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EX-32.2 - EX-32.2 - iPayment, Inc. | g25254exv32w2.htm |
EX-31.2 - EX-31.2 - iPayment, Inc. | g25254exv31w2.htm |
EX-32.1 - EX-32.1 - iPayment, Inc. | g25254exv32w1.htm |
EX-31.1 - EX-31.1 - iPayment, Inc. | g25254exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-50280
iPayment, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 62-1847043 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer 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
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 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
Title of each class | Shares Outstanding at November 12, 2010 | |
(Common stock, $0.01 par value) | 100 |
Table of Contents
Part 1.
Item 1. Financial Statements
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1 | $ | 2 | ||||
Accounts receivable, net of allowance for doubtful accounts of $867 and $857 at
September 30, 2010 and December 31, 2009, respectively |
23,190 | 25,077 | ||||||
Prepaid expenses and other current assets |
1,240 | 1,463 | ||||||
Deferred tax assets |
2,353 | 2,353 | ||||||
Total current assets |
26,784 | 28,895 | ||||||
Restricted cash |
657 | 680 | ||||||
Property and equipment, net |
4,919 | 4,673 | ||||||
Intangible assets and other, net of accumulated amortization of $167,430 and $138,789
at September 30, 2010 and December 31, 2009, respectively |
140,227 | 163,774 | ||||||
Goodwill |
527,978 | 527,978 | ||||||
Deferred tax assets, net |
6,149 | 8,219 | ||||||
Other assets, net |
11,307 | 11,147 | ||||||
Total
assets |
$ | 718,021 | $ | 745,366 | ||||
LIABILITIES and STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,253 | $ | 4,132 | ||||
Income taxes payable |
8,162 | 8,529 | ||||||
Accrued interest |
7,340 | 2,725 | ||||||
Accrued liabilities and other |
14,649 | 20,110 | ||||||
Total current liabilities |
32,404 | 35,496 | ||||||
Long-term debt |
616,430 | 651,519 | ||||||
Other liabilities |
5,849 | 15,213 | ||||||
Total liabilities |
654,683 | 702,228 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Equity |
||||||||
Common stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at September 30, 2010 and December 31, 2009 |
20,055 | 20,055 | ||||||
Accumulated other comprehensive loss, net of tax benefits of $1,347 and $4,984
at September 30, 2010 and December 31, 2009, respectively |
(2,022 | ) | (7,475 | ) | ||||
Retained earnings |
45,305 | 30,558 | ||||||
Total equity |
63,338 | 43,138 | ||||||
Total liabilities and equity |
$ | 718,021 | $ | 745,366 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
Three | Three | Nine | Nine | |||||||||||||
Months | Months | Months | Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues |
$ | 175,098 | $ | 182,716 | $ | 518,571 | $ | 543,513 | ||||||||
Operating expenses: |
||||||||||||||||
Interchange |
97,200 | 101,975 | 286,741 | 302,459 | ||||||||||||
Other costs of services |
54,069 | 56,151 | 160,270 | 173,262 | ||||||||||||
Selling, general and administrative |
3,766 | 5,145 | 10,157 | 14,105 | ||||||||||||
Total operating expenses |
155,035 | 163,271 | 457,168 | 489,826 | ||||||||||||
Income from operations |
20,063 | 19,445 | 61,403 | 53,687 | ||||||||||||
Other expense: |
||||||||||||||||
Interest expense, net |
11,477 | 11,559 | 34,296 | 34,909 | ||||||||||||
Other expense, net |
608 | 308 | 980 | 1,398 | ||||||||||||
Income before income taxes |
7,978 | 7,578 | 26,127 | 17,380 | ||||||||||||
Income tax provision |
2,761 | 2,833 | 10,380 | 6,428 | ||||||||||||
Net income |
5,217 | 4,745 | 15,747 | 10,952 | ||||||||||||
Less: Net income attributable to
noncontrolling interests |
| (1,004 | ) | | (3,196 | ) | ||||||||||
Net income attributable to iPayment, Inc. |
$ | 5,217 | $ | 3,741 | $ | 15,747 | $ | 7,756 | ||||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 15,747 | $ | 10,952 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities |
||||||||
Depreciation and amortization |
30,476 | 34,897 | ||||||
Noncash interest expense |
1,938 | 1,938 | ||||||
Loss on disposal of property and equipment |
278 | | ||||||
Changes in assets and liabilities, excluding effects of acquisitions: |
||||||||
Accounts receivable |
1,887 | 1,746 | ||||||
Prepaid expenses and other current assets |
223 | 476 | ||||||
Other assets |
(3,822 | ) | 104 | |||||
Accounts payable and income taxes payable |
(2,246 | ) | (4,979 | ) | ||||
Accrued interest |
4,615 | 4,384 | ||||||
Accrued liabilities and other |
(5,736 | ) | (2,460 | ) | ||||
Net cash provided by operating activities |
43,360 | 47,058 | ||||||
Cash flows from investing activities |
||||||||
Change in restricted cash |
23 | (29 | ) | |||||
Expenditures for property and equipment |
(2,169 | ) | (969 | ) | ||||
Investment in merchant advances, net |
| 4,149 | ||||||
Acquisitions of businesses & portfolios, net of cash acquired |
| (338 | ) | |||||
Payments related to businesses previously acquired |
| (2,734 | ) | |||||
Payments for prepaid residual expenses |
(4,865 | ) | (3,386 | ) | ||||
Net cash used in investing activities |
(7,011 | ) | (3,307 | ) | ||||
Cash flows from financing activities |
||||||||
Net (repayments) borrowings on line of credit |
(10,850 | ) | 3,200 | |||||
Repayments of debt |
(24,500 | ) | (47,000 | ) | ||||
Dividends paid to parent company |
(1,000 | ) | | |||||
Distributions to noncontrolling interest in equity of consolidated subsidiary |
| (2,640 | ) | |||||
Net cash used in financing activities |
(36,350 | ) | (46,440 | ) | ||||
Net decrease in cash and cash equivalents |
(1 | ) | (2,689 | ) | ||||
Cash and cash equivalents, beginning of period |
2 | 3,589 | ||||||
Cash and cash equivalents, end of period |
$ | 1 | $ | 900 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for income taxes |
$ | 11,897 | $ | 11,538 | ||||
Cash paid during the period for interest |
$ | 27,743 | $ | 28,587 |
See accompanying notes to consolidated financial statements.
5
Table of Contents
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 in 2001 and was reincorporated in Delaware under the name iPayment, Inc. in 2002.
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 its 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 September 30, 2010. The terms of our
long-term debt contain various nonfinancial and financial covenants as further described in Note 4.
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 immediately 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 immediately due and payable. Our debt-to-EBITDA ratio (described in Note 4)
was 5.14 to 1.00 as of September 30, 2010, compared to the allowed maximum of 5.25 to 1.00 as of
September 30, 2010. While we believe we will continue to meet our debt covenants in the
foreseeable future, including for the year ending December 31, 2010, our debt-to-EBITDA ratio is
currently expected to remain close to the allowed maximum throughout
2010. Our required debt-to-EBITDA ratio will be 4.75 to 1.00 at
December 31, 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 could become noncompliant with certain of 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) and reflect all adjustments,
which are of a normal and recurring nature, that are, in the opinion of management, necessary for a
fair presentation of results. All significant intercompany transactions and balances have been
eliminated in consolidation. We consolidate our majority-owned subsidiaries and reflect the
minority interest of the portion of the entities that we do not own as Noncontrolling interest on
our Consolidated Balance Sheets. Our equity interest in Central Payment Co., LLC (CPC) was sold
in the fourth quarter of 2009. Accordingly, we have no noncontrolling interest at September 30,
2010 and December 31, 2009.
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 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
recognize discounts and other fees related to payment transactions at the time the merchants
transactions are processed. Related interchange and assessment costs are also recognized at that
time. 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, payment
card industry (PCI) compliance fees, and fees for other miscellaneous services, such as handling
chargebacks. We recognize revenues derived from transaction fees and service fees at the time the
transaction occurs or the service is performed.
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Table of Contents
Other Costs of Services
Other costs of services include costs directly attributable to our provision of payment
processing and related services to our
merchants such as residual payments to independent sales groups, which are commissions we pay
to these groups based upon a percentage of the net revenues we generate from their merchant
referrals, and assessment fees payable to card associations, which are a percentage of the
processing volume we generate from Visa and MasterCard. In addition, other costs of services
includes telecommunications costs, personnel costs, occupancy costs, losses due to merchant
defaults, other miscellaneous merchant supplies and service expenses, sponsorship costs and other
third-party processing costs.
Financial Instruments
ASC 820 Fair Value Measurement and Disclosures (formerly known as Statement of Financial
Accounting Standard (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 September 30, 2010, including
cash, restricted cash and accounts receivable 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
$193.2 million at September 30, 2010. We estimate the fair value to be approximately $176.0
million, considering executed trades occurring around September 30, 2010. The carrying value of
the senior secured credit facility is $423.1 million at September 30, 2010. We estimate the fair
value to be approximately $400.9 million, considering executed trades occurring around September
30, 2010. The fair value of the Companys senior subordinated notes and senior secured credit
facility are estimated using direct and indirect observable market information and are classified
within Level 2 of the fair value hierarchy, as defined by ASC 820. The Company is contractually
obligated to repay its borrowings in full and the Company does not believe the creditors under its
borrowing arrangements are willing to settle these instruments with the Company at their estimated
fair values indicated herein.
Derivative Financial Instruments
We use certain variable rate debt instruments to finance our operations. These debt
obligations expose us 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. To meet certain requirements of our credit agreements, we enter
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, we receive variable interest rate payments and make fixed interest rate payments, thereby
effectively creating fixed-rate debt. We enter into derivative instruments solely for cash flow
hedging purposes, and we do 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 September 30,
2010 was a liability of $3.4 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. The change in the fair value of the
derivatives from December 31, 2009 to September 30, 2010 was $9.1 million, and is reported net of
tax expense of $3.6 million in accumulated other comprehensive loss in our Consolidated Balance
Sheets.
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Table of Contents
Amortization of Intangible Assets
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, the actual costs of revenues differ from the expected
costs of revenues, we will adjust amortization expense accordingly. Historically, we have
experienced an average monthly volume attrition of approximately 1.0% to 3.0% of our total charge
volume.
We use an accelerated method of amortization over a 15-year period for purchased merchant
processing portfolios. We believe that this method of amortization 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 estimated lives of 3 to 7 years. For the three
and nine months ended September 30, 2010, amortization expense related to our merchant processing
portfolios and other intangible assets was $9.1 million and $28.8 million, respectively. For the
three and nine months ended September 30, 2009, amortization expense related to our merchant
processing portfolios and other intangible assets was $10.2 million and $33.3 million,
respectively.
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 has occurred 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 compared to 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 better approximates 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 first two quarters of 2009 on some of
our portfolios. Accordingly, we recorded an increase to amortization expense of $2.1 million to
better approximate the distribution of actual cash flows generated by the merchant processing
portfolios, which was reflected in amortization expense for the nine months ended September 30,
2009. There were no unfavorable trends identified in the attrition rates used for the three months
ended September 30, 2009 or 2010, nor for the nine months ended September 30, 2010. Consequently,
there were no related increases to amortization expense for the three and nine months ended
September 30, 2010.
Common Stock
As a result of the Transaction (discussed above), the Company has 100 shares of common stock
outstanding at September 30, 2010. We have elected not to present earnings per share data as
management believes such presentation would not be meaningful.
(2) Acquisitions
In November 2009, we entered into a Purchase and Sale Agreement with 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.
There were no acquisitions of businesses during 2010 or 2009 that were significant enough to
require pro forma disclosure. Although the sale of our equity interest in CPC did not require pro
forma disclosure within our financial statements, the Company did provide supplemental financial
information within Note 14 of the Notes to the Consolidated Financial Statements in our Form 10-K
filed with the SEC on March 26, 2010. We provided pro forma quarterly financial information for
2009 presenting the sale of our equity interest in CPC as if the sale had occurred on January 1,
2009. Within the pro forma results for 2009, we also accounted for the merchant portfolio
acquisition made during the fourth quarter of 2009 as if the acquisition had occurred on January 1,
2009.
(3) Investments
Payments for Prepaid Residual Expenses
During the nine months ended September 30, 2010, we made payments totaling $4.9 million to
several independent sales groups in exchange for contract modifications which lower our obligations
for future payments of residuals. These payments have been assigned to intangible assets in the
accompanying Consolidated Balance Sheets and are amortized over their expected useful lives.
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Table of Contents
(4) Long-Term Debt
On May 10, 2006, in conjunction with the Transaction further described in Note 1, we replaced
our existing credit facility with a 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 substantially all of
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%), and 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%), in each case 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). We were in compliance with all such covenants as
of September 30, 2010. Our debt-to-EBITDA ratio was 5.14 to 1.00 as of September 30, 2010,
compared to the allowed maximum of 5.25 to 1.00 as of September 30, 2010. Our required
debt-to-EBITDA maximum ratio decreases periodically over the life of the senior secured credit
facility to a ratio of 4.00 to 1.00 at December 31, 2011. The required debt-to-EBITDA ratio will
be 4.75 to 1.00 at December 31, 2010. 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. Principal repayments on the term loans are 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 the quarter ended March 31, 2009, the Company paid its excess cash flow
sweep and prepaid its quarterly principal payments required by the senior secured credit facility
through the second quarter of 2010. Throughout the remainder of 2009, the Company prepaid the
remainder of its quarterly principal payments required by the senior secured credit facility.
Since that time, the Company has repaid an additional $37.4 million of debt principal beyond the
required quarterly principal payments. At September 30, 2010, we had outstanding $423.1 million
of term loans at a weighted average interest rate of 5.41% and $0.1 million outstanding under the
revolving credit facility at a weighted average interest rate of 4.50%. Outstanding principal
balances on the revolving credit facility are due when the revolving credit facility matures on May
10, 2012.
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 current applicable margin of 2.00%) over the entire term of the swaps. The
swap instruments qualify for hedge accounting treatment under ASC 815 Derivatives and Hedging
(see Note 1).
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
related to our senior subordinated notes as of
9
Table of Contents
September 30, 2010. We amended our senior secured
credit facility to allow for repurchases of our senior subordinated notes up to $10.0 million, and
have completed note repurchases under that amendment. At September 30, 2010, we had outstanding
$194.5 million of senior subordinated notes with $1.3 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 $2.9 million and net capitalized debt issuance costs related to the senior subordinated
notes totaling $3.9 million as of September 30, 2010. These costs are being amortized to interest
expense on a straight-line basis over the life of the related debt instruments, which is materially
consistent with amounts computed using an effective interest method. Amortization expense related
to the debt issuance costs was $0.6 million for each of the three month periods ended September 30,
2010 and 2009. Amortization expense related to the debt issuance costs was
$1.7 million for each of the nine month periods ended September 30, 2010 and 2009. Accrued
interest related to our debt was $7.3 million and $2.7 million at September 30, 2010 and December
31, 2009, respectively, and is included in Accrued liabilities and other on our Consolidated
Balance Sheets.
(5) 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. We have no single customer that represents 3% or more of revenues.
Substantially all revenues are generated in the United States.
(6) Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes (formerly known as SFAS
No. 109, Accounting for 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. 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 finanical reporting and for income tax
purposes.
Our effective income tax rate was 39.7% for the nine months ended September 30, 2010 compared
to 36.7% for the nine months ended September 30, 2009. Our income before income taxes in 2009
included 100% of earnings of our former joint venture, CPC, but our income tax expense does not
include any tax expense on the noncontrolling interests share of earnings of CPC. Consequently,
our effective tax rate increased as a result of our sale of our equity interest in CPC in the
fourth quarter of 2009.
During the first nine months of 2010 and 2009, we accrued less than $0.1 million of interest
related to our uncertain tax positions. As of September 30, 2010, our liabilities for unrecognized
tax benefits totaled $1.5 million and are included in other long-term liabilities in our
Consolidated Balance Sheets. 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 September 30, 2010 was $0.1 million.
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 prior to and through 2004.
At
September 30, 2010, we had approximately $1.6 million of federal net operating loss
carryforwards that will be available to offset regular taxable income through 2018, subject to
annual limitations of up to $0.2 million per year. We had state net operating loss carryforwards
of approximately $30.3 million as of September 30, 2010.
(7) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as net income (loss) 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. Comprehensive income for the three months ended September 30, 2009 and 2010 was
$0.8 million and $1.8 million, respectively. Changes in fair value, net of tax, on our swap
agreements amounted to $0.8 million and $1.8 million during the three months ended September 30,
2009 and 2010, respectively. The deferred tax expense was $0.6 million and $1.2 million for the
three months ended September 30, 2009 and 2010, respectively.
Comprehensive income for the nine months ended September 30, 2009 and 2010 was $3.2 million
and $5.5 million, respectively. Changes in fair value, net of tax, on our swap agreements amounted
to $3.2 million and $5.5 million during the nine months ended September 30, 2009 and 2010,
respectively. The deferred tax expense was $2.1 million and $3.6 million for the nine months ended
September 30, 2009 and 2010, respectively.
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(8) Commitments and Contingencies
Legal Proceedings
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.
(9) Recent Accounting Pronouncements
The Company did not adopt any new accounting pronouncements during 2010, nor are there
accounting pronouncements pending adoption that would have a significant effect on our financial
accounting and reporting. Please refer to our Annual Report for the year ended December 31, 2009,
filed on Form 10-K with the Securities and Exchange Commission on March 26, 2010, for all recent
accounting pronouncements adopted.
(10) Related Party Transactions
At September 30, 2010, we had a receivable of $0.2 million due from our parent company,
iPayment Investors, LP, included in our Consolidated Balance Sheets within Accounts receivable. In
August 2010, the Board of Directors of iPayment, Inc. declared a $1.0 million dividend to our
parent company, iPayment Investors, LP, to cover operating costs. The dividend was required by
iPayment Investors, LP to cover certain operating and legal costs, including reimbursement to the
Company of certain costs previously paid for by the Company on behalf of iPayment Investors, LP.
Subsequent to the dividend payment, iPayment Investors, LP settled $1.0 million of the
intercompany receivable outstanding at that time.
(11) Significant Developments
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 Chief Executive Officer, in connection with litigation over Mr.
Dailys beneficial ownership in us. 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 the verdict, Mr.
Daily filed for personal bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code in Nashville, Tennessee. On April 8, 2010, the bankruptcy court ordered the appointment of a
trustee to administer the estate of Mr. Daily.
(12) Subsequent Events
On November 4, 2010, we entered into an agreement to purchase a portfolio of approximately
8,400 merchant accounts from another merchant acquirer. This acquisition constituted a permitted
acquisition under our senior secured credit facility, and consideration included cash at closing
from our cash on hand and from our revolving credit facility. The effect of the portfolio acquisition will be included in our Consolidated Income
Statements beginning October 1, 2010 pursuant to the provisions of the Asset Purchase Agreement.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) |
Forward-Looking Statements May Prove Inaccurate
This report includes various forward-looking statements regarding the Company that are subject
to risks and uncertainties, including, without limitation, the factors set forth below and under
the caption Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 26, 2010.
These factors could affect our future financial results and could cause actual results to differ
materially from those expressed in forward-looking statements contained or incorporated by
reference in this document. Forward-looking statements include, but are not limited to,
discussions regarding our operating strategy, growth strategy, acquisition strategy, cost savings
initiatives, industry, economic conditions, financial condition, debt compliance, liquidity and
capital resources and results of operations. Such statements include, but are not limited to,
statements preceded by, followed by or that otherwise include the words believes, expects,
anticipates, intends, estimates or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Executive Overview
We are a provider of credit and debit card-based payment processing services focused on small
merchants across the United States. During September 2010, we generated revenue from approximately
175,000 small merchants located across the United States. Of these merchants, approximately
130,000 utilized our transaction processing services during September 2010. 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 are non-employee, external sales organizations.
We outsource certain processing functions such as card authorization, data capture and merchant
accounting to third party processors such as First Data Merchant Services Corporation (FDMS) and
TSYS Acquiring Solutions, among others. 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, primarily in our main operating center in
Westlake Village, California.
Our strategy has been to increase profits by increasing our penetration of the expanding small
merchant marketplace for payment services. We find merchants primarily through our relationships
with independent sales groups and have made acquisitions on an opportunistic basis in the
fragmented small merchant segment of the industry. Charge volume decreased 4.2% to $17,111 million
for the nine months ended September 30, 2010 from $17,859 million for the nine months ended
September 30, 2009. Revenues decreased 4.6% to $518.6 million in the first nine months of 2010
from $543.5 million in the same period of the prior year. The decrease in revenues was largely due
to the deconsolidation of CPC after the sale of our equity interest in the fourth quarter of 2009.
Revenues declined 1.4% to $518.6 million in the first nine months of 2010 from $526.2 million for
the nine months ended September 30, 2009 when the revenues of CPC are removed and the financial
impact of the merchant portfolio acquisition made during the fourth quarter of 2009 is included as
if the acquisition had occurred on January 1, 2009. The remaining decrease in revenues was due to
lower charge volume associated with a diminished merchant base following the 2009 recession.
Income from operations increased 14.4% to $61.4 million for the nine months ended September 30,
2010 from $53.7 million for the nine months ended September 30, 2009. Income from operations
increased 15.8% to $61.4 million for the nine months ended September 30, 2010 from $53.0 million
for the nine months ended September 30, 2009 when the operating results of CPC were removed and the
financial impact of the merchant portfolio acquisition was included as if the acquisition had
occurred on January 1, 2009. Income from operations increased due to lower depreciation and
amortization expense and reductions in processing costs when the consolidated results of CPC are
removed and we include the merchant portfolio acquisition as if the acquisition had occurred on
January 1, 2009.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, 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. 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
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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
are presently in the process of performing our annual impairment review as of July 31, 2010. We
expect the review to be completed before year-end.
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 September 30, 2010, 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 compared to 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 nine months ended September 30, 2009 on
some of our portfolios. Accordingly, we recorded an increase to amortization expense of
approximately $2.1 million for the nine months ended September 30, 2009 to better approximate the
distribution of actual cash flows generated by the merchant processing portfolios. There were no
unfavorable trends of the attrition rates used during the three or the nine months ended September
30, 2009 and 2010.
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 recognize discounts and other fees related to payment
transactions at the time the merchants transactions are processed. Related interchange and
assessment costs are also recognized at that time. 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, payment card industry (PCI) compliance fees, and fees
for other miscellaneous services, such as handling chargebacks. We recognize revenues derived from
transaction fees and service fees at the time the transaction occurs or the service is performed.
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 type and processing volume and are recognized at the time
transactions are processed. Revenues generated from certain agent bank portfolios acquired from
FDMS (the FDMS Agent Bank Portfolio) are reported net of interchange, as required by EITF 99-19,
because 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.
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Other costs of services include costs directly attributable to processing and bank sponsorship
costs. 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 also 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, as well
as other general administrative expenses such as marketing expenses and 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 September 30, 2010
and December 31, 2009, our reserve for losses on merchant accounts included in accrued liabilities
and other totaled $1.4 million. 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 September 30, 2010 and December 31, 2009.
Noncontrolling Interest. We previously owned a 20% equity interest in a joint venture, Central
Payment Co, LLC (CPC). However, during the fourth quarter of 2009, we sold our 20% equity
interest in CPC for $4.3 million. The sale of our equity interest caused us to deconsolidate CPC
and to record a deferred gain of $2.8 million that will be recognized as income over a three-year
period. As of September 30, 2010, we had $0.9 million of short-term deferred gain within Accrued
liabilities and other and $1.0 million of long-term deferred gain within Other liabilities on our
Consolidated Balance Sheets. During the three and nine months ended September 30, 2010, we
recognized $0.2 million and $0.7 million of gain, respectively, within Other income on our
Consolidated Income Statements.
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. 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 interest.
Seasonality Trend
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
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Three months ended | %of Total | Three months ended | %of Total | Change | ||||||||||||||||||||
September 30, 2010 | Revenue | September 30, 2009 | Revenue | Amount | % | |||||||||||||||||||
Revenues |
$ | 175,098 | 100.0 | % | $ | 182,716 | 100.0 | % | $ | (7,618 | ) | (4.2 | ) | |||||||||||
Operating Expenses |
||||||||||||||||||||||||
Interchange |
97,200 | 55.5 | 101,975 | 55.8 | (4,775 | ) | (4.7 | ) | ||||||||||||||||
Other costs of services |
54,069 | 30.9 | 56,151 | 30.7 | (2,082 | ) | (3.7 | ) | ||||||||||||||||
Selling, general and
administrative |
3,766 | 2.2 | 5,145 | 2.8 | (1,379 | ) | (26.8 | ) | ||||||||||||||||
Total operating expenses |
155,035 | 88.5 | 163,271 | 89.4 | (8,236 | ) | (5.0 | ) | ||||||||||||||||
Income from operations |
20,063 | 11.5 | 19,445 | 10.6 | 618 | 3.2 | ||||||||||||||||||
Other expenses |
||||||||||||||||||||||||
Interest expense, net |
11,477 | 6.6 | 11,559 | 6.3 | (82 | ) | (0.7 | ) | ||||||||||||||||
Other expenses, net |
608 | 0.3 | 308 | 0.2 | 300 | 97.4 | ||||||||||||||||||
Total other expense |
12,085 | 6.9 | 11,867 | 6.5 | 218 | 1.8 | ||||||||||||||||||
Income before income taxes and earnings
attributable to noncontrolling interests |
7,978 | 4.6 | 7,578 | 4.1 | 400 | 5.3 | ||||||||||||||||||
Income tax provision |
2,761 | 1.6 | 2,833 | 1.6 | (72 | ) | 1.0 | |||||||||||||||||
Net Income |
5,217 | 3.0 | 4,745 | 2.6 | 472 | 9.9 | ||||||||||||||||||
Less: Net income attributable to
noncontrolling interests |
| | (1,004 | ) | (0.5 | ) | 1,004 | (100.00 | ) | |||||||||||||||
Net income income attributable to
iPayment, Inc. |
$ | 5,217 | 3.0 | $ | 3,741 | 2.0 | $ | 1,476 | 39.5 | |||||||||||||||
Revenues. Revenues decreased 4.2% to $175.1 million in the third quarter of 2010 from
$182.7 million during the same period in 2009. The decrease in revenues was largely due to the
deconsolidation of CPC after the sale of our equity interest in the fourth quarter of 2009.
Revenues decreased 0.4% to $175.1 million in the third quarter of 2010 from $175.8 million during
the same period in 2009 when the revenues of CPC are removed and the financial impact of the
merchant portfolio acquisition made during the fourth quarter of 2009 is included as if the
acquisition had occurred on January 1, 2009. Our merchant processing volume, which represents the
total value of transactions processed by us, declined 5.2% to $5,718 million during the third
quarter of 2010 from $6,030 million during the same period in 2009, due to a diminished merchant
base following the recession.
Interchange Expenses. Interchange expenses decreased 4.7% to $97.2 million in the third
quarter of 2010 from $102.0 million during the same period in 2009. Interchange expenses decreased
due to decreased charge volume and due to the deconsolidation of CPC after the sale of our equity
interest in the fourth quarter of 2009. Interchange expenses decreased 1.5% to $97.2 million in
the third quarter of 2010 from $98.6 million during the same period in 2009 when the interchange
expenses related to CPC are removed and we include the merchant portfolio acquisition made during
the fourth quarter of 2009 as if the acquisition had occurred on January 1, 2009.
Other Costs of Services. Other costs of services decreased 3.7% to $54.1 million in the third
quarter of 2010 from $56.2 million during the same period in 2009. The decline in Other costs of
services was due to the deconsolidation of CPC, decreases in depreciation and amortization expense
and processing costs, partially offset by increases in sales expenses and network fees.
Selling, General and Administrative. Selling, general and administrative expenses decreased
26.8% to $3.8 million in the third quarter of 2010 as compared to $5.1 million during the same
period in 2009. The decrease was due to reduced direct selling expenses resulting from the
disposition of our equity interest in CPC during the fourth quarter of 2009. Selling, general and
administrative expenses increased 27.0% to $3.8 million in the third quarter of 2010 as compared
to$3.0 million for the same period in 2009 without selling, general and administrative expenses
related to CPC. The increase was due to increased compensation expense in 2010.
Other Expense. Other expenses increased to $12.1 million in the third quarter of 2010 from
$11.9 million during the same period in 2009. Interest expense during the third quarter of 2010
decreased $0.1 million from the same period in 2009, reflecting lower funded debt and a lower
average interest rate. This decrease was offset by an increase in Other expense. Other expense
during the third quarter of 2010 increased $0.3 million from the same period in 2009, primarily due
to increased professional fees.
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Income Tax. Income tax expenses were $2.8 million in the third quarter of 2010 compared to a
$2.8 million during the same period in 2009. Our effective income tax rate was 34.6% for the third
quarter of 2010 compared to 37.3% for the same period in 2009. Due to our adoption of SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160), now included
in ASC 810, our income before income taxes in 2009 included 100% of earnings of our former joint
venture, CPC, but our income tax expense does not include any tax expense on the noncontrolling
interests share of earnings of CPC. Consequently, our effective tax rate increased as a result of
our sale of our equity interest in CPC in the fourth quarter of 2009. However, this increase was
offset by the reversals of accruals related to certain state tax disputes in the third quarter of
2010. Excluding these items, our effective income tax rate would have been 40.7% for the third
quarter of 2010.
Noncontrolling Interests. There was no net income attributable to noncontrolling interest in
the third quarter of 2010, following the sale of our interest in CPC during the fourth quarter of
2009. Net income attributable to noncontrolling interests during the third quarter of 2009 was
$1.0 million.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Nine months ended | %of Total | Nine months ended | %of Total | Change | ||||||||||||||||||||
September 30, 2010 | Revenue | September 30, 2009 | Revenue | Amount | % | |||||||||||||||||||
Revenues |
$ | 518,571 | 100.0 | % | $ | 543,513 | 100.0 | % | $ | (24,942 | ) | (4.6 | ) | |||||||||||
Operating Expenses |
||||||||||||||||||||||||
Interchange |
286,741 | 55.3 | 302,459 | 55.6 | (15,718 | ) | (5.2 | ) | ||||||||||||||||
Other costs of services |
160,270 | 30.9 | 173,263 | 31.9 | (12,993 | ) | (7.5 | ) | ||||||||||||||||
Selling, general and
administrative |
10,157 | 2.0 | 14,106 | 2.6 | (3,949 | ) | (28.0 | ) | ||||||||||||||||
Total operating expenses |
457,168 | 88.2 | 489,828 | 90.1 | (32,660 | ) | (6.7 | ) | ||||||||||||||||
Income from operations |
61,403 | 11.8 | 53,685 | 9.9 | 7,718 | 14.4 | ||||||||||||||||||
Other expenses |
||||||||||||||||||||||||
Interest expenses, net |
34,296 | 6.6 | 34,909 | 6.4 | (613 | ) | (1.8 | ) | ||||||||||||||||
Other expenses, net |
980 | 0.3 | 1,398 | 0.3 | (418 | ) | (29.9 | ) | ||||||||||||||||
Total other expenses |
35,276 | 6.8 | 36,307 | 6.7 | (1,031 | ) | (2.8 | ) | ||||||||||||||||
Income before income taxes |
26,127 | 5.0 | 17,378 | 3.2 | 8,749 | 50.3 | ||||||||||||||||||
Income tax provision |
10,380 | 2.0 | 6,428 | 1.2 | 3,952 | 61.5 | ||||||||||||||||||
Net Income |
15,747 | 3.0 | 10,950 | 2.0 | 4,797 | 43.8 | ||||||||||||||||||
Less: Net income attributable to
noncontrolling interests |
| | (3,196 | ) | (0.6 | ) | 3,196 | (100.00 | ) | |||||||||||||||
Net income attributable to iPayment, Inc. |
$ | 15,747 | 3.0 | $ | 7,754 | 1.4 | $ | 7,993 | 103.1 | |||||||||||||||
Revenues. Revenues decreased 4.6% to $518.6 million in the first nine months of 2010 from
$543.5 million during the same period in 2009. Revenues decreased 1.4% to $518.6 million in the
first nine months of 2010 from $526.2 million during the same period in 2009 when the revenues of
CPC are removed and the financial impact of the merchant portfolio acquisition made during the
fourth quarter of 2009 is included as if the acquisition had occurred on January 1, 2009. Our
merchant processing volume, which represents the total value of transactions processed by us,
declined 4.2% to $17,111 million during the first nine months of 2010 from $17,859 million during
the same period in 2009, due to a diminished merchant base following the recession.
Interchange Expenses. Interchange expenses decreased 5.2% to $286.7 million in the first nine
months of 2010 from $302.5 million during the same period in 2009. Interchange expenses decreased
due to decreased charge volume and due to the deconsolidation of CPC after the sale of our equity
interest in the fourth quarter of 2009. Interchange expenses decreased 2.7% to $286.7 million in
the first nine months of 2010 from $294.7 million during the same period in 2009 when the
interchange expenses related to CPC are removed and we include the merchant portfolio acquisition
made during the fourth quarter of 2009 as if the acquisition had occurred on January 1, 2009.
Other Costs of Services. Other costs of services decreased 7.5% to $160.3 million in the first
nine months of 2010 from $173.3 million during the same period in 2009, corresponding with lower
revenues. The decline in Other costs of services was due to the deconsolidation of CPC, decreases
in depreciation and amortization expense and processing costs, partially offset by increases in
sales
expenses and network fees.
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Selling, General and Administrative. Selling, general and administrative expenses decreased
28.0% to $10.2 million in the first nine months of 2010 compared to $14.1 million during the same
period in 2009. The decrease was due to reduced direct selling expenses resulting from the
disposition of our equity interest in CPC during the fourth quarter of 2009. Selling, general and
administrative expenses increased 11.0% to $10.2 million in the first nine months of 2010 compared
to $9.2 million without selling, general and administrative expenses related to CPC. The increase
was due to increased compensation expense in 2010.
Other Expenses. Other expenses decreased to $35.3 million in the first nine months of 2010
from $36.3 million during the same period in 2009. Interest expenses during the nine months ended
September 30, 2010 decreased $0.6 million from the same period in 2009, reflecting lower funded
debt and a lower average interest rate. Other expense during the nine months ended September 30,
2010 decreased $0.4 million from the same period in 2009, due to $0.7 million of other income
recognized related to the deferred gain from the sale of CPC, partially offset by increased
professional fees.
Income Tax. Income tax expenses increased to $10.4 million in the first nine months of 2010
from $6.4 million during the same period in 2009. The change was primarily due to an increase in
taxable income. Income tax expenses as a percentage of income before taxes was 39.7% during the
first nine months of 2010 as compared to 36.7% during the same period in 2009. Due to our adoption
of SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160),
now included in ASC 810, our income before income taxes in 2009 included 100% of earnings of our
former joint venture, CPC, but our income tax expense does not include any tax expense on the
noncontrolling interests share of earnings of CPC. Consequently, our effective tax rate increased
as a result of our sale of our equity interest in CPC in the fourth quarter of 2009.
Noncontrolling Interests. There was no net income attributable to noncontrolling interest in
the first nine months of 2010, following the sale of our interest in CPC during the fourth quarter
of 2009. Net income attributable to noncontrolling interests during the first nine months of 2009
was $3.2 million.
Liquidity and Capital Resources
As of September 30, 2010 and December 31, 2009, we had cash and cash equivalents of less than
$0.1 million. 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 $5.6 million as of September 30, 2010, compared to $6.6 million as of December 31, 2009.
The working capital increase consisted primarily of paydowns of accrued liabilities and other
of $5.5 million using cash flows from operations, a reduction in
income taxes payable of $0.4 million, and a reduction of accounts payable of $1.9 million,
partially offset by an increase in accrued interest of $4.6 million and a reduction in accounts
receivable of $1.9 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 September 30, 2010. The terms of our
long-term debt contain various nonfinancial and financial covenants as further described below. 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 immediately due and payable. We currently do not
have available cash and similar liquid resources available to repay all of our debt obligations if
they were to become immediately due and payable. Our debt-to-EBITDA ratio was 5.14 to 1.00 as of
September 30, 2010, compared to the allowed maximum of 5.25 to 1.00 as of September 30, 2010.
While we believe we will continue to meet our debt covenants in the foreseeable future, including
for the year ending December 31, 2010, our debt-to-EBITDA ratio is currently expected to remain
close to the allowed maximum throughout 2010. Our required debt-to-EBITDA ratio will be 4.75 to
1.00 at December 31, 2010. The recessionary environment and credit contraction 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. These trends moderated in 2010. There is, however, a risk
that we may experience these negative trends in the future, 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 $43.3 million during the first nine months of
2010, consisting of net income of $15.7 million adjusted by depreciation and amortization of $30.5
million, non-cash interest expense of $1.9 million, non-cash loss on
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disposal of property and equipment of $0.3 million, and a net unfavorable change in operating
assets and liabilities of $5.1 million. The net unfavorable change in operating assets and
liabilities was primarily caused by decreases in accrued liabilities and other composed primarily
of payments of accrued bonuses, decreases in accounts payable due to the seasonality of the timing
of payments and decreases in income taxes payable due to tax payments made in the first nine months
of 2010.
Net cash provided by operating activities was $47.1 million during the first nine months of
2009, consisting of net income of $11.0 million adjusted by depreciation and amortization of $34.9
million, non-cash interest expense of $1.9 million and a net unfavorable change in working capital
of $0.7 million due primarily to the net payment of the tax liability of $5.4 million.
Investing activities
Net cash used in investing activities was $7.0 million during the first nine months of 2010.
Net cash used in investing activities consisted of $4.9 million of payments for contract
modifications for prepaid residual expenses and $2.2 million of capital expenditures. We
currently have no material capital spending or purchase commitments, but expect to continue to
engage in capital spending in the ordinary course of business.
Net cash used in investing activities was $3.3 million during the first nine months of 2009.
Net cash used in investing activities consisted of a $4.1 million reduction in investments in
merchant advances, $2.7 million paid for earnout payments associated with acquisitions from a prior
period, $3.4 million of payments for contract modifications for prepaid residual expenses, $0.9
million of capital expenditures, and $0.3 million paid for the acquisition of a merchant portfolio.
The reduction in investments in merchant advances was due to the Companys decision to discontinue
making new advances under the program in the fourth quarter of 2008.
Financing activities
Net cash used in financing activities was $36.4 million during the first nine months of 2010,
consisting of $35.4 million of net repayments on our long-term debt and $1.0 of dividends paid to
our parent company, iPayment Investors, LP.
Net cash used in financing activities was $46.4 million during the first nine months of 2009,
primarily consisting of $47.0 million of net repayments on our long-term debt and $2.6 million of
distributions paid to the majority shareholders of our former joint venture, CPC, partially offset
by borrowings under our revolving credit facility of $3.2 million.
See Note 4 to the Consolidated Financial Statements for further detail on the Companys
long-term debt.
Contractual Obligations
The following table of our material contractual obligations as of September 30, 2010,
summarizes the aggregate effect that these obligations are expected to have on our cash flows in
the periods indicated. We currently have no contingent payments in connection with earnouts
related to completed acquisitions.
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Credit Facility |
$ | 423,188 | $ | | $ | 423,188 | $ | | $ | | ||||||||||
Senior Subordinated Notes |
194,500 | | | 194,500 | | |||||||||||||||
Interest (1) |
97,928 | 32,428 | 53,648 | 11,852 | | |||||||||||||||
Operating lease obligations |
8,926 | 1,347 | 2,128 | 1,783 | 3,668 | |||||||||||||||
Purchase obligations (2)(3)(4) |
10,713 | 5,860 | 4,853 | | | |||||||||||||||
Total contractual obligations |
$ | 735,255 | $ | 39,635 | $ | 483,817 | $ | 208,135 | $ | 3,668 | ||||||||||
(1) | Future interest obligations are calculated using current interest rates on existing debt balances as of September 30, 2010, and assume no principal reduction other than mandatory principal repayments in accordance with the terms of the debt instruments as described in Note 4 in our consolidated financial statements. | |
(2) | Purchase obligations represent costs of contractually guaranteed minimum processing volumes with certain of our third-party transactions processors and third-party service providers. | |
(3) | We are required to pay FDMS an annual processing fee through 2011 related to an FDMS Merchant Portfolio and |
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the FDMS Agent Bank Portfolio which fee will be at least $4.3 million in fiscal year 2010, and at least 70% of the amount of such fee paid to FDMS in 2010 in fiscal 2011. The minimum commitment for years after 2010, included in the table above, is based on the preceding year minimum amounts. The actual minimum commitments for such years may vary based on actual results in preceding years. | ||
(4) | We have agreed to utilize First Data to process at least 75% of our consolidated transaction sales volume in any calendar year through 2011. The minimum commitments for such years are not calculable as of September 30, 2010, 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 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.
Item 3. | Quantitative and Qualitative Disclosure 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 September 30,
2010, $423.1 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 that
expire on December 31, 2010. A rise in LIBOR rates of one percentage point would result in net
additional annual interest expense of $3.6 million.
We hold certain derivative financial instruments for the sole purpose 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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Evaluation of disclosure controls and procedures. An evaluation was conducted under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2010. Based on that evaluation, our principal
executive officer and principal financial officer have concluded that 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)) were effective as of such date to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosures.
Changes in internal control over financial reporting. There was no change in our
internal control over financial reporting during the first three fiscal quarters of 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
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) / and related case Truck Insurance
Exchange, v. E-Commerce Exchange, Inc.; et al, Superior Court of Orange County, State of
California, Civil Action No. 30-2010- 00340649 (the TIC Declaratory Action)
The Bruns lawsuit and the related declaratory judgment action filed by Truck Insurance
Exchange (TIC) against E-Commerce Exchange, Inc. (ECX) and Dana Bruns (individually and as
alleged class representative of all others similarly situated) (the TIC Declaratory Action) were
last updated in our Quarterly Report for the first quarter ended March 31, 2010, filed on Form 10-Q
with the Securities and Exchange Commission on May 12, 2010. Since we last reported on the TIC
Declaratory Action, a Case Management Conference was held on August 24, 2010. Following the Case
Management Conference, the Court set a trial date for May 16, 2011.
Although we currently intend to vigorously defend ourselves in the TIC Declaratory Action and
currently believe that we have meritorious defenses to the claims asserted, at this time the
ultimate outcome of the 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.
L. Green d/b/a Tisas Cakes v. Northern Leasing Systems, Inc., Online Data Corporation, and
iPayment, Inc.,, United States District Court, Eastern District of New York, Case No.
09CV05679-RJD-SMG.
This matter was last updated in our Quarterly Report for the second quarter ended June 30,
2010, filed on Form 10-Q with the Securities and Exchange Commission on August 13, 2010. As
previously reported, this matter relates to a purported class action lawsuit filed by plaintiff L.
Green d/b/a Tisas Cakes in December 2009 in the U.S. District Court for the Eastern District of
New York, naming us, Online Data Corporation (ODC) (one of our subsidiaries), and Northern
Leasing Systems, Inc. (NLS) as defendants (the Original Complaint). As we last reported, we
filed a motion to dismiss Counts One (violation of New York Consumer Protection Law Gen. Bus. Law §
349) and Two (unjust enrichment) of plaintiffs Original Complaint. Since we last reported on this
matter, on August 27, 2010 a Court conference was held regarding our motion to dismiss. At the
August 27, 2010 conference, the Court did not issue a ruling on our motion to dismiss nor did it
set a hearing date for our motion to dismiss. Shortly after the August 27, 2010 conference,
Plaintiff, on September 8, 2010, filed a First Amended Class Action Complaint (FAC). The FAC is
similar to the Original Complaint, but has two significant differences. First, it does not include
Northern Leasing Systems, Inc., as a defendant. Second, it does not include the New York Consumer
Protection claim that was initially included in the Original Complaint, and contains claims only
for unjust enrichment and for a declaratory judgment. On October 8, 2010, we filed a motion to
dismiss Count One (unjust enrichment) of plaintiffs FAC. Plaintiff filed its opposition to our
motion to dismiss on November 3, 2010, and our reply to Plaintiffs opposition is due on or before
November 19, 2010.
Although we currently intend to continue to vigorously defend ourselves and currently believe
that we have meritorious defenses to the claims asserted, at this time the ultimate outcome of the
lawsuit and our potential liability associated with the claims asserted against us cannot be
predicted with certainty, and there can be no assurance that we will be successful 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.
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 cases; 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 and
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 012624.
These related matters were last updated in our Quarterly Report for the second quarter ended
June 30, 2010, filed on Form 10-Q with the Securities and Exchange Commission on August 13, 2010.
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, and JPMorgan Chase Bank
(Chase) and a subsequent default judgment entered against us (and Vericomm), in the amount of
$359,700 (the North Carolina Judgment). Plaintiff assigned its North Carolina Judgment to
Judgment Recovery Group, LLC (JRG) who commenced an action in California state court for entry of
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sister state judgment, which it obtained on June 12, 2009, against Vericomm in the amount of
$93,500 and against the iPayment Defendants, jointly and severally, in the amount of $452,800 (the
California Amended Judgment). JRG subsequently commenced a
related action in California state court for entry of sister state judgment, as amended,
against Vericomm in the amount of $98,744 and against the iPayment Defendants, jointly and
severally, in the amount of $478,010, which the Court entered on May 13, 2010 (the May 2010
California Judgment). Since we last updated this matter, on September 15, 2010, we and JRG
executed formal settlement documents providing for the complete settlement of all claims of JRG
against the iPayment Defendants in the related subject litigation matters (the Subject
Litigation), including for any and all amounts payable or owed by the iPayment Defendants (but not
Vericomm) under the North Carolina Judgment, the California Amended Judgment and/or the May 2010
California Judgment (the Judgments), with full mutual releases between the iPayment Defendants
and JRG as to all claims and all matters in the Subject Litigation, and requiring JRG to file
Acknowledgments of Satisfaction of Judgment as to the iPayment Defendants for each and all of the
Judgments.
Accordingly, these related litigation matters are completely settled as between us (iPayment
and iPayment of Valencia) and JRG, and all claims against us in the Subject Litigation, including
the Judgments against us (iPayment and iPayment of Valencia), have been fully settled and
released. The terms of the settlement did 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 1A. | Risk Factors |
As further described in Note 11 to the Consolidated Financial Statements, a trustee has been
appointed to administer the estate of Mr. Daily, our Chairman and Chief Executive Officer, in
connection with his filing for personal bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. As was stated in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, the appointment of a trustee by the bankruptcy court could result in one
or more of the change of control events under our senior secured credit facility, 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. Current market conditions may make it particularly
difficult and expensive to obtain any such waiver or to refinance our existing 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.
Any new or changes made to laws, regulations, card network rules or other industry standards
affecting our business may have an unfavorable impact on our financial results.
We are subject to regulations that affect the electronic payments industry. Regulation
and proposed regulation of the payments industry has increased significantly in recent years.
Failure to comply with regulations may result in the suspension or revocation of a license or
registration, the limitation, suspension or termination of service, and the imposition of civil and
criminal penalties, including fines which could have an adverse effect on our financial condition.
We are subject to U.S. financial services regulations, a myriad of consumer protection laws,
escheat regulations, and privacy and information security regulations to name only a few. Changes
to legal rules and regulations, or interpretation or enforcement thereof, could have a negative
financial effect on the Company. We are also subject to the card network rules of Visa,
MasterCard, and of various other credit and debit networks. Furthermore, we are subject to the
Housing Assistance Tax Act of 2008, which requires information returns to be made for each calendar
year by merchant acquiring entities starting in 2011.
Interchange fees (which are typically paid by the acquirer to the issuer in connection with
transactions) are subject to increasingly intense legal, regulatory, and legislative scrutiny. In
particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
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Dodd-Frank Act),
which was signed into law in July 2010, significantly changes the U.S. financial regulatory system,
including restricting debit card fees paid by merchants to issuer banks and allowing merchants to
offer discounts for different payment methods. The impact of the Dodd-Frank Act on the Company is
difficult to estimate, in part because regulations need to be developed by the Federal Reserve
Board, with respect to interchange fees.
Regulatory actions such as these, even if not directed at us, may require us to make
significant efforts to change our products and may require that we change how we price our services
to customers. These regulations may adversely affect the Companys business or operations,
directly or indirectly.
Please see the additional risk factors set forth in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2009 for the various risks that could have a negative effect
on our business, financial position, cash flows and results of operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
Item 5. | Other Information |
None |
Item 6. | Exhibits |
The exhibits to this report are listed in the Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
iPayment, Inc. |
||||
Date: November 12, 2010 | By: | /s/ Gregory S. Daily | ||
Gregory S. Daily | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 12, 2010 | By: | /s/ Mark C. Monaco | ||
Mark C. Monaco | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. | Description | |
31.1
|
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a 14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002), filed herewith. | |
31.2
|
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a 14(a) (as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002), filed herewith. | |
32.1
|
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a 14(b) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith. | |
32.2
|
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a 14(b) and 18 U.S.C. 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith. |
25