||||||
Accounts receivable |
(1,001 | ) | (967 | ) | (1,792 | ) | ||||||
Prepaid expenses and other current assets |
344 | 612 | (162 | ) | ||||||||
Other assets |
(5,804 | ) | (5,851 | ) | (5,595 | ) | ||||||
Accounts payable and income taxes payable |
3,139 | (2,353 | ) | 5,865 | ||||||||
Accrued liabilities and other |
2,287 | (766 | ) | (487 | ) | |||||||
Net cash provided by operating activities |
62,705 | 46,439 | 41,411 | |||||||||
Cash flows from investing activities |
||||||||||||
Change in restricted cash |
9 | 267 | (230 | ) | ||||||||
Expenditures for property and equipment |
(2,304 | ) | (2,374 | ) | (1,110 | ) | ||||||
Investment in merchant advances |
4,460 | (4,344 | ) | | ||||||||
Proceeds from disposition of noncontrolling interest, net of
cash disposed |
2,772 | | | |||||||||
Acquisitions of businesses and portfolios, net of cash acquired |
(24,629 | ) | (22,063 | ) | (13,375 | ) | ||||||
Payments related to businesses previously acquired |
(2,734 | ) | | (8,772 | ) | |||||||
Payments for prepaid residual expenses |
(5,126 | ) | (4,160 | ) | (719 | ) | ||||||
Net cash used in investing activities |
(27,552 | ) | (32,674 | ) | (24,206 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Net borrowings (repayments) on line of credit |
10,900 | (2,200 | ) | 1,350 | ||||||||
Repayments of debt |
(47,000 | ) | (8,009 | ) | (18,618 | ) | ||||||
Distributions to noncontrolling interest in equity of subsidiary |
(2,640 | ) | | | ||||||||
Net cash used in financing activities |
(38,740 | ) | (10,209 | ) | (17,268 | ) | ||||||
Net (decrease) increase in cash and cash equivalents |
(3,587 | ) | 3,556 | (63 | ) | |||||||
Cash and cash equivalents, beginning of period |
3,589 | 33 | 96 | |||||||||
Cash and cash equivalents, end of period |
$ | 2 | $ | 3,589 | $ | 33 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the period for income taxes |
$ | 13,712 | $ | 13,917 | $ | 5,943 | ||||||
Cash paid during the period for interest |
$ | 44,218 | $ | 54,072 | $ | 57,616 | ||||||
Supplemental schedule of non-cash activities: |
||||||||||||
Accrual of deferred payments for acquisitions of businesses |
$ | | $ | 2,456 | $ | | ||||||
Non-cash (decreases) increases in assets (liabilities): |
||||||||||||
Goodwill |
$ | | $ | (2,277 | ) | $ | |
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business and Basis of Presentation
Organization and Business
iPayment, Inc. (iPayment) was originally incorporated as iPayment Holdings, Inc. in
Tennessee and was reincorporated in Delaware under the name iPayment, Inc. iPayment is a provider
of card-based payment processing services to small business merchants located across the United
States. We enable merchants to accept credit and debit cards as payment for their products and
services by providing card authorization, data capture, settlement, risk management, fraud
detection and chargeback services. Our services also include data organization and retrieval,
ongoing merchant assistance and resolution support in connection with disputes with cardholders. We
market and sell our services primarily through independent sales groups.
On May 10, 2006, the Company completed a merger transaction with iPayment Holdings, Inc.
(Holdings) pursuant to which iPayment MergerCo, Inc. (MergerCo) was merged with and into the
Company, with the Company remaining as the surviving corporation and a wholly-owned subsidiary of
Holdings (the Transaction). The Transaction has been accounted for as a purchase at the parent
company level (Holdings), with the related purchase accounting adjustments pushed down to the
Company.
We have significant outstanding long-term debt as of December 31, 2009. The terms of our
long-term debt contain various nonfinancial and financial covenants as further described in Note 7.
If we do not comply with these covenants or cannot cure a noncompliance, when the underlying
debt agreement allows for a cure, our debt becomes due and payable. We currently do not have
available cash and similar liquid resources available to repay our debt obligations if they were to
become due and payable. While we believe we will continue to meet our debt covenants in the
foreseeable future and at least for the year ending December 31, 2010, our debt to EBITDA covenant
(described in Note 7) was very close to the allowed maximum of 5.50 to 1.00 as of December 31, 2009
and is currently expected to remain close to the allowed maximums throughout 2010. There is a risk
that our actual financial results during 2010 could be worse than currently expected, and,
accordingly, there is a possibility we may experience noncompliance with our debt covenants.
As used in these Notes to Consolidated Financial Statements, the terms iPayment, the
Company, we, us, our and similar terms refer to iPayment, Inc. and, unless the context
indicates otherwise, its consolidated subsidiaries.
Basis of Presentation
The accompanying consolidated financial statements of iPayment have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP). All significant intercompany
transactions and balances have been eliminated in consolidation. We consolidate our majority-owned
subsidiaries and reflect the interest of the portion of the entities that we do not own as
Noncontrolling interest on our Consolidated Balance Sheets. Certain prior year amounts have been
reclassified to conform to the current year presentation due to the adoption of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160), now found within
FASB Accounting Standards Codification (ASC) Topic 810, Consolidation.
In June 2009, the FASB established the ASC, as the source of authoritative GAAP recognized by
the FASB to be applied by nongovernmental entities in the preparation of financial statements.
Rules and interpretive releases of the U.S. Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.
The ASC became effective for the Company on July 1, 2009, and supersedes all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the ASC became non-authoritative. The ASC does not change or alter existing GAAP and,
therefore, the adoption of the ASC did not impact the Companys Consolidated Financial Statements.
Accordingly, the financial statements for the year ended December 31, 2009, and the financial
statements for future interim and annual periods, will reflect the codification references.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of iPayment, Inc. and its
wholly-owned subsidiaries iPayment of California, LLC 1st National Processing, Inc., E-Commerce
Exchange, Inc., iPayment of Maine, Inc., Online Data Corporation, CardSync Processing, Inc.,
CardPayment Solutions, LLC, TS Acquisition Sub, LLC, PCS Acquisition Sub, LLC, Quad City
Acquisition Sub, Inc, NPMG Acquisition Sub, LLC, iFunds Cash Solutions, LLC, Cambridge Acquisition
Sub, LLC, MSC Acquisition Sub, LLC, iScan Solutions, LLC, and iPayment Acquisition Sub, LLC. All
significant accounts, transactions and profits between the consolidated companies have been
eliminated in consolidation. Significant accounts and transactions between iPayment, Inc.,
including its subsidiaries, and its directors and officers are disclosed as related party
transactions (Note 10).
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements. Estimates and
assumptions also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue and Cost Recognition
Substantially all of our revenues are generated from fees charged to merchants for card-based
payment processing services. We typically charge these merchants a bundled rate, primarily based
upon the merchants monthly charge volume and risk profile. Our fees principally consist of
discount fees, which are a percentage of the dollar amount of each credit or debit transaction. We
charge all merchants higher discount rates for card-not-present transactions than for card-present
transactions in order to compensate ourselves for the higher risk of underwriting these
transactions. We derive the balance of our revenues from a variety of fixed transaction or service
fees, including fees for monthly minimum charge volume requirements, statement fees, annual fees,
discount
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income on merchant advances and fees for other miscellaneous services, such as handling
chargebacks. We recognize discounts and other fees related to payment transactions at the time the
merchants transactions are processed. We recognize revenues derived from service fees at the time
the service is performed. Related interchange and assessment costs are also recognized at that
time.
We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent, included in the Revenue Recognition Topic of ASC Topic 605, in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and ultimate responsibility
for the merchant, revenues are reported at the time of sale on a gross basis equal to the full
amount of the discount charged to the merchant. This amount includes interchange paid to card
issuing banks and assessments paid to payment card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of merchants.
Interchange fees are set by Visa and MasterCard and are based on transaction processing volume and
are recognized at the time transactions are processed. Revenues generated from certain bank
portfolios acquired as part of the First Data Merchant Services Corporation (FDMS) acquisition are reported net of interchange, as required by
EITF 99-19, where we may not have credit risk, portability or the ultimate responsibility for the
merchant accounts.
Other costs of services include costs directly attributable to processing and bank sponsorship
costs, which amounted to $30.9 million, $38.1 million, and $40.1 million in the years ended
December 31, 2009, 2008, and 2007, respectively. They also include related costs such as residual
payments to sales groups, which are commissions we pay to our sales groups based upon a percentage
of the net revenues we generate from their merchant referrals, and assessment fees payable to card
associations, which is a percentage of the charge volume we generate from Visa and MasterCard. In
addition, other costs of services include telecommunications costs, personnel costs, occupancy
costs, losses due to merchant defaults, other miscellaneous merchant supplies and services
expenses, bank sponsorship costs and other third-party processing costs directly attributable to
our provision of payment processing and related services to our merchants.
Other costs of services include depreciation expense, which is recognized on a straight-line
basis over the estimated useful life of the assets, and amortization expense, which is recognized
using an accelerated method over a fifteen-year period. Amortization of intangible assets results
from our acquisitions of portfolios of merchant contracts or acquisitions of a business where we
allocated a portion of the purchase price to the existing merchant processing portfolios and other
intangible assets.
Selling, general and administrative expenses consist primarily of salaries and wages and other
administrative expenses such as professional fees.
Cash and Cash Equivalents and Statements of Cash Flows
For purposes of reporting financial condition and cash flows, cash and cash equivalents
include cash and securities with original maturities of three months or less. Our cash accounts at
various banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements
to cover potential merchant losses, and funds held by lending institutions pursuant to loan
agreements to provide additional collateral.
Accounts Receivable, net
Accounts receivable are primarily comprised of amounts due from our clearing and settlement
banks from revenues earned, net of related interchange and bank processing fees, as required by
GAAP, on transactions processed during the month ending on the balance sheet date. Such balances
are typically received from the clearing and settlement banks within 30 days following the end of
each month. The allowance for doubtful accounts as of December 31, 2009 and 2008 was $0.9 million
and $1.0 million, respectively. We record allowances for doubtful accounts when it is probable that
the accounts receivable balance will not be collected.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method for financial reporting purposes and primarily
accelerated methods for tax purposes. For financial reporting purposes, equipment is depreciated
over two to five years. Leasehold improvements are amortized over the useful life of the asset.
Depreciation expense for property and equipment for the years ended December 31, 2009, 2008, and
2007 was $1.9 million, $1.6 million, and $1.2 million, respectively. Maintenance and repairs are
charged to expense as incurred. Expenditures for renewals and improvements that extend the useful
life are capitalized.
Intangible Assets, net
Intangible assets primarily include merchant accounts from portfolio acquisitions (i.e. the
right to receive future cash flows related to transactions of these applicable merchants) (Note 3).
We utilize an accelerated method of amortization over a fifteen-year period, which we believe
approximates the distribution of actual cash flows generated by our merchant processing portfolios.
All other intangible assets are amortized using the straight-line method over an estimated life of
three to seven years. In addition, we have implemented both quarterly and annual procedures to
determine whether a significant change in the trend of the current attrition rates being
used exists on a portfolio by portfolio basis. In reviewing the current attrition rate trends, we
consider relevant benchmarks such as merchant processing volume, revenues, gross profit and future
expectations of the aforementioned factors versus historical amounts and rates. If we identify any
significant changes or trends in the attrition rate of any portfolio, we will adjust our current
and prospective estimated attrition rates so that the amortization expense would better approximate
the distribution of actual cash flows generated by the merchant processing portfolios. Any
adjustments made to the amortization schedules would be reported in
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the current Consolidated Income Statements and on a prospective basis until further evidence
becomes apparent. We identified an unfavorable trend of the attrition rates being used during the
year ended December 31, 2008 on some of our portfolios. Accordingly, we recorded an increase to
amortization expense of approximately $2.4 million to better approximate the distribution of actual
cash flows generated by the merchant processing portfolios. This trend continued during the first
half of 2009, during which we recorded an increase to amortization expense of $2.1 million to
better approximate the distribution of cash flows generated by the merchant processing portfolios.
Estimated useful lives are determined for merchant processing portfolios based on the life of
the expected cash flows from the underlying merchant accounts and for other intangible assets
primarily over the remaining terms of the contracts. During the years ended December 31, 2009,
2008, and 2007, amortization expense related to intangible assets was $43.7 million, $36.3 million,
and $34.5 million, respectively. As of December 31, 2009, estimated amortization expense for each
of the five succeeding years is expected to be as follows (in thousands):
Year ended December 31, | Amount | |||
2010 |
$ | 37,223 | ||
2011 |
30,053 | |||
2012 |
23,545 | |||
2013 |
18,850 | |||
2014 |
13,277 |
Estimated future amortization expense is based on intangible amounts recorded as of December 31,
2009. Actual amounts will increase if additional amortizable intangible assets are acquired.
Goodwill
We follow ASC 350 Intangibles Goodwill and Other Topics (formerly known as SFAS No. 142,
Goodwill and Other Intangible Assets), which addresses financial accounting and reporting for
acquired goodwill and other intangible assets, and requires that goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment. If facts and circumstances indicate goodwill may be impaired, we
perform a recoverability evaluation. In accordance with ASC 350, the recoverability analysis is
based on fair value. The calculation of fair value includes a number of estimates and assumptions,
including projections of future income and cash flows, the identification of appropriate market
multiples of other publicly traded institutions in our industry, the current economic environment,
and the choice of an appropriate discount rate.
We completed our most recent annual goodwill impairment review as of July 31, 2009, and
updated our review as of December 31, 2009, using the present value of future cash flows to
determine whether the fair value of the reporting unit exceeded the carrying amount of the net
assets, including goodwill. All goodwill impairment testing is performed by an independent third
party valuation firm in conjunction with the Company. We determined that no impairment charge to
goodwill was required.
Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets, in relation to the
respective projected future undiscounted cash flows, to assess recoverability. An impairment loss
is recognized if the sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. The difference between the carrying amount of the long-lived
assets being evaluated and the fair value, calculated as the sum of the expected cash flows
discounted at a market rate, represents the impairment loss. Based on the analyses we performed as
of December 31, 2009 for goodwill and intangible assets, we concluded that none of our long-lived
assets were impaired.
Other Assets
Other assets at December 31, 2009 and 2008, include approximately $0.1 million and $0.4
million, respectively, of notes receivable (an additional $0.7 million and $0.6 million are
included in prepaid expenses and other current assets at December 31, 2009 and 2008, respectively),
representing amounts advanced to sales agents. The notes bear interest at amounts ranging from 6%
to 13%, and are payable back to us through 2013. We secure the loans by the independent sales
groups assets, including the rights they have to receive residuals and the fees generated by the
merchants they refer to us and any other accounts receivable and typically by obtaining personal
guarantees from the individuals who operate the independent sales groups.
Also included in other assets at December 31, 2009 and 2008, are approximately $8.7 million
and $10.7 million of debt issuance costs (net of accumulated amortization of $8.1 million and $5.9
million, respectively), which are being amortized over the terms of the related debt agreements
using the straight-line method which approximates the effective interest method. Other assets also
include sales-type leases held for investment, which are stated at the present value of the future
minimum lease payments and estimated residual values discounted at the rate implicit in the lease,
net of allowances for losses. Sales-type leases held for investment included in other assets were
approximately $0.1 million and $0.5 million at December 31, 2009 and 2008, respectively.
Reserve for Losses on Merchant Accounts
We maintain a reserve for merchant losses necessary to absorb chargeback and other losses for
merchant transactions that have been previously processed and which have been recorded as revenue.
We analyze the adequacy of our reserve for merchant losses each reporting period. The reserve for
merchant losses is comprised of three components: (1) specifically identifiable reserves for
merchant transactions for which losses are probable and estimable, (2) a calculated reserve based
upon historical loss experience applied to the previously processed transactions, and (3) a
management analysis component for concentration issues and general macroeconomic and other factors.
The reserve for losses on merchant accounts is decreased by merchant losses (arising primarily
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from chargebacks) and is increased by provisions for merchant losses and recoveries of merchant
losses. Provisions for merchant losses of $4.9 million, $4.2 million, and $3.6 million for the
years ended December 31, 2009, 2008, and 2007, respectively, are included in other costs of
services in the accompanying Consolidated Income Statements. At December 31, 2009 and 2008, our
reserve for losses on merchant accounts included in accrued liabilities and other totaled
$1.5 million and $1.3 million, respectively.
We also maintain a reserve for merchant advance losses. In 2007, we began, on a selective
basis, offering advances to prospective and current merchants based on expected future processing
volume. We stopped offering new merchant advances to our customers in 2008. During the term of our existing advances, there is risk that an advance
may be deemed uncollectible. We evaluate the risk of potential loss for each advance and record a
loss reserve accordingly. As of December 31, 2009, our reserve for merchant advances was $0.5
million and is included in investment in merchant advances in our Consolidated Balance Sheets. Our
receivable for merchant advances was fully reserved for at December 31, 2009.
Financial Instruments
ASC 820 Fair Value Measurement and Disclosures (formerly known SFAS No. 157, Fair Value
Measurements) establishes a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements
for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to
the valuation of an asset or liability as of the measurement date. The three levels are defined as
follows:
| 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. |
We believe the carrying amounts of financial instruments at December 31, 2009 approximate fair
value. Due to the short maturities of the cash and cash equivalents and accounts receivable,
carrying amounts approximate the respective fair values. The carrying value of our senior
subordinated notes, net of discount, is $193 million at December 31, 2009. We estimate the fair
value to be approximately $162 million, considering executed trades occurring around December 31,
2009. The carrying value of the senior secured credit facility is $448 million at December 31,
2009. We estimate the fair value to be approximately $410 million, considering executed trades
occurring around December 31, 2009.
Derivative Financial Instruments
The Company uses certain variable rate debt instruments to finance its operations. These debt
obligations expose the Company to variability in interest payments due to changes in interest
rates. If interest rates increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases. Management believes it is prudent to limit the
variability of its interest payments.
To meet this objective and to meet certain requirements of our credit agreements, the Company
enters into certain derivative instruments to manage fluctuations in cash flows resulting from
interest rate risk. These instruments consist solely of interest rate swaps. Under the interest
rate swaps, the Company receives variable interest rate payments and makes fixed interest rate
payments, thereby effectively creating fixed-rate debt. The Company enters into derivative
instruments solely for cash flow hedging purposes, and the Company does not speculate using
derivative instruments.
The Company accounts for its derivative financial instruments in accordance with ASC 815
Derivatives and Hedging (formerly known as SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities). Under ASC 815, we recognize all derivatives as either other assets or
other liabilities, measured at fair value. The fair value of these instruments at December 31,
2009, was a liability of $12.5 million, and was included as other liabilities in our Consolidated
Balance Sheets. ASC 815 also requires that any ineffectiveness in the hedging relationship,
resulting from differences in the terms of the hedged item and the related derivative, be
recognized in earnings each period. The underlying terms of our interest rate swaps, including the
notional amount, interest rate index, duration, and reset dates, are identical to those of the
associated debt instruments and therefore the hedging relationship results in no material
ineffectiveness. Accordingly, such derivative instruments are classified as cash flow hedges, and
any changes in the fair market value of the derivative instruments are included in accumulated
other comprehensive loss in our Consolidated Balance Sheets.
Income Taxes
We account for income taxes pursuant to the provisions of ASC 740 Income Taxes (formerly
known as SFAS No. 109, Accounting for Income Taxes). Under this method, deferred tax assets and
liabilities are recorded to reflect the future tax consequences attributable to the effects of
differences between the carrying amounts of existing assets and liabilities for financial reporting
and for income tax purposes.
Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future
years in which temporary differences are expected to reverse. The impact on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that the rate change is
enacted. A deferred tax valuation reserve is established if it is more likely than not that a
deferred tax asset will not be realized.
Advertising Costs
We recognize advertising costs as incurred. For the years ended December 31, 2009, 2008, and
2007, advertising costs were $148,000, $146,000, and $161,000, respectively, and were included in
selling, general and administrative expenses.
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Noncontrolling Interest
We previously owned a 20% interest in a joint venture, Central Payment Co, LLC (CPC).
However, during the fourth quarter of 2009, we sold our 20% interest in CPC for $4.3 million. The
sale of our equity caused us to deconsolidate CPC and to recognize a deferred gain of $2.8 million
that will be recognized as income over a three-year period. As of December 31, 2009, we had $0.9
million of short-term deferred gain within Accrued liabilities and other and $1.7 million of
long-term deferred gain within Other liabilities on our Consolidated Balance Sheets. We
recognized $0.2 million of gain during the fourth quarter of 2009 within Other income on our Consolidated Income Statements. Although the sale of our equity in CPC does
not require pro forma disclosure within our financial statements, within Note 14 of the Notes to
the Consolidated Financial Statements we have provided pro forma quarterly financial information
presenting the effect of CPC as a deconsolidated entity. The noncontrolling interest in CPC was
$1.0 million at December 31, 2008. There was no remaining noncontrolling interest at December 31,
2009 due to the sale of our equity interest in CPC.
We also previously owned a 51% interest in a second joint venture, iPayment ICE of Utah, LLC
(ICE). However, during the third quarter of 2008, we acquired the remaining 49% of ICE for less
than $0.1 million, which caused ICE to be wholly-owned. We accounted for our investments pursuant
to the provisions of ASC 810 Consolidation (formerly known as FAS Interpretation No. 46R,
Consolidation of Variable Interest Entities). Under this method, if a business enterprise has a
controlling financial interest in or is the primary beneficiary of a variable interest entity, the
assets, liabilities, and results of the activities of the variable interest entity should be
included in consolidated financial statements with those of the business enterprise. As a result,
we considered CPC a variable interest entity, and as the primary beneficiary during our time as an
equity holder, we consolidated CPC. During the quarter ended March 31, 2009 and the quarter ended
September 30, 2009, CPC made distributions of profits to the Company and the majority shareholders
of CPC. The distributions to the majority shareholders reduced our noncontrolling interest balance
prior to the sale of our equity.
Common Stock
The Company has 100 shares of common stock outstanding at December 31, 2009. The Company has
elected not to present earnings per share data as management believes such presentation would not
be meaningful.
New Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159), which permits
entities to choose to measure many financial instruments and certain other items at fair value. The
Company did not make this election. As such, the adoption of this statement did not have any impact
on its results of operations, financial position or cash flows. The guidance in SFAS No. 159 is
included in Financial Instruments Topic of FASB ASC Topic 825.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)),
which establishes a framework for the recognition and measurement of identifiable assets and
goodwill acquired in a business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. As applicable, the Company will continue
to apply the requirements of SFAS No. 141(R) to business combinations completed after January 1,
2009. The guidance in SFAS No. 141(R) is included in the Business Combinations Topic of FASB ASC
Topic 805.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160), which establishes a framework for the reporting of a parent
companys interests and noncontrolling interests in a subsidiary. SFAS No. 160 is effective as of
January 1, 2009, and has been applied prospectively except for the presentation and disclosure
requirements that applied retrospectively for all periods presented. The accompanying financial
statements, including those as of December 31, 2008, include the reclassification of Minority
interest in equity of consolidated subsidiary, and related taxes, as a noncontrolling interest in
equity, rather than as part of liabilities (as previously reported) as required by SFAS No. 160.
The guidance in SFAS No. 160 is included in the Consolidation Topic of FASB ASC Topic 810.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entitys results of operations, financial position and cash flows. SFAS No. 161 is effective for
all financial statements issued for fiscal years and interim periods beginning after November 15,
2008. For further detail on the Companys derivative instruments and hedging activities, see Note
1. The guidance in SFAS No. 161 is included in the Derivatives and Hedging Topic of FASB ASC Topic
815.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value
of Financial Instruments, and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. This FSP is effective for interim reporting
periods ending after June 15, 2009. The adoption of this FSP resulted in additional interim
disclosures only. See Financial Instruments within Note 1. The guidance in this FSP is included in
the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC Topic 820.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which establishes
general standards of accounting for and disclosure of subsequent events that occur after the
balance sheet date. SFAS 165 is effective for financial statements ending after June 15, 2009.
The guidance in SFAS No. 165 is included in the Subsequent Events Topic of FASB ASC Topic 855.
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In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value. This update
provides clarification for the fair value measurement of liabilities in circumstances in which a
quoted price in an active market for an identical liability is not available. This update is
effective for interim periods beginning after August 28, 2009. The adoption of this standard did
not have a material effect on our financial position or results of operations. The guidance in this
ASU is included in the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC
Topic 820.
3. Acquisitions
The effective date of each of the acquisitions discussed in this Note is the date the
acquisition was recognized in our financial statements, unless otherwise noted. For the years ended
December 31, 2009, 2008, and 2007, amortization expense related to our merchant processing
portfolios and other intangible assets was $43.7 million, $36.3 million, and $34.5 million,
respectively.
Earnout Payments
Certain purchase agreements for acquisitions made in prior periods contained earnout payments
based on the subsequent performance of the business acquired. As the terms of these earnout
provisions are met, we accrue the amount owed in our Consolidated Balance Sheets and record an
increase to goodwill. We provided for $2.5 million in earnout payments in 2008. There were no
earnout provisions provided for in 2009.
Other Acquisitions
We made various purchases of residual cash flow streams and one business, Cambridge Payment
Systems LLC (Cambridge), collectively totaling $14.1 million during 2007. Cambridge was acquired
on December 28, 2007, and the results of operations were included in our Consolidated Income
Statements beginning January 1, 2008. Consideration for this acquisition included cash at closing
and a contingent payment based upon future performance over three years. The Cambridge acquisition
was recorded under the purchase method. The purchase prices for the residual cash flow streams and
merchant processing portfolios were primarily assigned to intangible assets in the accompanying
Consolidated Balance Sheets and are amortized over their expected useful lives. As a result of the
Cambridge acquisition, we recorded approximately $4.6 million of intangible assets and $8.3 million
of goodwill during fiscal 2007.
On April 1, 2008, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of Merchant Service Center (MSC), an independent sales group with a
portfolio of over 7,000 merchants. Consideration included cash at closing and contingent payments
based on performance in 2008, 2009, and 2010. MSC is a provider of card-based payment transaction
processing services. The acquisition was recorded under the purchase method with the total
consideration allocated to the fair value of assets acquired and liabilities assumed. The
operating results of MSC were included in our Consolidated Income Statements beginning April 1,
2008. As a result of the MSC acquisition, we recorded approximately $10.2 million of intangible
assets and $11.5 million of goodwill during fiscal 2008.
In November 2009, we entered into a Purchase and Sale Agreement with Central Payment Co., LLC
(CPC), whereby we acquired a merchant portfolio consisting of approximately 8,000 merchants from
CPC. The transaction was effective as of November 1, 2009. Consideration at closing was $23.8
million in cash. As a result of the portfolio purchase, we recorded $23.8 million of intangible
assets.
4. Details of Balance Sheet Accounts
(in thousands) | 2009 | 2008 | ||||||
Property and Equipment, net: |
||||||||
Machinery and equipment |
$ | 3,665 | $ | 2,567 | ||||
Furniture and fixtures |
1,336 | 1,066 | ||||||
Leasehold improvements |
457 | 508 | ||||||
Computer software and equipment |
4,454 | 4,202 | ||||||
9,912 | 8,343 | |||||||
Less accumulated depreciation and amortization |
(5,239 | ) | (3,629 | ) | ||||
$ | 4,673 | $ | 4,714 | |||||
Goodwill: |
||||||||
Beginning balance |
$ | 527,912 | $ | 518,639 | ||||
Acquired during the period |
| 11,486 | ||||||
Divested during the period |
(212 | ) | | |||||
Adjustments to goodwill acquired in prior period |
278 | (2,213 | ) | |||||
$ | 527,978 | $ | 527,912 | |||||
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5. Commitments and Contingencies
Leases
We lease our office facilities for approximately $140,000 per month under operating leases.
Our facilities include locations in Nashville, Tennessee, California locations in Westlake Village
and Santa Barbara; Minden, Nevada; Phoenix, Arizona; Novi, Michigan; and Akron, Ohio. Our future
minimum lease commitments under noncancelable leases are as follows at December 31, 2009 (in
thousands):
Year ended December 31, | Amount | |||
2010 |
$ | 1,181 | ||
2011 |
1,165 | |||
2012 |
1,073 | |||
2013 |
1,018 | |||
2014 |
938 | |||
Thereafter |
4,283 | |||
Total |
$ | 9,658 | ||
Total rent expense for the years ended December 31, 2009, 2008, and 2007 was $2.3 million,
$2.1 million, and $2.4 million, respectively.
Minimum Processing Commitments
We have non-exclusive agreements with several processors to provide us services related to
transaction processing and transmittal, transaction authorization and data capture, and access to
various reporting tools. Certain of these agreements require us to submit a minimum monthly number
of transactions for processing. If we submit a number of transactions that is lower than the
minimum, we are required to pay to the processor the fees that it would have received if we had
submitted the required minimum number of transactions. As of December 31, 2009, such minimum fee
commitments were as follows (in thousands):
Year ended December 31, | Amount | |||
2010 |
$ | 4,330 | ||
2011 |
3,031 | |||
2012 |
| |||
2013 |
| |||
2014 |
| |||
Thereafter |
| |||
Total |
$ | 7,361 | ||
In conjunction with our purchase of a merchant portfolio from First Data Merchant Services
(FDMS) in 2004, we also entered into service agreements with FDMS (the Service Agreements),
pursuant to which FDMS agreed to perform certain data processing and related services with respect
to the acquired merchant contracts through 2011. In consideration for entering into the Service
Agreements, we are required to pay FDMS a processing fee related to these accounts of at least 70%
of the amount paid during the immediately preceding year. The minimum commitments for years after
2009 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 fees paid in the preceding years.
We also 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 December 31, 2009, and are excluded from this table.
Contingent Acquisition Price Obligations
Certain of our acquisitions include purchase price escalations that are contingent upon future
performance. For acquisitions prior to January 1, 2009 (the effective date of SFAS 141R), we
accrue such obligations once all contingencies are met. As of December 31, 2008, $2.5 million
related to contingent purchase price obligations was included in accrued liabilities and other in
the accompanying Consolidated Balance Sheets. There were no contingent purchase price obligations
accrued at December 31, 2009.
Reserves on Merchant Accounts
Some of our merchants are required to maintain reserves (cash deposits) that are used to
offset chargebacks incurred. Our sponsoring banks hold these reserve cash deposits related to our
merchant accounts as long as there is an exposure to loss resulting from a merchants processing
activity. As of December 31, 2009, these reserve cash deposits totaled approximately $44.2
million. We have no legal title to the cash accounts maintained at the sponsor bank in order
to cover potential chargeback and related losses under the applicable merchant agreements. We also
have no legal obligation to these merchants with respect to these reserve cash accounts, and
accordingly, we do not include these accounts and the corresponding obligation to the merchants in
our consolidated financial statements.
If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor
of the merchant, the disputed
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transaction is charged back to the merchants bank and credited to
the account of the cardholder. After the chargeback occurs, we attempt to recover the chargeback
either directly from the merchant or from the merchants reserve account. If we or our sponsoring
banks are unable to collect the chargeback from the merchants account, or, if the merchant refuses
or is financially unable due to bankruptcy or other reasons, to reimburse the merchants bank for
the chargeback, we bear the loss for the amount of the refund paid to the cardholders bank. At
December 31, 2009 and 2008, our reserve for losses on merchant accounts included in accrued
liabilities and other totaled $1.5 million and $1.3 million, respectively.
Legal
We are subject to certain legal proceedings that have arisen in the ordinary course of our
business and have not been fully adjudicated. Although the ultimate outcome of these other legal
proceedings cannot be predicted with certainty, based on information currently available, advice of
counsel, and available insurance coverage, in our opinion, the outcome of such legal proceedings is
not expected to have a material adverse effect on our business, financial condition or results of
operations. However, the results of legal proceedings cannot be predicted with certainty and in
the event of unexpected future developments, it is possible that the ultimate resolution of one or
more of these matters could be unfavorable. Should we fail to prevail in any of these legal
matters or should several of these legal matters be resolved against us in the same reporting
period, our consolidated financial position or operating results could be materially adversely
affected. Regardless of the outcome, any litigation may require us to incur significant litigation
expenses and may result in significant diversion of managements attention. All litigation
settlements are recorded within other expense on our Consolidated Income Statements.
6. Investments
Investments in Merchant Advances
In 2007, we began, on a selective basis, offering advances to prospective and current
merchants based on expected future processing volume. We stopped offering new merchant advances to
our customers in 2008. Our merchant advances are reflected in Investment in merchant advances in
the Consolidated Balance Sheets. Investments in merchant advances were $0, net of allowance for
doubtful accounts of $0.5 million, at December 31, 2009 and $4.5 million, net of allowance for
doubtful accounts of $3.8 million, at December 31, 2008. The allowance for doubtful accounts is
further described in Reserve for Losses on Merchant Accounts within Note 2.
Payments for Prepaid Residual Expenses
During the year ended December 31, 2009, we made payments totaling $5.1 million to several
independent sales groups in exchange for contract modifications which lower our obligations for
future payments of residuals to them. These payments have been assigned to intangible assets in
the accompanying Consolidated Balance Sheets and are amortized over their expected useful lives.
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Senior secured credit facility: |
||||||||
Term loans |
$ | 447,638 | $ | 494,638 | ||||
Revolver |
10,900 | | ||||||
Senior subordinated notes, net of discount |
192,981 | 192,633 | ||||||
Various equipment lease agreements |
| 55 | ||||||
651,519 | 687,326 | |||||||
Less: current portion of long-term debt |
| (17,324 | ) | |||||
Less: current portion of lease agreements |
| (23 | ) | |||||
$ | 651,519 | $ | 669,979 | |||||
The senior secured credit facility consists of $515.0 million of term loans and a
$60.0 million revolving credit facility, further expandable to $100.0 million. The senior secured
credit facility contains a $25.0 million letter of credit sublimit and is secured by the Companys
assets. Interest on outstanding borrowings under the term loans is payable at a rate of LIBOR plus
a margin of 2.00% to 2.25% (currently 2.00%). Interest on outstanding borrowings under the
revolving credit facility is payable at prime plus a margin of 0.50% to 1.25% (currently 1.25%) or
at a rate of LIBOR plus a margin of 1.50% to 2.25% (currently 2.25%) depending on our ratio of
consolidated debt to EBITDA, as defined in the agreement. Additionally, the senior secured credit
facility requires us to pay unused commitment fees of up to 0.50% (currently 0.50%) on any undrawn
amounts under the revolving credit facility. The senior secured credit facility contains customary
affirmative and negative covenants, including financial covenants requiring maintenance of
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a debt-to-EBITDA ratio (as defined therein), which is currently 5.50 to 1.00, but which decreases
periodically over the life of the agreement to a ratio of 4.00 to 1.00 at December 31, 2011. We
were in compliance with all such covenants as of December 31, 2009. The senior secured credit
facility also contains an excess cash flow covenant (as defined therein), which requires us to make
additional principal payments after the end of every fiscal year. At December 31, 2009, there was
no payment attributable to this covenant. At December 31, 2008, this payment attributable to this
covenant was $12.2 million and was included in the current portion of long-term debt. Principal
repayments on the term loans were due quarterly in the amount of $1.3 million, which began on
June 30, 2006, with any remaining unpaid balance due on March 31, 2013. In 2009, the Company
prepaid all of the $1.3 million quarterly principal payments required by the senior secured credit
facility through its expiration on March 31, 2013 and repaid an additional $12.9 million of debt
principal. Outstanding principal balances on the revolving credit facility are due when the
revolving credit facility matures on May 10, 2012. At December 31, 2009, we had $447.6 million of
outstanding term loans at a weighted average interest rate of 5.23% and $10.9 million of borrowings
outstanding under the revolving credit facility at a weighted average interest rate of 3.20%.
Under the senior secured credit facility we were required to hedge at least 50% of the
outstanding balance through May 10, 2008. Accordingly, we entered into interest rate swap
agreements with a total notional amount of $260.0 million that expire on December 31, 2010. The
swap agreements effectively convert an equivalent portion of our outstanding borrowings to a fixed
rate of 5.39% (plus the applicable margin) over the entire term of the swaps. In September 2007,
we entered into two additional interest rate swap agreements. The first swap was for a notional
value of $100.0 million and expired on September 17, 2008. This swap effectively converted an
equivalent portion of our outstanding borrowings to a fixed rate of 4.80% (plus the applicable
margin) over the entire term of the swap. The second swap was for a notional value of $75.0
million and expired on September 28, 2008. This swap effectively converted an equivalent portion
of our outstanding borrowings to a fixed rate of 4.64% (plus the applicable margin)
over the entire term of the swap. The swap instruments qualify for hedge accounting treatment
under ASC 815 Derivatives and Hedging (see Note 2).
Our senior secured credit facility provides that certain change of control events will result
in an event of default, including the following:
| 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). |
A change of control under the indenture governing our senior subordinated notes includes
the following events:
| 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. |
An event of default resulting from a change of control could result in the acceleration of the
maturity of our borrowings and terminate commitments to lend under the senior secured credit
facility. An acceleration of our senior secured credit facility would constitute an event of
default under the indenture governing our senior subordinated notes and could result in the
acceleration of our senior subordinated notes.
On May 10, 2006, in conjunction with the Transaction further described in Note 1, we also
issued senior subordinated notes in the aggregate principal amount of $205.0 million. These senior
subordinated notes were issued at a discount of 1.36%, with interest payable semi-annually at 9.75%
on May 15 and November 15 of each year. The senior subordinated notes mature on May 15, 2014, but
may be redeemed, in whole or in part, by the Company at any time on or after May 15, 2010, at
redemption prices specified in the indenture governing the senior subordinated notes, plus accrued
and unpaid interest. The senior subordinated notes contain customary restrictive covenants,
including restrictions on incurrence of additional indebtedness if our fixed charge coverage ratio
(as defined therein) is not at least 2.00 to 1.00. We were in compliance with all such covenants
as of December 31, 2009.
During 2008, the Company spent $1.1 million on repurchases of senior subordinated notes. The
Company intends to hold the senior subordinated notes until maturity. In accordance with ASC 860
Transfers and Servicing, formerly known as SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, the repurchase was accounted for as an
extinguishment of debt. We reflected this transaction as a reduction in long-term debt within the
Consolidated Balance Sheets as of December 31, 2008. We amended our senior secured credit facility
to allow for repurchases of our senior subordinated notes up to $10.0 million, and have now
completed note repurchases in compliance with that amendment. At December 31, 2009, we had $194.5
million of outstanding senior subordinated notes and $1.5 million of remaining unamortized discount
on the senior subordinated notes.
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We had net capitalized debt issuance costs related to the senior secured credit facility
totaling $3.7 million and net capitalized debt issuance costs related to the senior subordinated
notes totaling $4.7 million as of December 31, 2009, which is materially consistent with amounts
computed using an effective interest method. These costs are being amortized to interest expense on
a straight-line basis over the life of the related debt instruments. Amortization expense related
to the debt issuance costs was $2.2 million for the years ended December 31, 2009, 2008, and 2007
and is included within interest expense on the Consolidated Income Statements.
Year ended December 31, | Amount | |||
2010 |
$ | | ||
2011 |
| |||
2012 |
| |||
2013 |
10,900 | |||
2014 |
642,138 | |||
Thereafter |
| |||
Total |
$ | 653,038 | ||
The maturities of long-term debt (before unamortized discount) are as follows (in thousands)
8. Income Taxes
The provision for income taxes and liabilities for the years ended December 31, 2009, 2008 and
2007, was comprised of the following (in thousands):
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 11,736 | $ | 13,743 | $ | 9,417 | ||||||
State |
2,435 | 2,778 | 1,347 | |||||||||
Total current |
14,171 | 16,521 | 10,764 | |||||||||
Deferred |
(5,146 | ) | (6,327 | ) | (5,272 | ) | ||||||
Change in valuation allowance |
81 | 523 | 223 | |||||||||
Changes in uncertain tax positions |
(370 | ) | 178 | 290 | ||||||||
Total income tax provision |
$ | 8,736 | $ | 10,895 | $ | 6,005 | ||||||
The differences between the federal statutory tax rate of 35% and effective tax rates are
primarily due to state income tax provisions, deferred tax valuation allowance and permanent
differences, as follows:
2009 | 2008 | 2007 | ||||||||||
Statutory Rate |
35 | % | 35 | % | 35 | % | ||||||
Increase (decreases) in taxes resulting from the following: |
||||||||||||
State income taxes net of federal tax benefit |
5 | % | 4 | % | 4 | % | ||||||
Recognition of previously reserved deferred tax assets utilized in current year |
0 | % | 0 | % | -2 | % | ||||||
Permanent differences |
-4 | % | 0 | % | 11 | % | ||||||
Increase to valuation allowance |
0 | % | 2 | % | 2 | % | ||||||
Other |
0 | % | 0 | % | 3 | % | ||||||
Total |
36 | % | 41 | % | 53 | % | ||||||
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Deferred income tax assets are included as a component of other assets in the accompanying
Consolidated Balance Sheets as of December 31, 2009 and 2008 and were comprised of the following
(in thousands):
2009 | 2008 | |||||||
Current deferred tax assets: |
||||||||
State taxes |
$ | | $ | | ||||
Net operating loss |
| 164 | ||||||
Reserves |
1,971 | 2,585 | ||||||
Gain on sale of noncontrolling interest |
367 | | ||||||
Other |
966 | 1,040 | ||||||
Valuation allowances |
(116 | ) | | |||||
Total current deferred tax assets |
3,188 | 3,789 | ||||||
Current deferred tax liabilities: |
||||||||
Prepaid expenses |
(212 | ) | (348 | ) | ||||
Other |
(623 | ) | | |||||
Total current deferred tax liabilities |
(835 | ) | (348 | ) | ||||
Net current deferred tax asset |
$ | 2,353 | $ | 3,441 | ||||
Long-term deferred tax assets: |
||||||||
Tax benefit of unrealized loss on fair value of derivatives |
$ | 4,976 | $ | 8,287 | ||||
Net operating loss |
1,898 | 1,552 | ||||||
Cancellation of debt income |
704 | 1,342 | ||||||
Gain on sale of noncontrolling interest |
889 | | ||||||
Other |
7,188 | | ||||||
Valuation allowances |
(711 | ) | (746 | ) | ||||
Total long-term deferred tax assets |
14,944 | 10,435 | ||||||
Long-term deferred tax liabilities: |
||||||||
Intangible assets, net of depreciation and amortization |
(6,725 | ) | (4,906 | ) | ||||
Other |
| (538 | ) | |||||
Total long-term deferred tax liabilities |
(6,725 | ) | (5,444 | ) | ||||
Net long-term deferred tax asset |
$ | 8,219 | $ | 4,991 | ||||
We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 clarifies the
accounting and reporting for uncertainties in income tax law by prescribing a comprehensive model
for the financial statement recognition, measurement, presentation and disclosure for uncertain tax
positions taken or expected to be taken in income tax returns.
As of December 31, 2009, our liabilities for unrecognized tax benefits totaled $1.1 million,
included in other long-term liabilities. Interest and penalties related to income tax liabilities
are included in income tax expense. The balance of accrued interest and penalties recorded in the
Consolidated Balance Sheets at December 31, 2009 was $0.1 million.
The following presents a rollforward of our unrecognized tax benefits (in thousands):
Unrecognized | ||||
Tax Benefits | ||||
Balance at December 31, 2007 |
$ | 688 | ||
Decrease in prior year tax positions |
| |||
Increase for tax positions taken during the current period |
452 | |||
Balance at December 31, 2008 |
$ | 1,140 | ||
Decrease in prior year tax positions |
(604 | ) | ||
Increase for tax positions taken during the current period |
551 | |||
Balance at December 31, 2009 |
$ | 1,087 | ||
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
With limited exception, we are no longer subject to federal, state and local income tax audits by
taxing authorities for the years through 2004.
At December 31, 2009, we had state net operating loss carryforwards of approximately
$29.7 million. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets
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will not be realized. At December 31, 2009, we had
$0.8 million of valuation allowances on deferred tax assets. The net deferred taxes recorded at
December 31, 2009, represent amounts that are more likely than not to be utilized in the near term.
9. Comprehensive Income (Loss)
Comprehensive income (loss) includes our net income plus the net-of-tax impact of fair market
value changes in our interest rate swap agreements. The accumulated elements of other
comprehensive loss, net of tax, are included within stockholders equity on the Consolidated
Balance Sheets. Other comprehensive income (loss) for years ended December 31, 2009, 2008 and 2007
was $4.8 million, ($4.9) million an ($5.1) million, respectively. Changes in fair value, net of
tax, on our swap agreements amounted to $4.8 million. ($4.9) million, and ($5.1) million for the
years ended December 31, 2009, 2008 and 2007, respectively. The related deferred tax expense
(benefit) was $3.2 million, ($3.3) million and ($3.4) million for the years ended December 31,
2009, 2008 and 2007, respectively.
10. Related Party Transactions
During 2008, our shareholders repurchased $14.2 million of our senior subordinated notes.
These repurchases caused us to recognize cancellation of debt income for tax purposes for the year
ended December 31, 2008, which resulted in an increase to both our tax expense and our deferred tax
assets of $1.3 million. The deferred tax asset will be realized as an income tax benefit over the
remaining life of the senior subordinated notes. At December 31, 2009, we have a receivable of
$0.4 million due from our ultimate parent company, iPayment Investors, LP, included in our
Consolidated Balance Sheets within accounts receivable.
11. Significant Concentration
Our customers consist of a diverse portfolio of small merchants whose businesses frequently
are newly established. As of December 31, 2009, we provided services to small business merchants
located across the United States in a variety of industries. A substantial portion of our
merchants transaction volume comes from card-not-present transactions, which subject us to a
higher risk of merchant losses. No single customer accounted for more than 3% of revenues during
any periods presented. We believe that the loss of any single merchant would not have a material
adverse effect on our financial condition or results of operations.
We have agreed to utilize FDMS to process at least 75% of our consolidated transaction sales
volume in any calendar year through 2011. The principal sponsoring bank through which we process
the significant majority of our transactions is Wells Fargo.
12. Segment Information and Geographical Information
We consider our business activities to be in a single reporting segment as we derive greater
than 90% of our revenue and results of operations from processing revenues and other fees from
card-based payments. Substantially all revenues are generated in the United States.
13. Employee Agreements and Employee Benefit Plans
During 2002 and 2001, we entered into employment agreements with various officers to secure
employment. Under the terms of the agreements, we provided the employees with salary, incentive
compensation and stock grants and/or options in return for various periods of employment. On
November 10, 2008, Messrs. Daily and Grimstad each provided us with notice of their intention to
not renew their respective employment agreements with us. Accordingly, Messrs. Dailys and
Grimstads respective employment agreements terminated on February 25, 2009 pursuant to their
terms. Following the termination of their employment agreements, Messrs. Daily and Grimstad intend
to continue to serve as our chief executive officer and president, respectively, pursuant to
at-will employment arrangements, the terms of which remain subject to negotiation.
We sponsor a defined contribution plan (the Plan) under Section 401(k) of the Internal
Revenue Code, covering employees of iPayment, Inc. and certain of its subsidiaries. Under the Plan,
we may match contributions of up to 3% of a participants salary. Employer contributions for the
years ended December 31, 2009, 2008, and 2007 were $179,000, $197,000, and $199,000, respectively.
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14. Summarized Quarterly Financial Data
The following unaudited schedule indicates our quarterly results of operations for 2009, 2008
and 2007 (in thousands, except charge volume). We have also included pro forma quarterly results
from 2009 that remove the operating results of CPC resulting from the sale of our equity in CPC.
Within the pro forma results for 2009, we have also included the financial impact of the merchant
portfolio acquisition made during the fourth quarter of 2009 as if the acquisition had occurred on
January 1, 2009.
1st | 2nd | 3rd | 4th | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Audited) | ||||||||||||||||
2009 |
||||||||||||||||||||
Revenue |
$ | 170,053 | $ | 190,745 | $ | 182,716 | $ | 174,414 | $ | 717,928 | ||||||||||
Interchange |
96,910 | 103,575 | 101,975 | 95,070 | 397,530 | |||||||||||||||
Other cost of services |
55,543 | 60,774 | 56,368 | 56,386 | 229,071 | |||||||||||||||
Selling, general, and administrative |
4,817 | 4,940 | 4,928 | 4,845 | 19,530 | |||||||||||||||
Income from operations |
12,783 | 21,456 | 19,445 | 18,113 | 71,797 | |||||||||||||||
Depreciation and amortization |
11,956 | 12,160 | 10,781 | 10,931 | 45,828 | |||||||||||||||
Net income (loss) attributable to
iPayment, Inc. |
(210 | ) | 4,224 | 3,741 | 3,985 | 11,740 | ||||||||||||||
Charge Volume (in millions,
unaudited) |
5,737 | 6,091 | 6,030 | 5,668 | 23,526 | |||||||||||||||
2009 - PRO FORMA |
||||||||||||||||||||
Revenue, unaudited |
$ | 165,349 | $ | 185,082 | $ | 175,766 | $ | 171,765 | $ | 697,962 | ||||||||||
Interchange, unaudited |
95,254 | 100,814 | 98,645 | 93,862 | 388,575 | |||||||||||||||
Other cost of services, unaudited |
55,090 | 59,749 | 55,057 | 55,847 | 225,743 | |||||||||||||||
Selling, general, and
administrative, unaudited |
2,916 | 2,884 | 2,750 | 4,062 | 12,612 | |||||||||||||||
Income from operations, unaudited |
12,089 | 21,635 | 19,314 | 17,994 | 71,032 | |||||||||||||||
Depreciation and amortization,
unaudited |
12,905 | 13,110 | 11,728 | 11,247 | 48,990 | |||||||||||||||
2008 |
||||||||||||||||||||
Revenue |
$ | 185,455 | $ | 212,580 | $ | 203,654 | $ | 193,136 | $ | 794,825 | ||||||||||
Interchange |
108,381 | 121,855 | 116,188 | 104,146 | 450,570 | |||||||||||||||
Other cost of services |
55,773 | 62,055 | 61,449 | 62,255 | 241,532 | |||||||||||||||
Selling, general, and administrative |
4,818 | 4,915 | 5,003 | 5,553 | 20,289 | |||||||||||||||
Income from operations |
16,483 | 23,755 | 21,014 | 21,183 | 82,434 | |||||||||||||||
Depreciation and amortization |
8,563 | 8,988 | 9,665 | 10,825 | 38,041 | |||||||||||||||
Net income attributable to
iPayment, Inc. |
1,331 | 5,772 | 3,729 | 3,471 | 14,303 | |||||||||||||||
Charge Volume (in millions,
unaudited) |
6,535 | 7,280 | 6,924 | 6,044 | 26,783 | |||||||||||||||
2007 |
||||||||||||||||||||
Revenue |
$ | 177,740 | $ | 192,674 | $ | 193,599 | $ | 195,096 | $ | 759,109 | ||||||||||
Interchange |
103,620 | 112,440 | 111,264 | 110,631 | 437,955 | |||||||||||||||
Other cost of services |
54,284 | 57,743 | 57,105 | 59,405 | 228,537 | |||||||||||||||
Selling, general, and administrative |
6,549 | 4,708 | 4,688 | 5,199 | 21,144 | |||||||||||||||
Income from operations |
13,287 | 17,783 | 20,542 | 19,861 | 71,473 | |||||||||||||||
Depreciation and amortization |
9,401 | 9,064 | 8,909 | 8,574 | 35,948 | |||||||||||||||
Net income (loss) |
(1,715 | ) | 1,338 | 3,387 | 2,421 | 5,431 | ||||||||||||||
Charge Volume (in millions,
unaudited) |
6,368 | 6,915 | 6,829 | 6,685 | 26,797 |
15. Guarantor Financial Information
In connection with the May 2006 issuance of 9.75% senior subordinated notes due 2014, we and
all of our existing and future subsidiaries (the Guarantors) that guarantee our other debt or
debt of the guarantors have fully and unconditionally guaranteed, on a joint and several basis, our
obligations under the related indenture (the Guarantees). iPayment, Inc., the issuer of the
senior subordinated notes and parent company of the Guarantors, has no independent assets or
operations. Any subsidiary of iPayment, Inc. other than the Guarantors is minor, and there are no
significant restrictions on our ability to obtain funds from our subsidiaries by dividend or loan.
16. Significant Developments
On May 11, 2009, a jury in the Superior Court of the State of California for the County of Los
Angeles handed down a verdict in the amount of $300 million, plus punitive damages of $50 million,
against Gregory S. Daily, our Chairman and Chief Executive Officer. This lawsuit was brought
against Mr. Daily individually and not in his capacity as the Chairman and Chief Executive Officer
or Director of the Company. Neither the Company, nor any other shareholders, officers, employees
or directors were a party to this action. The Company has no indemnification, reimbursement or
any other contractual obligation to Mr. Daily in connection with this legal matter. In response to
this verdict, Mr. Daily has filed for personal bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code in Nashville, Tennessee. The Company is not a party to these bankruptcy
proceedings.
The plaintiff has filed a motion with the bankruptcy court in order to have a trustee
appointed to administer the estate of Mr. Daily. The bankruptcy court has not yet ruled on the
motion. The enforcement or settlement of any judgment against Mr. Daily, or the appointment of a
trustee by the bankruptcy court, could lead to one or more of the change of control events that
would constitute an event of default under our senior secured credit facility or a change of
control under the indenture governing our senior subordinated notes. See risk factors In the
event of a change of control, we may not be able to repurchase our senior subordinated notes as
required by the indenture, which would result in a default under our indenture, A change of
control under our senior secured credit facility could cause a material adverse effect on our
liquidity, financial condition or results of operations and A change of control under the
indenture governing our senior subordinated notes could cause a material adverse effect on our
liquidity, financial condition or results of operations.
Mr. Daily is in the process of appealing this verdict.
The Company has entered into a new lease through November 2019 for 31,665 square feet in
Westlake Village, California that commenced in December 2009. The Calabasas operating center has moved from its location
in Calabasas, California to the new location in Westlake Village, California. Annual commitments
under this lease will approximate $0.8 million.
In
August 2009, the Company entered into an eighth amendment to the Service Agreement, dated as
of July 1, 2002, as amended by amendments dated October 25, 2002, November 27, 2002, January 8,
2004, July 11, 2005 and September 29, 2006, with First Data Merchant Services Corporation (FDMS).
The amendment sets forth a new schedule of fees charged by FDMS for processing services and
extends the term of the Service Agreement to December 31, 2014. The Company also amended its
Sponsorship Agreement with FDMS and Wells Fargo Bank, N.A. to be coterminous with the FDMS Service
Agreement.
In August 2009, the Company entered into a new service agreement with TSYS Acquiring Solutions
for processing services through July 31, 2016.
17. Subsequent Events
The Company has completed an evaluation of all subsequent events through the issuance of these
consolidated financial statements. There were no subsequent events that required disclosure.
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures. Our management, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered by this Annual Report (the Evaluation Date).
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of
the Evaluation Date that our disclosure controls and procedures were effective such that the
information relating to our Company, including our consolidated subsidiaries, required to be
disclosed in our Securities and Exchange Commission (SEC) reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) promulgated under the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and board of directors regarding the reliability of
financial reporting and the preparation and fair presentation of published financial statements for
external purposes in accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation, pursuant to Rule 13a-15(c)
promulgated under the Exchange Act, of the effectiveness, as of the end of the period covered by
this Annual Report, of its internal control over financial reporting. Based on the results of this
evaluation, management concluded that our internal control over financial reporting was effective
as of the Evaluation Date.
This Annual Report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this Annual Report.
During the twelve months ended December 31, 2009, there have been no changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table provides information about our directors and executive officers as of
December 31, 2009:
Name and Age | Principal Occupation, Business Experience and Directorships | |
Gregory S. Daily Chairman and CEO Age 50 |
Greg Daily has served as Chairman of the board of
directors and Chief Executive Officer since February 2001.
In 1984, Mr. Daily co-founded PMT Services, Inc., a credit
card processing company, and served as President of PMT
Services, Inc. Mr. Daily served as the Vice-Chairman of
the board of directors of NOVA Corporation from September
1998 until May 2001. Mr. Daily has served as the Chief
Manager and President of Caymas, LLC, a private investment
company, since January 2001 and he has served as the Chief
Executive Officer of Hardsworth, LLC, a private investment
company, since May 1997. |
|
Carl A. Grimstad Director and President Age 42 |
Carl Grimstad co-founded iPayment and has served as the
Companys President since inception. In 2003, Mr. Grimstad
led iPayment in a successful IPO (NASDAQ: IPMT). Mr.
Grimstad was instrumental in taking iPayment private in
2006. Mr. Grimstad has served since 1995 as the managing
partner of GS Capital, LLC, a private investment company.
Mr. Grimstad and his family are active supporters of
various charities including the Nashville Zoo and the
Sexual Assault Center. Mr. Grimstad currently serves as a
trustee of the Cheekwood Botanical Gardens, as a board
member of the Nashville Symphony and as a board member of
the Oasis Center, a safe haven for children in
trouble. Mr. Grimstad graduated with a B.A. in Economics
from Boston University in 1989. |
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Table of Contents
Name and Age | Principal Occupation, Business Experience and Directorships | |
Clay M. Whitson CFO and Treasurer Age 52 |
Clay Whitson has served as our Chief Financial Officer and
Treasurer since October 2002. From November 1998 to
September 2002, Mr. Whitson was Chief Financial Officer of
The Corporate Executive Board Company, a provider of best
practices research and quantitative analysis focusing on
corporate strategy, operations and general management
issues. From 1996 to October 1998, Mr. Whitson served as
the Chief Financial Officer of PMT Services, Inc., a
credit card processing company. Mr. Whitson graduated with
a B.A. from Southern Methodist University and an M.B.A.
from the University of Virginia, Colgate Darden School of
Business. |
|
Robert S. Torino COO and Executive Vice President Age 56 |
Robert Torino has served as our Executive Vice President
since the Companys founding in 2001. From January 2001 to
September 2002, he served as our Chief Financial Officer.
From October 1999 to April 2000, Mr. Torino served as
Chief Executive Officer of M80 Technologies, Inc., a
start-up software development company. Mr. Torino served
as President and Chief Executive Officer of TRUE Software
Inc., a software development company, from April 1995
until its acquisition by McCabe & Associates in October
1999. |
|
Afshin M. Yazdian Executive Vice President, General Counsel and Secretary Age 37 |
Afshin Yazdian has served as our Executive Vice President
and General Counsel since the Companys founding. Mr.
Yazdian previously served as General Counsel and Vice
President of Mergers and Acquisitions for eConception, a
technology venture fund. Prior, Mr. Yazdian practiced in
the Corporate and Mergers & Acquisitions groups at the law
firm of Waller Lansden Dortch & Davis, PLLC in Nashville,
Tennessee. Mr. Yazdian is currently on the board of the
Nashville Jewish Federation and is involved in a variety
of other local and national charities. Mr. Yazdian
graduated from Emory University with a BBA in business,
and graduated with honors from the University of Miami
School of Law. |
In May 2009, a jury in the Superior Court of the State of California for the County of Los Angeles
handed down a verdict in the amount of $300 million, plus punitive damages in the amount of $50
million, against Mr. Daily, our Chairman and Chief Executive Officer, in connection with litigation over Mr. Dailys beneficial ownership in us. In response to
the verdict, Mr. Daily filed for personal bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code in Nashville, Tennessee.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics (the Code of Ethics), which
applies to all directors, consultants and employees, including the Chief Executive Officer and the
Chief Financial Officer and any other employee with any responsibility for the preparation and
filing of documents with the SEC. A copy of the Code of Ethics is incorporated by reference in this
Form 10-K. We will disclose amendments to provisions of the Code of Ethics by posting such
amendments on our website. In addition, any such amendments, as well as any waivers of the Code of
Ethics for directors or executive officers will be disclosed in a report on Form 8-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers and persons who own more than ten percent of the our common stock (Section 16
Persons) to file reports of ownership and changes in ownership in our common stock with the SEC.
Based on our records and other information we believe that all Section 16(a) filing requirements
for the Section 16 Persons have been complied with during or with respect to the fiscal year ended
December 31, 2009. As a result of the Transaction, beginning May 11, 2006, the Company no longer
has a class of equity securities registered with the SEC and therefore its directors, officers and
10% shareholders are no longer required to make Section 16 filings.
ITEM 11. Executive Compensation
Compensation Discussion and Analysis
The primary goals of our executive compensation program are to link the interests of
management and stockholders, attract and retain a highly-skilled executive team, and base rewards
on both personal and corporate performance.
As a private company, we do not have a compensation committee. Our board of directors is
currently composed of Mr. Daily and Mr. Grimstad. The board, in consultation with the other
executive officers, establishes policies and makes decisions regarding compensation of directors
and executive officers. The executive compensation program currently contains two elements:
| competitive base salaries, and | ||
| annual cash incentives determined by the performance of each executive officer and the Company against predetermined targets. |
The program is designed so that the combination of these two elements, assuming performance
targets are met, will generally be comparable to similar positions with peer companies.
Base Salaries. Base salaries for our executive officers are determined, in part, through (a)
comparisons with peer companies with which we compete for personnel and (b) general geographic
market conditions. Additionally, the board evaluates individual
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experience and performance and our overall performance during the period under consideration. The board reviews each executive
officers salary on an annual basis and may increase salaries based on (i) the individuals
contribution to the Company compared to the preceding year, (ii) the individuals responsibilities
compared to the preceding year and (iii) any increase in median pay levels at peer companies.
Annual Bonuses. The boards policy is to award annual bonuses in order to motivate and reward
the Companys executive officers, as individuals and as a team, and to attain our annual financial
goals and operating objectives. Annual bonuses typically reflect competitive industry practice and
certain performance metrics. Annual bonus awards for the executive officers in 2009 were made at
the discretion of the board. There is currently no formal bonus plan in place for executive
officers.
Stock-based Compensation. Upon closing the Transaction on May 10, 2006, all outstanding
options were exercised or cancelled and all stock-based compensation plans were terminated. We
currently have no share-based compensation plans.
Retirement Plan. Mr. Daily, Mr. Whitson and Mr. Yazdian participate in iPayments defined
contribution plans. iPayments contributions to its defined contribution plans on behalf of the
named executive officers are shown in the All Other Compensation column of the Summary
Compensation Table below.
Summary. The board believes that the combination of competitive base salaries and annual
incentives paid in cash comprise a highly-effective and motivational executive compensation
program, which works to attract and retain talented executives and strongly aligns the interests of
senior management with those of the stockholders of the Company in seeking to optimize long-term
performance. The board has reviewed the total compensation received by the executive officers
during the year ended December 31, 2009, and has determined that those amounts were not excessive
or unreasonable.
The following table shows the cash and other compensation paid or earned and certain long-term
awards made to our Chief Executive Officer, Chief Financial Officer, and each of our three most
highly compensated executive officers (the Named Executives) for all services to us in all
capacities for 2009, 2008 and 2007.
SUMMARY COMPENSATION TABLE
Annual Compensation | ||||||||||||||||||||
Name and | All Other | |||||||||||||||||||
Principal Position | Year | Salary | Bonus | Compensation | Total | |||||||||||||||
Gregory S. Daily |
2009 | $ | 187,500 | $ | 1,000,000 | $ | 3,750 | (1) | $ | 1,191,250 | ||||||||||
Chairman and |
2008 | | | | | |||||||||||||||
Chief Executive Officer |
2007 | | | | | |||||||||||||||
Carl A. Grimstad |
2009 | $ | 300,000 | $ | 1,000,000 | $ | | $ | 1,300,000 | |||||||||||
Director and President |
2008 | 300,000 | | | 300,000 | |||||||||||||||
2007 | 300,000 | | | 300,000 | ||||||||||||||||
Clay M. Whitson |
2009 | $ | 296,000 | $ | 100,000 | $ | 11,880 | (1) | $ | 407,880 | ||||||||||
Chief Financial Officer |
2008 | 296,000 | 100,000 | 8,880 | (1) | 404,880 | ||||||||||||||
and Treasurer |
2007 | 296,000 | | 2,220 | (1) | 298,220 | ||||||||||||||
Afshin M. Yazdian |
2009 | $ | 185,000 | $ | 165,000 | $ | 10,050 | (1) | $ | 345,050 | ||||||||||
Executive Vice President, |
2008 | 185,000 | 230,000 | 7,950 | (1) | 422,950 | ||||||||||||||
General Counsel and Secretary |
2007 | 185,000 | | 4,388 | (1) | 189,388 | ||||||||||||||
Robert S. Torino |
2009 | $ | 296,000 | $ | 220,000 | $ | 59,820 | (2) | $ | 575,820 | ||||||||||
Chief Operating Officer |
2008 | 230,000 | 200,000 | | 430,000 | |||||||||||||||
and
Executive Vice President |
2007 | 230,000 | | | 230,000 | |||||||||||||||
(1) | Represents Companys matching of 401(k) plan contributions made by executive officers. | |
(2) | Represents housing reimbursements made to Mr. Torino. |
Compensation of Directors
Following the closing of the Transaction in 2006, we did not pay our directors, Gregory S.
Daily and Carl. A. Grimstad, any compensation for their service as directors. We continued this
policy in 2007, 2008, and 2009.
Compensation Committee Interlocks and Insider Participation
As a private company, we do not have a compensation committee. Our board of directors, which is
currently composed of Mr. Daily and Mr. Grimstad, in consultation with the other executive
officers, establishes policies and makes decisions regarding compensation of directors and
executive officers.
Compensation Committee Report
Our board of directors has reviewed and discussed with our management the Compensation Discussion
and Analysis set forth above.
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Based on the review and discussion, our board of directors has
recommended that the Compensation Discussion and Analysis be included in this Form 10-K for the
year ended December 31, 2009.
By the board of directors:
Gregory S. Daily
Carl A. Grimstad
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Gregory S. Daily
In February 2001, we entered into an employment agreement with Gregory S. Daily, our Chairman
of the Board and Chief Executive Officer. The employment agreement was originally for one year,
with successive one-year terms unless either party provides written notice to the other party
ninety days prior to the expiration of the term. In connection with the execution of his employment
agreement with us, Mr. Daily purchased 156,161 shares of our common stock in April 2001 at a price
of $0.02 per share. Pursuant to the terms of his employment agreement, Mr. Daily was initially
entitled to an annual salary of $12,000, plus a bonus, as determined by the board of directors in
its sole discretion, based on Mr. Dailys performance, our business and financial condition and the
operating results achieved. Commencing in 2004, our compensation committee approved an increase in
Mr. Dailys base salary to $300,000. From July 1, 2006 through May 15, 2009, he elected to draw no
annual salary. Beginning May 16, 2010, Mr. Daily resumed drawing his annual salary of $300,000.
In addition, Mr. Daily is entitled to receive those employee benefits generally provided to our
executive employees.
On November 10, 2008, Mr. Daily provided us with notice of his intention to not renew his
employment agreement with us. Accordingly, Mr. Dailys employment agreement terminated on February
25, 2009 pursuant to its terms. Following the termination of his employment agreement, Mr. Daily
intends to continue to serve as our Chief Executive Officer, pursuant to at-will employment
arrangements, the terms of which remain subject to negotiation.
Carl A. Grimstad
In February 2001, we entered into an employment agreement with Carl A. Grimstad, our
President. The employment agreement was originally for one year, with successive one-year terms
unless either party provides written notice to the other party ninety days prior to the expiration
of the term. In connection with the execution of his employment agreement, Mr. Grimstad purchased
147,601 shares of our common stock in April 2001 at a price of $0.02 per share. Pursuant to the
terms of his employment agreement, Mr. Grimstad was initially entitled to an annual salary of
$180,000, plus a bonus, as determined by the board of directors in its sole discretion, based on
Mr. Grimstads performance, our business and financial condition and the operating results
achieved. Our compensation committee approved an increase in Mr. Grimstads base salary to $300,000
in 2005. In addition, Mr. Grimstad is entitled to receive those employee benefits generally
provided to our executive employees.
On November 10, 2008, Mr. Grimstad provided us with notice of his intention to not renew his
employment agreement with us. Accordingly, Mr. Grimstads employment agreement terminated on
February 25, 2009 pursuant to its terms. Following the termination of his employment agreement,
Mr. Grimstad intends to continue to serve as our President, pursuant to at-will employment
arrangements, the terms of which remain subject to negotiation.
Clay M. Whitson
In June 2002, we entered into an employment agreement with Clay M. Whitson, our Chief
Financial Officer and Treasurer. The employment agreement was originally for one year with
successive one-month terms beginning each month after September 3, 2003. Under the agreement, Mr.
Whitson is entitled to an annual base salary (currently $296,000), to be reviewed annually by the
board of directors , plus a bonus of (a) up to 50% of his base salary for achieving performance
criteria established by the board of directors or (b) a pro rata portion of such bonus which is
greater or less than the amount in clause (a) based on Mr. Whitsons performance, our business and
financial condition and the operating results achieved. If a change of control (as defined therein)
occurs and Mr. Whitsons employment agreement is not terminated, Mr. Whitsons bonus must be at
least the highest bonus determined by the board of directors (whether or not paid to him prior to
the change of control) during any of the three fiscal years preceding such change of control. Mr.
Whitson will also receive those employee benefits generally provided to our executive employees.
We may terminate Mr. Whitsons employment agreement without cause. If Mr. Whitson is
terminated without cause prior to a change of control, he will be entitled to his then existing
base salary and bonus for the entire period remaining on the term of his employment agreement. Mr.
Whitson may terminate the employment agreement without cause, whereby he will be entitled to a
pro-rata amount of his base salary and bonus for the portion of the term of his employment
agreement completed on the date of termination. Mr. Whitson may also terminate the employment
agreement for cause following a change in control.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
On May 10, 2006, Holdings acquired all of our issued and outstanding common stock. Holdings is
a wholly-owned subsidiary of iPayment Investors. The general partner of iPayment Investors is
iPayment GP, LLC (GP). Under the limited partnership agreement of iPayment Investors, GP is
granted full authority to act on behalf of iPayment Investors and the limited partners of iPayment
Investors may not participate in management of iPayment Investors or vote for the election, removal
or replacement of GP. The board of directors of GP is comprised of Gregory S. Daily and Carl A.
Grimstad and any action by the board requires the vote of
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both directors. As a result, Messrs. Daily and Grimstad may be deemed to share beneficial
ownership of all of our outstanding shares. Messrs. Daily and Grimstad disclaim beneficial
ownership of such shares except to the extent of their respective pecuniary interests therein. Mr.
Dailys indirect percentage interest in us is 65.8% (including shares held in trust for the benefit
of certain family members of Mr. Daily) and Mr. Grimstads indirect percentage interest in us is
34.2% (including shares held by certain members of Mr. Grimstads immediate family). None of our
other executive officers beneficially own any of our shares.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
In the ordinary course of business, the Company and its subsidiaries from time to time engage
in transactions with other corporations or financial institutions whose officers or directors are
also directors or officers of the Company or a subsidiary. Transactions with such corporations and
financial institutions are conducted on an arms-length basis and may not come to the attention of
the directors or officers of the Company or of the other corporations or financial institutions
involved. The board of directors of the Company does not consider that any such transactions would
interfere with the exercise of independent judgment in carrying out the responsibilities of a
director and the board of directors of the Company is not currently aware of any related party
transactions other than those set forth below.
During 2008, our shareholders repurchased $14.2 million of our senior subordinated notes.
These repurchases caused us to recognize cancellation of debt income for tax purposes for the year
ended December 31, 2008, which resulted in an increase to both our tax expense and our deferred tax
assets of $1.3 million. The deferred tax asset will be realized as an income tax benefit over the
remaining life of the senior subordinated notes. During 2009, we made adjustments that decreased
the cancellation of debt income, which reduced income tax expense and deferred taxes by $0.6
million.
At December 31, 2009, we have a receivable of $0.4 million due from our ultimate parent
company, iPayment Investors, LP, included in our Consolidated Balance Sheets within accounts
receivable.
The Company does not have securities listed on a national securities exchange or inter-dealer
quotation system with requirements that a majority of the board of directors be independent.
Accordingly, the Company is not subject to rules requiring certain of its directors to be
independent. The board of directors has determined that Messrs. Daily and Grimstad were not
independent under the listing standards of the Nasdaq Stock Market. However, if we were a listed
company, we believe we would be eligible for the controlled company exception set forth in Nasdaq
Listing Rule 5615(c) (if that were the exchange on which we were listed) from the rule that would
ordinarily require that a majority of a listed issuers board of directors be independent and from
certain other rules.
ITEM 14. Principal Accountant Fees and Services
We do not have an audit committee. As a result, our board of directors performs the duties of
an audit committee. Our board of directors evaluates and approves in advance the scope and cost of
the engagement of an auditor before the auditor renders audit and non-audit services. We do not
rely on pre-approval policies and procedures. The following table sets forth the aggregate fees
billed to iPayment, Inc. for the years ended December 31, 2009 and 2008, by Ernst & Young LLP:
2009 | 2008 | |||||||
Audit Fees |
$ | 430,000 | (a) | $ | 415,000 | (b) | ||
Audit Related Fees |
| | ||||||
Tax Fees |
176,000 | 146,000 | ||||||
All Other Fees |
| | ||||||
$ | 606,000 | $ | 561,000 | |||||
(a) | Comprised of fees for the fiscal 2009 financial statement audit and review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. | |
(b) | Comprised of fees for the fiscal 2008 financial statement audit and review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. |
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PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The Consolidated Financial Statements, together with the report thereon of Ernst & Young LLP
dated March 26, 2010, are included as part of Item 8, Financial Statements and Supplementary Data,
commencing on page 38, above. Schedule II Valuation and Qualifying Accounts is included
below. All other schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the respective financial statements or notes thereto.
Schedule II Valuation and Qualifying Accounts
iPayment, Inc.
iPayment, Inc.
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other | End of | |||||||||||||||||
Period | Expenses | Accounts | Deductions | Period | ||||||||||||||||
Year ended December 31, 2007 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 275,000 | $ | 638,000 | $ | | $ | 145,000 | (1) | $ | 768,000 | |||||||||
Valuation allowance on
deferred tax asset |
| | 223,000 | | 223,000 | |||||||||||||||
Reserve for merchant losses |
1,208,000 | 3,600,000 | | 3,788,000 | (2) | 1,020,000 | ||||||||||||||
Total |
$ | 1,483,000 | $ | 4,238,000 | $ | 223,000 | $ | 3,933,000 | $ | 2,011,000 | ||||||||||
Year ended December 31, 2008 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 768,000 | $ | 304,000 | $ | | $ | 74,000 | (1) | $ | 998,000 | |||||||||
Valuation allowance on
deferred tax asset |
223,000 | | 523,000 | | 746,000 | |||||||||||||||
Reserve for merchant advance losses |
| 4,283,000 | | 461,000 | (3) | 3,822,000 | ||||||||||||||
Reserve for merchant losses |
1,020,000 | 4,200,000 | | 3,901,000 | (2) | 1,319,000 | ||||||||||||||
Total |
$ | 2,011,000 | $ | 8,787,000 | $ | 523,000 | $ | 4,436,000 | $ | 6,885,000 | ||||||||||
Year ended December 31, 2009 |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 998,000 | $ | 704,000 | $ | | $ | 845,000 | (1) | $ | 857,000 | |||||||||
Valuation allowance on
deferred tax asset |
746,000 | | 73,000 | | 819,000 | |||||||||||||||
Reserve for merchant advance losses |
3,822,000 | 206,000 | | 3,501,000 | (3) | 527,000 | ||||||||||||||
Reserve for merchant losses |
1,319,000 | 4,900,000 | | 4,695,000 | (2) | 1,524,000 | ||||||||||||||
Total |
$ | 6,885,000 | $ | 5,810,000 | $ | 73,000 | $ | 9,041,000 | $ | 3,727,000 | ||||||||||
(1) | Write-off of previously reserved accounts receivables. | |
(2) | Write-off of previously reserved merchant losses. | |
(3) | Write-off of previously reserved merchant advances. |
2. Exhibits
Reference is made to the Exhibit Index beginning on page 61 hereof.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IPAYMENT INC. |
||||
By: | /s/ Gregory S. Daily | |||
Name: | Gregory S. Daily | |||
Title: | Chairman and Chief Executive Officer March 26, 2010 | |||
March 26, 2010 | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on March 26, 2010.
Signature | Title | |
/s/ Gregory S. Daily
|
Director | |
Gregory S. Daily |
||
/s/ Carl M. Grimstad
|
Director | |
Carl M. Grimstad |
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EXHIBIT INDEX
2.1 | Agreement and Plan of Merger, dated as of December 27, 2005, among iPayment Holdings, Inc., iPayment MergerCo, Inc. and iPayment, Inc., (incorporated by reference to Exhibit 2.1 of the Registrants Form 8-K for the period December 28, 2005). | |
2.2 | Guarantee, dated as of December 27, 2005, by Gregory S. Daily in favor of iPayment, Inc. (incorporated by reference to Exhibit 2.2 of the Registrants Form 8-K for the period December 28, 2005). | |
2.3 | Guarantee, dated as of December 27, 2005, by Carl A. Grimstad in favor of iPayment, Inc. (incorporated by reference to Exhibit 2.3 of the Registrants Form 8-K for the period December 28, 2005). | |
3.1 | 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 Registrants Form S-4 filed with the Commission on July 21, 2006). | |
3.2 | Bylaws of Merger Co., as adopted by iPayment, Inc. (incorporated by reference to Exhibit 3.2 of the Registrants Form S-4 filed with the Commission 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 Registrants Form S-4 filed with the Commission on July 21, 2006). | |
4.2 | 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 Registrants Form S-4 filed with the Commission on July 21, 2006). | |
4.3 | 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. (incorporated by reference to Exhibit 4.3 of the Registrants Form S-4 filed with the Commission on July 21, 2006). | |
4.4 | Form of Note (included as Exhibit A to Exhibit 4.1 hereto) (incorporated by reference to Exhibit 4.4 of the Registrants Form S-4 filed with the Commission on July 21, 2006). | |
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 Registrants Form S-4 filed with the Commission 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 Registrants Form S-4 filed with the Commission 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 Registrations Form S-4 filed with the Commission on July 21, 2006). | |
10.4 | Service Agreement, dated July 1, 2002, between First Data Merchant Services Corporation and iPayment Holdings, Inc. (incorporated by reference to Exhibit 10.16 of the Registration Statement on Form S-1 (File No. 333-101705) filed with the Commission on March 4, 2003). | |
10.5 | First Amendment to Service Agreement, dated October 25, 2002, between First Data Merchant Services Corporation and iPayment, Inc. (incorporated by reference to Exhibit 10.14 of the Registration Statement on Form S-1 (File No. 333-101705) filed with the Commission on December 6, 2002). |
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10.8 | Employment Agreement, effective September 3, 2002, between Clay M. Whitson and iPayment Holdings, Inc. (incorporated by reference to Exhibit 10.36 of the Registration Statement on Form S-1 (File No. 333-101705) filed with the Commission on December 6, 2002). | |
10.9 | Asset Purchase Agreement, dated December 27, 2004, between iPayment Inc., iPayment Acquisition Sub LLC, First Data Merchant Services Corporation and Unified Merchant Services (incorporated by reference to Exhibit 10.32 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.10 | Services Agreement, dated December 27, 2004, between iPayment, Inc. and First Data Merchant Services Corporation (incorporated by reference to Exhibit 10.33 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2004). | |
14.1 | Code of Ethics (incorporated by reference to Exhibit 14.1 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2003). | |
21.1 | Subsidiaries of the Registrant, filed herewith. | |
31.1 | Certification of Gregory S. Daily, 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 Clay M. Whitson, 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 Gregory S. Daily, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. | |
32.2 | Certification of Clay M. Whitson, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. |
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