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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes þ No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ (Note: The registrant, as a voluntary filer, is not subject to the filing
requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, but has been filing
all reports required to be filed by those sections for the preceding 12 months.)
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a Smaller reporting company) |
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Aggregate market value of registrants common stock held by non-affiliates of the registrant as of
June 30, 2010, was NONE. There is no trading market for the common stock of the Registrant.
Number of shares of the registrants common stock outstanding as of March 21, 2011, was 100.
Documents incorporated by reference: NONE
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Caution Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements about iPayment, Inc. within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. For example, statements in the future tense, words such as anticipates, estimates,
expects, intends, plans, believes, and other words and terms of similar substance used in
connection with any discussion of future results, performance or achievements identify such
forward-looking statements. Those forward-looking statements involve risks and uncertainties and
are not guarantees of future results, performance or achievements, and actual results, performance
or achievements could differ materially from the Companys current expectations as a result of
numerous factors, including those discussed in the Risk Factors section in Item 1A of this Form
10-K and elsewhere in this Form 10-K.
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially. These risks and
uncertainties include but are not limited to the following: merchant transaction volume; liability
for merchant chargebacks; violations of covenants governing the Companys indebtedness; weakening
consumer spending and a generally weak economy; actions taken by its bank sponsors; merchant
attrition; the Companys reliance on card payment processors and on independent sales groups
(ISGs); changes in interchange fees; changes in government regulations; risks associated with the
unauthorized disclosure of data; imposition of taxes on Internet transactions; actions by the
Companys competitors; and risks related to the integration of companies and merchant portfolios
the Company has acquired or may acquire. Any forward-looking statements contained in this Form
10-K reflect our current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of operations, growth
strategy and liquidity. We have no intention, and disclaim any obligation, to update or revise any
forward-looking statements, whether as a result of new information, future results or otherwise.
Readers should not place undue reliance on forward-looking statements, which reflect our view only
as of the date of this Form 10-K.
Throughout this document, the terms iPayment, the Company, we, us, our and similar
terms refer to iPayment, Inc., and, unless the context indicates otherwise, its consolidated
subsidiaries.
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PART I
ITEM 1. BUSINESS
General
We are a provider of credit and debit card-based payment processing services focused on small
merchants across the United States. During December 2010, we generated revenue from approximately
172,000 small merchants located across the United States. Of these merchants, approximately
133,000 were active merchants. We define a merchant as active if the merchant processes at least
one Visa or MasterCard transaction in a given month. The small merchants we serve have an average
charge volume of approximately $170,000 per year and typically have an average transaction value of
approximately $67. Small merchants, such as those served by the Company, have historically paid
higher fees per transaction than larger merchants because they are difficult to identify and
service, and their businesses are more likely to fail than larger merchants.
Our payment processing services enable 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. A
traditional card-present transaction occurs whenever a cardholder physically presents a credit or
debit card to a merchant at the point-of-sale. A card-not-present transaction occurs whenever the
customer does not physically present a payment card at the point-of-sale and may occur over the
Internet, mail, fax or telephone.
We believe our experience and knowledge in providing payment processing services to small
merchants gives us the ability to effectively evaluate and manage the payment processing needs and
risks that are unique to small businesses. In order to identify small merchants, we market and
sell our services primarily through independent sales groups, or ISGs, which are non-employee,
external sales organizations. We also sell our services through a direct sales force operating out
of one of our subsidiaries, CardPayment Solutions, LLC. Our relationships with the ISGs allow us
to access a large and experienced sales force with a local presence, providing access to small
merchants over a broad geographic area without incurring the additional overhead costs associated
with an internal sales force. ISGs and sales agents may market and sell our services to merchants
under their own brand name. We enable merchants to accept credit and debit cards as payment for
their merchandise and services by providing processing, risk management, fraud detection, merchant
assistance and support and chargeback services in connection with disputes with cardholders. In
addition, we rely on third-party processors to provide card authorization and data capture, and
banks to sponsor us for membership in the Visa and MasterCard associations and to settle
transactions with merchants. We believe that this structure allows us to maintain an efficient and
flexible operating structure, and enables us to easily expand our operations without significantly
increasing our fixed costs.
The Nilson Report, a publication specializing in consumer payment systems worldwide, listed us
in its 2009 ranking of the top bank card acquirers (or owners of merchant card processing
contracts) as one of the largest providers of card-based payment processing services in the United
States. Due to the challenging economic environment, our merchant processing volume, which
represents the total value of transactions processed by us, declined to $22.7 billion in 2010
compared to $23.5 billion in 2009. Corresponding to the decrease in charge volume, our revenues
also decreased. We currently expect this trend to moderate in 2011. We also believe our ability
to recruit and retain ISGs, combined with our experience in identifying, completing and integrating
acquisitions, provides us with significant opportunities for future growth in an economic recovery.
Historical Developments
In December 2004, we entered into an asset purchase agreement with First Data Merchant
Services Corporation (FDMS), a subsidiary of First Data Corporation, pursuant to which we
acquired a portfolio of merchant contracts (the FDMS Merchant Portfolio) from FDMS for a price of
$130.0 million in cash. The portfolio had over 25,000 small merchant accounts representing
approximately $9 to $10 billion in annual bankcard volume. The transaction strengthened our
existing strategic relationship with First Datas merchant services unit.
In connection with the transaction with FDMS, we also entered into service agreements (the
Service Agreements) with FDMS pursuant to which FDMS agreed to perform certain data processing
and related services with respect to the merchant contracts acquired through 2011. We are required
to pay FDMS an annual processing fee through 2011 related to the FDMS Merchant Portfolio and the
FDMS Bank Portfolio. The minimum fee for 2011 will be at least 70% of such fee paid to FDMS in
2010, or at least $3.8 million. We are also required to pay FDMS certain additional amounts in
accordance with the terms of the Service Agreements, including certain special fees for amounts
paid to third-party providers. We also have agreed to utilize FDMS to process at least 75% of our
consolidated transaction sales volume in any calendar year until December 31, 2011 and are required
to pay FDMS an amount representing the fees that it would have received if we had submitted the
required minimum number of
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transactions, which for 2010 was 15.1 million transactions. We do not currently expect that
we will be required to pay such additional fee based on our present business plan.
Industry Overview
The use of card-based forms of payment, such as credit and debit cards, by consumers in the
United States has generally increased steadily over the last ten years and is expected to continue
to increase. According to The Nilson Report, in 2009, merchant locations in the United States
generated approximately $3.3 trillion of total purchases by U.S. consumers using card-based systems
(excluding retail store cards). According to this report, total card-based purchases are expected
to grow to approximately $5.7 trillion by 2015, representing a compound annual growth rate of
approximately 11.6% from 2009 to 2015. The proliferation of credit and debit cards has made the
acceptance of card-based payment a necessity for businesses, both large and small, in order to
remain competitive.
We focus exclusively on the small merchant segment, which we believe generates a
disproportionate amount of the payment processing industrys net revenue.
Services
We provide a comprehensive solution for merchants accepting electronic and other payments,
including the various services described below:
Application Evaluation Underwriting. We recognize that there are varying degrees of risk
associated with different merchant types based on industry, the nature of their businesses,
processing volume and average transaction amounts. We apply varying levels of scrutiny in our
application evaluation and underwriting of prospective merchant accounts, ranging from basic due
diligence for merchants with a low risk profile to a more thorough and detailed review for higher
risk merchants. The results of this review serve as the basis for our decision whether to accept
or reject a merchant account and also provide the criteria for establishing reserve requirements,
processing limits, average transaction amounts and pricing. Once aggregated, these criteria also
assist us in monitoring transactions for those accounts when an account exceeds pre-determined
criteria.
Merchant Set-up and Training. After we establish a contract with a merchant, we create the
software configuration that is downloaded to the merchants payment card terminal or computer.
This configuration includes the merchant identification number, which allows the merchant to accept
Visa and MasterCard as well as debit cards and any other payment cards, such as American Express,
Discover and Diners Club, to the extent provided for in the contract. The configuration might also
accommodate check verification and gift and loyalty programs. If a merchant requires a pin-pad to
accept debit cards, the configuration allows for the terminal or computer to communicate with the
peripheral device. After the download has been completed, we conduct a training session on use of
the products.
Transaction Processing. A transaction begins with authorization of the customers credit or
debit card. The transaction data is captured by the processor and electronically transmitted to
the issuer of the card, which then determines the availability of credit or debit funds. The
issuer then communicates an approval decision back to the merchant. This process typically takes
less than five seconds. After the transaction is completed, the final transaction data is
transmitted to the card issuer for settlement of funds. Generally, we outsource these
authorization and capture services to third-party processors such as FDMS.
Risk Management/ Detection of Fraudulent Transactions. Our risk management staff relies on
the criteria set by our underwriting department to assist merchants in identifying and avoiding
fraudulent transactions by monitoring exceptions and providing access to other resources for fraud
detection. By employing these and other risk management procedures, we enable our merchants to
balance the risk of fraud against the loss of a valid transaction.
Merchant Service and Support. We provide merchants with ongoing service and support.
Customer service and support includes: answering billing questions, responding to requests for
supplies, resolving failed payment transactions, troubleshooting and repairing equipment, educating
merchants on general industry compliance, and assisting merchants with pricing changes and
purchases of additional products and services. We maintain a toll-free help-line staffed by our
customer service representatives. The information access and retrieval capabilities of our
proprietary decision support systems provide our customer service representatives prompt access to
merchant account information and customer call history. This data allows them to quickly respond
to customer inquiries relating to fees, charges and funding of accounts as well as technical
issues.
Chargeback Service. In the event of a billing dispute between a cardholder and a merchant, we
assist the merchant in investigating and resolving the dispute as quickly and as accurately as
possible. Before instructing the cardholders bank to debit the merchants account for the
chargeback, we provide the merchant with the opportunity to demonstrate that the transaction was
valid. If the merchant is unable to demonstrate that the transaction was valid and the dispute is
resolved in favor of the cardholder, the transaction is charged back to the merchant and
correspondingly credited to the cardholder. For the year ended December 31, 2010,
chargeback losses were approximately 1.5 basis points of our total charge volume.
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Merchant Reporting. We organize our merchants transaction data into various files for
merchant accounting purposes. We use this data to provide merchants with information, such as
charge volume, discounts, fees and funds held for reserves to help them track their account
activity. Merchants may access this archived information through our customer service
representatives or online through our Internet-based customer service system.
The transactions for which we provide processing services involve the following third parties:
Merchants. Merchants, who are our customers, are the businesses that accept payment cards,
including Visa and MasterCard, as payment for their merchandise and services.
Sponsoring Banks. Sponsoring banks are financial institutions that are Visa and MasterCard
card association members and provide the funds on behalf of the card user, enabling merchants to
accept payment cards.
Processing Vendors. Processing vendors, which may include banks, gather sales information from
merchants, obtain authorization for merchants transactions from card issuers, facilitate the
collection of funds from sponsoring banks for payment to merchants and provide merchant accounting
and settlement services on our behalf.
The following diagram illustrates a typical relationship among our Company and a merchant, a
processing vendor and a sponsoring bank:
We derive the majority of our revenues from fee income related to transaction processing,
which is primarily comprised of a percentage of the dollar amount of each transaction we process,
as well as a fixed fee per transaction. The percentage we charge varies upon several factors,
including the transaction amount, as well as whether the transaction process is a swipe transaction
or a non-swipe transaction. On average, the gross revenue we generate from processing transactions
equals approximately $3.00 for every $100 transaction we process, excluding costs and expenses. The
following diagram illustrates the portion of a typical transaction amount paid to the processing
bank, the Visa and MasterCard card associations and us:
An Example of a Typical $100 Transaction
Purchase Amount |
$ | 100.00 | ||
Less Cash to Merchant |
(97.00 | ) | ||
iPayment Gross Revenue |
$ | 3.00 | ||
Less: Interchange |
(1.75 | ) | ||
Less: Network dues and assessments and bank processing fees |
(0.21 | ) | ||
Average iPayment Net Settlement |
$ | 1.04 | ||
Less: Other Transaction Costs |
(0.61 | ) | ||
Average iPayment Processing Margin |
$ | 0.43 | ||
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Distribution of $3.00 Revenue
Visa and MasterCard card-based payment transactions represent approximately 80% of the total
card transaction volume generated by our merchant accounts.
Marketing and Sales
We market and sell our services to merchants throughout the United States primarily through a
network of ISGs, which are non-employee, external sales organizations with which we have
contractual relationships. These relationships are typically mutually non-exclusive, permitting us
to establish relationships with multiple ISGs and permitting our groups to enter into relationships
with other providers of payment processing services. We believe that this sales approach provides
us with access to an experienced sales force to market our services with limited investment in
sales infrastructure and management time. We believe our focus on the unique needs of small
merchants allows us to develop compelling offerings for our ISGs to bring to prospective merchants
and provides us with a competitive advantage in our target market. Among the services and
capabilities we provide are rapid application response time, merchant application acceptance by fax
or on-line submission, superior customer service and merchant reporting. In addition, we believe
we offer the ISGs more rapid and consistent review of merchant applications than may be available
from other service providers. Additionally, in certain circumstances, we offer our sales
organizations tailored compensation programs and unique technology applications to assist them in
the sales process. We keep an open dialogue with our ISGs to address their concerns as quickly as
possible and to work with them in investigating chargebacks or potentially suspicious activity with
the aim of ensuring our merchants do not unduly suffer downtime or the unnecessary withholding of
funds.
As compensation for their referral of merchant accounts, we pay our ISGs an agreed-upon
residual, or percentage of the processing income we derive from the transactions we process from
the merchants they refer to us. The amount of the residuals we pay to our ISGs varies on a
case-by-case basis and depends on several factors, including the number and type of merchants each
group refers to us. We provide additional incentives to our ISGs, including, from time to time,
loans that are secured by and repayable from future compensation that may be earned by the groups
in respect of the merchants they have referred to us. As of December 31, 2010, we had outstanding
loans to ISGs in an aggregate amount of $1.3 million. We may decide to loan additional amounts in
the future. We have a limit of $20.0 million on the amount of loans we may make to ISGs in
accordance with the terms of our senior secured credit facility. The notes representing these
loans bear interest in amounts ranging from 5% to 15% and are due through 2014. We secure the
loans by attaching the ISGs assets, including the rights they have to receive residuals and fees
generated by the merchants they refer to us, any other accounts receivable and, in certain cases,
by obtaining personal guarantees from the individuals who operate the ISGs.
Relationships with Sponsors and Processors
In order to provide payment processing services for Visa and MasterCard transactions, we must
be sponsored by a financial institution that is a principal member of the Visa and MasterCard card
associations. Additionally, we must be registered with Visa as an independent sales organization
and with MasterCard as a member service provider.
Sponsoring Banks. We have agreements with several banks that sponsor us for membership in the
Visa and MasterCard card associations and settle card transactions for our merchants. The
principal sponsoring bank through which we process the significant
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majority of our transactions is Wells Fargo. The initial term of our agreement with Wells
Fargo lasts through December 2014 and will thereafter automatically continue unless either party
provides the other at least six months notice of its intent to terminate. Typically, the
sponsoring banks may terminate their agreements with us if we materially breach the agreements and
do not cure the breach within an established cure period, if our membership with Visa or MasterCard
terminates, if we enter bankruptcy or file for bankruptcy, or if applicable laws or regulations,
including Visa and MasterCard regulations, change to prevent either the applicable bank or us from
performing its services under the agreement. The agreements generally define a material breach as
a failure to perform a material obligation under the agreement, specifically any breach of any
warranty, representation or covenant or condition or term of the agreement, such as noncompliance
with applicable laws, failure to provide relevant documentation as to certain account related data,
failure to provide a marketing plan upon request, failure to maintain a transfer account or failure
to pay for services. From time to time, we may enter into agreements with additional banks. If
these sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able
to process bankcard transactions. Furthermore, our agreements with our sponsoring banks, including
our agreement with Wells Fargo, provide the sponsoring banks with substantial discretion in
approving certain elements of our business practices, including our solicitation, application and
qualification procedures for merchants, the terms of our agreements with merchants, the processing
fees that we charge, our customer service levels and our use of ISGs. We cannot guarantee that our
sponsoring banks actions under these agreements will not be detrimental to us, nor can we
guarantee that any of our sponsoring banks will not terminate their sponsorship of us in the future
or seek to modify their agreement with us in a manner that may adversely affect our ability to
process bankcard transactions or otherwise operate our business.
Processing Vendors. We have agreements with several processing vendors to provide us with, on
a non-exclusive basis, transaction processing and transmittal, transaction authorization and data
capture, and access to various reporting tools. Our primary processing vendor is FDMS. Under our
service contracts with FDMS, we have undertaken to process 75% of our annual transactions through
FDMS. If we process less than the minimum number of transactions, we are required to pay FDMS the
fees that it would have received if we had submitted the required
minimum number of transactions. Each of the FDMS agreements may be terminated by FDMS if, among other
things, (i) we fail to comply with certain requirements of the agreements
(including, but not limited to, failing to pay any amount due under the agreements)
and we do not cure such failure within 30 days after receipt of written notice of
such failure, (ii) certain insolvency events occur with respect to us, (iii) we fail to
maintain our good standing in the Visa or MasterCard associations or (iv) FDMS
terminates all of our customer accounts pursuant to the agreements. We may
terminate each of the agreements if, among other things, (i) certain insolvency
events occur with respect to FDMS, (ii) FDMS materially breaches any of the
terms, covenants or conditions of the agreements and fails to cure such breach
within 30 days following receipt of written notice thereof, or (iii) under certain
circumstances, FDMS is unable to perform interchange settlement services.
Our Merchant Base
We serve a diverse portfolio of small merchants. As of December 31, 2010, we provided
processing services to approximately 133,000 active small merchants located across the United
States engaged in a wide variety of businesses. We define a merchant as active if the merchant
processes at least one Visa or MasterCard transaction in a given month.
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Primary Merchant Categories Based on Our Historical Charge Volume
No single merchant accounted for more than 1% of our aggregate transaction volume for 2010.
We believe that this merchant diversification makes us less sensitive to shifting economic
conditions in the industries or regions in which our merchants operate. We believe that the loss
of any single merchant would not have a material adverse effect on our financial condition or
results of operations.
Generally, our agreements with merchants are for one to three years and automatically renew
for additional one year periods unless otherwise terminated. Our sponsoring banks are also a party
to these agreements. The merchants are obligated to pay for all chargebacks, fines, assessments,
and fees associated with their merchant account, and in some cases, annual fees and other fees,
including early termination fees. Generally, the sponsoring bank may terminate its agreement with
a merchant for any reason on 30 days notice and immediately upon a breach by the merchant of any of
its terms. The merchant may terminate such agreement on 30 days notice, subject to the payment of
any applicable early termination fees. Generally, the agreement may not be assigned by the
merchant without the prior written consent of the sponsoring bank.
Merchant attrition is expected in the payment processing industry in the ordinary course of
business; however, we believe the low average transaction volume of the merchants whose accounts we
service makes them less likely to change providers because of the inconvenience associated with a
transfer. During 2010, we experienced monthly volume attrition ranging from 1.0% to 2.0% of our
total annual charge volume on our various merchant portfolios. Declining merchant charge volume due
to weak general economic conditions may increase attrition. The primary cause of our attrition is
small business customers that ultimately fail. Small businesses typically fail at a greater rate
than larger established businesses.
We believe that we have extensive experience and resources which allow us to assess the risks
associated with providing payment processing services to small merchants. These risks include the
limited operating history of many of the small merchants we serve and the risk that these merchants
are typically subject to a higher rate of insolvency, which could adversely affect us financially.
Risk Management
As a result of our exposure to potential liability for merchant fraud, chargebacks, and other
losses created by our merchant services business, we view our risk management practices as integral
to our operations and overall success.
As of December 31, 2010, we had a staff of 33 employees dedicated to risk management
operations, which encompasses underwriting new accounts, monitoring and investigating merchant
account activity for suspicious transactions or trends and avoiding or recovering losses.
Effective risk management helps us minimize merchant losses for the mutual benefit of our merchant
customers and ourselves. Our risk management procedures also help protect us from fraud perpetrated
by our merchants. We believe our knowledge and experience in dealing with attempted fraud,
established as a result of our managements extensive experience with higher risk market segments,
has resulted in our development and implementation of highly effective risk management and fraud
prevention systems and procedures.
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We employ the following systems and procedures to minimize our exposure to merchant fraud and
transaction-based fraud:
Underwriting. Our sales agents send new applications to our underwriting department for their
review and screening. All of our underwriters have previous industry underwriting experience and
have the authority to render judgment on new applications. Our underwriters also take additional
actions such as adjusting aggregate processing and average charge per transaction limits, or
establishing reserve requirements for new and existing merchants, as they deem appropriate. We
obtain a personal guaranty from most of the owners of new merchants we enroll.
Proprietary Management Information Systems. Our proprietary systems automatically generate
credit reports on new applicants, categorize risk based on all of the information provided and
place the applications in a queue to be processed by our underwriting staff. The underwriting
staff can access all of the collected information on a merchant online in order to render a
decision on whether to approve or reject an application or whether to seek additional information.
Merchant Monitoring. We provide several levels of merchant account monitoring to help us
identify suspicious transactions and trends. Daily merchant activity is downloaded to our
iWorkflow system from our third-party processors such as FDMS and is sorted into a number of
customized reports by our proprietary systems. Our risk management team generates daily reports
that highlight all exceptions to the established daily merchant parameters such as average ticket
size, total processing volume or expected merchandise returns.
Risk Review Department. We have established an in-house risk review department that monitors
the sales activities of all of the merchants that we service. The risk review department conducts
background checks on these merchants, interviews merchants, anonymously purchases products and
services, reviews sales records and follows developments in risk management procedures and
technology.
Investigation and Loss Prevention. If a merchant exceeds any approved parameter as
established by our underwriting and/or risk management staff or violates regulations established by
the applicable card association or the terms of our agreement with the merchant, an investigator
will identify the incident and take appropriate action to reduce our exposure to loss, as well as
the exposure of our merchants. This action may include requesting additional transaction
information, withholding or diverting funds, verifying delivery of merchandise or even deactivating
the merchant account.
Reserves. Some of our merchants are required to post reserves (cash deposits) that are used
to offset chargebacks incurred. Our sponsoring banks hold such reserves related to our merchant
accounts as long as we are exposed to loss resulting from a merchants processing activity. In the
event that a small company finds it difficult to post a cash reserve upon opening an account with
us, we may build the reserve by retaining a percentage of each transaction the merchant performs
until the reserve is established. This solution permits the merchant to fund our reserve
requirements gradually as its business develops. As of December 31, 2010, our total reserve
deposits were approximately $41.5 million. We have no legal title to the cash accounts maintained
at the sponsor bank in order to cover potential chargeback and related losses under the applicable
merchant agreements. We also have no legal obligation to these merchants with respect to these
reserve accounts. Accordingly, we do not include these accounts and the corresponding obligation
to the merchants in our Consolidated Financial Statements.
If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor
of the merchant, the disputed transaction is charged back to the merchants bank and credited to
the account of the cardholder. After the chargeback occurs, we attempt to recover the chargeback
either directly from the merchant or from the merchants reserve account. If we or our sponsoring
banks are unable to collect the chargeback from the merchants account, or, if the merchant refuses
or is financially unable to reimburse the merchants bank for the chargeback, we bear the loss for
the amount of the refund paid to the cardholders bank.
Technology
In the course of our operations, we solicit, compile and maintain a large database of
information relating to our merchants and their transactions. We place significant emphasis on
providing a high level of security in order to protect the information of our merchants and their
customers. We have complied with Visa and Mastercards security standards for the last six years.
We have deployed the latest generation of network intrusion detection technology and system
monitoring appliances to enhance our level of protection.
Our internal network configuration provides multiple layers of security to isolate our
databases from unauthorized access and implements detailed security rules to limit access to all
critical systems. We cannot be sure that these security measures will be sufficient to prevent
unauthorized access to our internal network. Application components communicate using
sophisticated security protocols and are directly accessible by a limited number of employees on a
need-only basis. Our operation and customer support systems are primarily located at our
facilities in Westlake Village, California.
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We also rely on connections to the systems of our third-party processing providers. In all
cases, we install encrypted or tunneled communications circuits with backup connectivity to
withstand telecommunications problems.
Competition
The payment processing industry is highly competitive. We compete with other providers of
payment processing services on the basis of the following factors:
| quality and reliability of service; | ||
| ability to evaluate, undertake and manage risk; | ||
| ability to attract and retain sales organizations; | ||
| speed in approving merchant applications; and | ||
| cost to the customer. |
Many small and large companies compete with us in providing payment processing services and
related services to a wide range of merchants. There are a number of large transaction processors,
including FDMS, Bank of America, Chase Payment Solution, and
Elavon, Inc., that serve a broad market spectrum from large to small merchants and provide
banking, ATM and other payment-related services and systems in addition to card-based payment
processing. There are also a large number of smaller transaction processors that provide various
services to small and medium sized merchants. Many of our competitors have substantially greater
capital resources than we have and operate as subsidiaries of financial institutions or bank
holding companies, which may allow them on a consolidated basis to own and conduct depository and
other banking activities that we do not have the regulatory authority to own or conduct. This may
allow our competitors to offer more attractive pricing to our current and prospective merchants, or
other products or services that we do not offer. See Risk Factors The payment processing
industry is highly competitive and such competition is likely to increase, which may further
adversely influence our prices to merchants, and as a result, our profit margins.
We believe that our specific focus on smaller merchants, in addition to our understanding of
the needs and risks associated with providing payment processing services to small merchants and
ISGs, gives us a competitive advantage over larger competitors, which have a broader market
perspective and priorities. We also believe that we have a competitive advantage over competitors
of a similar or smaller size that may lack our extensive experience and resources.
Segment Information and Geographical Information
We consider our business activities to be in a single reporting segment as we realize greater
than 90% of our revenue and results of operations from one business segment representing processing
revenues and other fees from card-based payments. During 2010, 2009 and 2008, no single merchant
represented 3% or more of our revenues. All revenues are generated and all of our long-lived
assets are located in the United States. See Managements Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of the impact of seasonality on our business.
Our History
iPayment Technologies, Inc., (Technologies) was formed in 1992 as a California corporation.
In February 2001, we were formed by the majority stockholders of Technologies, as a Tennessee
corporation, under the name iPayment Holdings, Inc. as a holding company for Technologies and other
card processing businesses.
In August 2002, we were reincorporated in Delaware under the name iPayment, Inc. and in May
2003 we completed an initial public offering of 5,625,000 shares of common stock raising net
proceeds of approximately $75.6 million. Immediately prior to the offering, we effected a reverse
split of our outstanding common stock of 0.4627 shares for each share outstanding.
On May 10, 2006, pursuant to an Agreement and Plan of Merger dated as of December 27, 2005, by
and among two new entities, iPayment, Inc., MergerCo and iPayment Holdings, Inc., MergerCo was
merged with and into iPayment, Inc., with iPayment, Inc. remaining as the surviving corporation and
a wholly-owned subsidiary of iPayment Holdings, Inc. Holdings is a wholly-owned subsidiary of
iPayment Investors, which is a Delaware limited partnership formed by Gregory S. Daily, the
Chairman and Chief Executive Officer of iPayment, Carl A. Grimstad, the President of iPayment, and
certain parties related to them.
The total amount of consideration required to consummate the merger and the related
transactions was approximately $895.4 million, consisting of (1) approximately $800.0 million to
fund the payment of the merger consideration and payments in
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respect of the cancellation of
outstanding stock options, (2) approximately $70.0 million to repay certain existing indebtedness
of iPayment and (3) approximately $25.4 million to pay transaction fees and expenses. These funds
were obtained from equity and debt financings as follows:
| equity financing in an aggregate amount of $170.0 million provided through (1) the delivery of an aggregate of $166.6 million of iPayment common stock by Mr. Daily, on his own behalf and on behalf of certain related parties, and by Mr. Grimstad, on his own behalf and on behalf of certain related parties, and (2) approximately $3.4 million of cash provided by Mr. Daily; | ||
| a term loan of $515.0 million pursuant to a credit facility entered into between iPayment and a syndicate of lenders, which also included a $60.0 million revolving credit facility; | ||
| approximately $202.2 million raised through the private issuance by iPayment of senior subordinated notes; and | ||
| approximately $8.2 million funded by cash on hand and borrowings under the revolving credit facility described above. |
Employees
As of December 31, 2010, we and our wholly-owned subsidiaries employed 334 full-time
personnel, including 210 in operations, 72 in sales and administration, 33 in risk management, and
19 in information systems and technology employees. Many of our employees are highly skilled, and
we believe our future success will depend in large part on our ability to attract and retain
such employees. None of our employees are represented by a labor union, and we have
experienced no work stoppages. We believe that our employee relations are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and all amendments to those reports are available free of charge on our website at
www.ipaymentinc.com as soon as reasonably practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission (SEC).
ITEM 1A. RISK FACTORS
Risks Relating to our Indebtedness
Our substantial debt could adversely affect our financial condition and prevent us from fulfilling
our obligations to our debtholders.
As of December 31, 2010, we had consolidated debt of $625.0 million, $431.6 million of which
was senior indebtedness. Our substantial indebtedness could adversely affect our financial
condition and make it more difficult for us to satisfy our obligations with respect to the
debtholders. Our substantial indebtedness, any new indebtedness we may incur and the resulting
reduction in our available cash could also:
| increase our vulnerability to adverse general economic and industry conditions; | ||
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund investments, capital expenditures, working capital and for other general corporate purposes; | ||
| limit our ability to make required payments under our existing contractual commitments (see Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources); | ||
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | ||
| limit our ability to withstand competitive pressures; | ||
| place us at a competitive disadvantage compared to our competitors that have proportionately less debt than we have; | ||
| create a perception that we may not continue to support and develop certain products or services; |
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| increase our exposure to rising interest rates because a significant portion of our borrowings is at variable interest rates; and | ||
| limit our ability to borrow additional funds on terms that are satisfactory to us or at all. |
We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our
debt obligations will depend on our future financial performance which will be affected by a range
of economic, competitive, regulatory, legislative and business factors, many of which are outside
of our control. If we do not generate sufficient cash flow from operations to satisfy our debt
obligations, including interest payments and the payment of principal at maturity, we may have to
undertake alternative financing plans, such as refinancing or restructuring our debt, selling
assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot
be sure that any refinancing would be possible or that any assets could be sold on acceptable terms
or otherwise. Our inability to generate sufficient cash flow to satisfy our debt obligations, or
to refinance our obligations on commercially reasonable terms, would have an adverse effect on our
business, financial condition and results of operations, as well as on our ability to satisfy our
obligations under our senior secured credit facility and senior subordinated notes. Revolving and
term loans under the senior secured credit facility will mature in May of 2012 and 2013,
respectively, and our senior subordinated notes will mature in May of 2014. Any refinancing of our
debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations, and would depend upon the condition of the
finance and credit markets.
Despite our level of indebtedness, our current credit arrangements allow us to incur substantially
more debt. Incurring such debt
could further exacerbate the risks to our financial condition.
Although the indenture governing our senior subordinated notes and the credit agreement
governing our senior secured credit facility each contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a number of qualifications and
exceptions. The indebtedness incurred in compliance with these restrictions could be substantial.
For example, we are able to incur additional indebtedness if the fixed charge coverage ratio, as
defined in the indenture governing our senior subordinated notes is above 2 to 1 for the periods
set forth in the indenture, and, under certain circumstances, if the indebtedness is of a person
acquired by us and we did not incur the indebtedness in contemplation of the acquisition. In
addition, pursuant to the terms of the indenture governing our senior subordinated notes, we may
incur additional indebtedness in an aggregate principal amount at any time outstanding of at least
$50.0 million. As of December 31, 2010, we would have been able to borrow an additional $49.0
million under our senior secured credit facility, and we and the subsidiary guarantors may be able
to incur additional senior debt in the future, including under the senior secured credit facility.
To the extent new debt is added to our current debt levels, the risks we face related to our
substantial leverage would increase.
The indenture governing our senior subordinated notes and the credit agreement governing the senior
secured credit facility contain financial and other covenants that limit our flexibility and
prevent us from taking certain actions.
The indenture governing our senior subordinated notes and the credit agreement governing our
senior secured credit facility include a number of significant restrictive covenants. These
covenants could adversely affect us by limiting our ability to plan for or react to market
conditions, meet our capital needs and execute our business strategy. These covenants, among other
things, limit our ability and the ability of our restricted subsidiaries to:
| incur additional debt; | ||
| pay dividends on, redeem or repurchase capital stock; | ||
| issue capital stock of restricted subsidiaries; | ||
| make certain investments; | ||
| sell assets; | ||
| enter into certain types of transactions with affiliates; | ||
| engage in material unrelated businesses; | ||
| incur certain liens; and | ||
| consolidate, merge or sell all or substantially all of our assets. |
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In addition, the credit agreements restrictions on us and the subsidiary guarantors are
stricter than the indenture governing our senior subordinated notes. Examples of such restrictions
are as follows:
| The scope of permitted liens under the credit agreement is narrower than under the indenture. For example, the indenture permits us to incur liens to secure up to $5.0 million of additional permitted indebtedness, while the credit agreement permits us to incur liens to secure only up to $1.0 million of additional permitted indebtedness. | ||
| The credit agreement contains a general prohibition on restricted payments subject to certain exceptions, while the indenture permits us to make restricted payments up to an amount that is based, in part, on our cumulative consolidated net income since the date of the indenture. | ||
| The credit agreement generally prohibits the incurrence of additional indebtedness subject to certain exceptions, while the indenture permits us to incur additional indebtedness provided we maintain a fixed charge coverage ratio of 2:1. | ||
| The credit agreement requires us to maintain an agreed consolidated interest coverage ratio and consolidated leverage ratio at the end of each fiscal quarter. There is no comparable requirement in the indenture. | ||
| The credit agreement prohibits us from making dispositions of our property other than for cash and not in excess of $2.0 million in net book value in any fiscal year. The indenture does not prohibit such dispositions, but requires us to apply the net proceeds therefrom to repay senior debt, make certain investments or expenditures, and otherwise repay our senior subordinated notes. | ||
| The credit agreement prohibits us from prepaying our other debt, including our senior subordinated notes, while borrowings under our senior secured credit facility are outstanding. |
Our failure to comply with any of these covenants could result in an event of default, which,
if not cured or waived, could result in our being required to repay these borrowings before their
scheduled due date. If we were unable to make this repayment or otherwise refinance these
borrowings, the lenders under the senior secured credit facility could elect to declare all amounts
borrowed under the senior secured credit facility, together with accrued interest, to be due and
payable, which would be an event of default under the indenture governing our senior subordinated
notes. In addition, these lenders could foreclose on our assets. Any future refinancing of the
senior secured credit facility is likely to contain similar restrictive covenants and financial
tests.
Substantially all of our operations are conducted at the subsidiary level, which may materially
adversely affect our ability to service our indebtedness.
Our principal assets are the equity interests we hold, directly and indirectly, in our
subsidiaries. Our subsidiaries are legally distinct from us and have no obligation to pay amounts
due on our debt or to make funds available to us for such payment, other than through guarantees of
our debt. Because much of our operations are conducted through our subsidiaries, our ability to
service our indebtedness depends upon the earnings of our subsidiaries and the distribution of
those earnings, or upon loans or other payments of funds, by our subsidiaries to us. Although our
credit agreement governing our senior secured credit facility and the indenture that governs our
senior subordinated notes limit the ability of our subsidiaries to enter into covenant restrictions
on their ability to pay dividends and make other payments to us, these limitations are subject to a
number of significant qualifications. If our subsidiaries do not have sufficient earnings or
cannot distribute their earnings or other funds to us, our ability to service our indebtedness may
be materially adversely affected.
Our senior subordinated notes and the related guarantees are subordinated in right of payment to
all of our and the subsidiary guarantors existing and future senior debt, and are effectively
subordinated to all of our and the subsidiary guarantors existing and future secured debt.
Our senior subordinated notes and the related guarantees rank junior in right of payment to
all of our existing and future senior debt, including the borrowings under our senior secured
credit facility, and all existing creditors and future senior debt of our subsidiary guarantors,
respectively. As of December 31, 2010, we had approximately $431.6 million of debt that was senior
to our senior subordinated notes and $49.0 million of additional borrowing available under our
senior secured credit facility. We may also incur additional senior or secured debt in the future,
consistent with the terms of the indenture governing our senior subordinated notes and our other
debt agreements.
As a result of the subordination, upon any distribution to creditors in a bankruptcy,
liquidation or reorganization or similar proceeding, the holders of our senior debt or senior debt
of any of our subsidiary guarantors will be entitled to be paid in full before we or our subsidiary
guarantors make any payment on our senior subordinated notes or related guarantees. Holders of our
secured debt and the secured debt of any of our subsidiary guarantors similarly will have claims
that are prior to claims of holders of our
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senior subordinated notes to the extent of the value of
the assets securing such debt. The indenture governing the senior subordinated notes requires that
amounts otherwise payable to holders of the notes in a bankruptcy or similar proceeding be paid to
holders of senior debt instead. As a result, holders of our senior subordinated notes may receive
less, ratably, than other creditors. We cannot be sure that sufficient assets will remain after
making payments on our senior or secured debt to allow us to make any payments on our senior
subordinated notes.
We may not pay principal, premium, if any, interest or other amounts to the holders of our
senior subordinated notes in the event of a payment default or other defaults permitting the
acceleration of our designated senior indebtedness, including debt under the senior secured credit
facility, unless the designated senior indebtedness has been paid in full, the default has been
cured or, in the case of any such nonpayment defaults, a designated period of time has passed.
Fraudulent conveyance laws could void the guarantees of our senior subordinated notes.
Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a
guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other
debts of that guarantor if, among other things, the subsidiary guarantor, at the time it incurred
the indebtedness evidenced by its guarantee either (i) intended to hinder, delay or defraud any
present or future creditor; or (ii) received less than reasonably equivalent value or fair
consideration for the incurrence of the guarantee and (a) was insolvent or rendered insolvent by
reason of the incurrence of the guarantee; (b) was engaged in a business or transaction for which
the subsidiary guarantors remaining assets constituted unreasonably small capital; or (c) intended
to incur, or believed that it would incur, debts beyond its ability to pay such debts as they
mature.
Moreover, any payments made by a subsidiary guarantor pursuant to its guarantee could be
voided and required to be returned to the subsidiary guarantor, or to a fund for the benefit of the
creditors of the subsidiary guarantor. To the extent that any guarantee is voided as a fraudulent
conveyance, the claims of holders of our senior subordinated notes with respect to such guarantee
would be materially adversely affected.
In addition, a legal challenge of a guarantee on fraudulent transfer grounds will focus on,
among other things, the benefits, if any, realized by the relevant subsidiary guarantor as a result
of the issuance of our senior subordinated notes. The measures of insolvency for purposes of these
fraudulent transfer laws will vary depending upon the governing law. Generally, however, a
subsidiary guarantor would be considered insolvent if:
| the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or | ||
| the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or | ||
| it could not pay its debts as they become due. |
On the basis of historical financial information, recent operating history and other factors,
we believe that the subsidiary guarantees have been incurred for proper purposes and in good faith
and that each subsidiary guarantor, after giving effect to its guarantee of our senior subordinated
notes, is not insolvent, does not have unreasonably small capital for the business in which it is
engaged and has not incurred debts beyond its ability to pay such debts as they mature. There can
be no assurance, however, as to what standard a court would apply in making such determinations or
that a court would agree with our conclusions in this regard.
The interests of our stockholders may not be aligned with the interests of the holders of our
senior subordinated notes.
All of our issued and outstanding equity interests are held indirectly by iPayment Investors,
a limited partnership controlled jointly by Gregory S. Daily, our Chairman and Chief Executive
Officer, and Carl A. Grimstad, our President. Messrs. Daily and Grimstad own substantially all of
the economic interests in iPayment Investors, and are the sole members of the board of directors of
its general partner and our board of directors. Circumstances may occur in which the interests of
iPayment Investors and its equity holders could be in conflict with the interests of the holders of
our senior subordinated notes. Moreover, iPayment Investors equity holders may have interests in
their other respective investments that could also be in conflict with the interests of the holders
of our senior subordinated notes. In addition, iPayment Investors may have an interest in pursuing
acquisitions, divestitures or other transactions that, in its judgment, could enhance its equity
investment, even though such transactions might involve risks to holders of our senior subordinated
notes. For example, iPayment Investors and its equity holders may cause us to pursue a growth
strategy (including acquisitions which are not accretive to earnings), which could impact our
ability to make payments under the indenture governing our senior subordinated notes and the senior
secured credit facility or cause a change of control. In July 2006, iPayment Investors issued
$75.0 million of notes payable in 2014, which are subordinated to all debt issued by us, and the
net proceeds of which were used by iPayment Investors to pay a dividend to its equity holders. To
the extent permitted by the indenture governing our senior subordinated notes and the senior
secured credit facility, iPayment Investors may cause us to pay dividends rather than make capital
expenditures.
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In the event of a change of control, we may not be able to repurchase our senior subordinated notes
as required by the indenture, which would result in a default under our indenture.
Upon a change of control under the indenture, we will be required to offer to repurchase all
of our senior subordinated notes then outstanding at a purchase price equal to not less than 101%
of the principal amount, plus accrued and unpaid interest, if any, up to but excluding the
repurchase date. Our senior secured credit facility provides that certain change of control events
will be an event of default that will permit the required lenders to accelerate the maturity of all
borrowings thereunder and terminate commitments to lend thereunder. An acceleration of the
maturity of our senior secured credit facility would result in an event of default under our
indenture. Any of our future debt agreements may contain similar provisions. We cannot be sure
that we will have the financial resources to repurchase the senior subordinated notes, particularly
if that change of control event triggers a similar repurchase requirement for, or results in the
acceleration of other indebtedness. Our senior secured credit facility also prohibits us from
redeeming or repurchasing our senior subordinated notes if a default exists under the senior
secured credit facility and if we do not meet specified leverage ratios.
See Risk Factors A change of control under our senior secured credit facility could cause a
material adverse effect on our liquidity, financial condition or results of operations and A
change of control under the indenture governing our senior subordinated notes could cause a
material adverse effect on our liquidity, financial condition or results of operations below.
A change of control under our senior secured credit facility could cause a material adverse
effect on our liquidity, financial condition or results of operations.
Our senior secured credit facility provides that certain change of control events will result
in an event of default, including the following:
| Gregory S. Daily, our Chairman and Chief Executive Officer, Carl A. Grimstad, our President, and certain other investors (collectively, the Permitted Holders) cease to beneficially own equity interests in iPayment Holdings, Inc. (Holdings) representing more than 50% of its voting equity interests; | ||
| during any period of twelve consecutive months, a majority of Holdings board of directors ceases to be composed of individuals who were members of Holdings board of directors at the beginning of such period or who were elected or nominated by such members or appointees of such members who constituted at least a majority of the board of directors at the time of such election or nomination; | ||
| Gregory S. Daily and certain trusts controlled by Mr. Daily cease to beneficially own or control at least a majority of the equity interests in Holdings or any parent company beneficially owned by the Permitted Holders; or | ||
| a change of control occurs under the indenture governing our senior subordinated notes (described below). |
In May 2009, a jury in the Superior Court of the State of California for the County of Los
Angeles handed down a verdict in the amount of $300 million, plus punitive damages in the amount of
$50 million, against Mr. Daily, our Chief Executive Officer, in connection with litigation (the
Daily 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. 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. There can be no assurance that we would be able to do so. Market
conditions at the time such waiver or refinancing is sought 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, including with respect to the appointment of a trustee to administer the estate of Mr.
Daily, could have a material adverse effect on our liquidity, financial condition or results of
operations.
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The preceding description only purports to summarize the change of control provisions and
the consequences of a change of control under our senior secured credit facility. This
description is qualified in its entirety by reference to our senior secured credit facility, which
was filed with the SEC as Exhibit 10.1 to our Form S-4 on July 21, 2006.
A change of control under the indenture governing our senior subordinated notes could cause a
material adverse effect on our liquidity, financial condition or results of operations.
A change of control under the indenture governing our senior subordinated notes requires us
to offer to repurchase all of our senior subordinated notes then outstanding at a purchase price
equal to not less than 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, up to but excluding the repurchase date. A change of control includes the following events:
| any person or group other than one or more of the Permitted Holders or a parent company becomes the beneficial owner of (i) 35% or more of the voting power of our voting stock and (ii) more of the voting power of our voting stock than that beneficially owned by the Permitted Holders; or | ||
| a majority of the members of our board of directors cease to be continuing directors; |
The Daily Litigation, or the appointment of a trustee by the bankruptcy court, described above
under the risk factor A change of control under our senior secured credit facility could cause a
material adverse effect on our liquidity, financial condition or results of operations, could
result in one or more of the change of control events described above. Upon the occurrence of a
change of control, our senior secured credit facility will, subject to certain exceptions, prohibit
us from purchasing our senior subordinated notes. In the event a change of control occurs at a
time when we are prohibited from purchasing our senior subordinated notes, we
could attempt to seek the consent of the required lenders under our senior secured credit
facility to effect such purchase or could attempt to refinance our senior secured credit facility.
If we do not obtain such a consent or are unable to refinance our senior secured credit facility,
we will remain prohibited from purchasing our senior subordinated notes. This would result in an
event of default under the indenture governing our senior subordinated notes. In such
circumstances, the subordination provisions in the indenture governing our senior subordinated
notes would likely restrict payments to holders of our senior subordinated notes. The market
conditions may make it difficult or expensive to obtain consents or waivers with respect to our
senior secured credit facility or indenture governing our senior subordinated notes, refinance our
debt or raise the funds necessary to purchase tendered senior subordinated notes. If we are able
to do so, the cost of our financing could materially increase and our indebtedness may subject us
to more onerous terms. These consequences of a change of control under the indenture governing our
senior subordinated notes could have a material adverse effect on our liquidity, financial
condition or results of operations.
The preceding description only purports to summarize the change of control provisions and
the consequences of a change of control under the indenture governing our senior subordinated
notes. This description is qualified in its entirety by reference to the indenture governing our
senior subordinated notes, which was filed with the SEC as Exhibit 4.1 to our Form S-4 on July 21,
2006.
Changes in the financial and credit markets or in our credit ratings could adversely affect the market prices of our senior secured credit facility and our senior subordinated notes.
The market prices of our senior secured credit facility and our senior subordinated notes
depend on a number of factors, including:
| the prevailing interest rates being paid by companies similar to us; | ||
| our ratings with major credit rating agencies; and | ||
| the overall condition of the financial and credit markets. |
The condition of the financial and credit markets and prevailing interest rates have
fluctuated in the past and are likely to fluctuate in the future. Fluctuations in these factors
have had adverse effects on the market prices of our senior secured credit facility and our senior
subordinated notes, and further fluctuation may continue these adverse effects. In addition,
credit rating agencies continually revise their ratings for companies that they follow, including
us. We cannot be sure that any credit rating agencies that rate the senior secured credit facility
and senior subordinated notes will maintain their ratings on our credit instruments. A negative
change in our rating could have an adverse effect on the market price of the senior secured credit
facility and the senior subordinated notes.
Historically, the market for non-investment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of securities similar to the senior subordinated
notes. The market for the senior subordinated notes, if any, may be subject to similar
disruptions. Any such disruptions may adversely affect the value of the senior subordinated notes.
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We cannot be sure that an active trading market will be maintained for our senior subordinated
notes.
There is no public market for the senior subordinated notes. We do not intend to apply for a
listing of any of the senior subordinated notes on any securities exchange. We do not know if an
active market will develop for the senior subordinated notes, or if developed, will continue. If
an active market is not developed or maintained, the market price and the liquidity of the senior
subordinated notes may be adversely affected. In addition, the liquidity and the market price of
the senior subordinated notes may be adversely affected by changes in the overall market for high
yield securities and by changes in our financial performance or prospects, or in the prospects of
the companies in our industry.
Risks Relating to Our Business
Any new or changes made to laws, regulations, card network rules or other industry standards
affecting our business may have an adverse impact on our financial results.
We are subject to numerous 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 have an adverse effect on our business, including
the limitation, suspension or termination of services provided to, or by, third parties, and the
imposition of penalties, including fines. We are also subject to U.S. financial services
regulations, numerous consumer protection laws, escheat regulations, and privacy and information
security regulations, among others. Changes to legal rules and regulations, or the interpretation
or enforcement thereof, could have a negative financial effect on the Company. We are also subject
to the rules of Visa, MasterCard and 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 by
merchant acquiring entities for each calendar year 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 Dodd-Frank Act), which was signed into law in July 2010, significantly changes the U.S.
financial regulatory system, including by regulating debit card fees charged by 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, particularly with regard to debt fees, because
regulations need to be developed by the Federal Reserve Board. Such regulations have yet to be
implemented.
Regulatory actions such as these, even if not directed at us, may require us to make
significant efforts to change our products and services and may require that we change how we price
our services to customers. These regulations may materially and adversely affect the Companys
business or operations, either directly or indirectly.
We have faced, and may face in the future, significant chargeback liability and liability for
merchant or customer fraud, which we may not be able to accurately anticipate.
We have potential liability for chargebacks associated with the transactions we process. If a
billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the
merchant, the disputed transaction is charged back to the merchants bank and credited to the
account of the cardholder. If we or our sponsoring banks are unable to collect the chargeback from
the merchants account, or, if the merchant refuses or is financially unable (due to bankruptcy or
other reasons) to reimburse the merchants bank for the chargeback, we bear the loss for the amount
of the refund paid to the cardholders bank.
We also have potential liability for losses caused by fraudulent card-based payment
transactions. Card fraud occurs when a merchants customer uses a stolen card (or a stolen card
number in a card-not-present transaction) to purchase merchandise or services. In a traditional
card-present transaction, if the merchant swipes the card, receives authorization for the
transaction from the card issuing bank and verifies the signature on the back of the card against
the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a
fraudulent card-not-present transaction, even if the merchant receives authorization for the
transaction, the merchant is liable for any loss arising from the transaction. Many of the small
merchants that we serve are small businesses that transact a substantial percentage of their sales
in card-not-present transactions over the Internet or in response to telephone or mail orders,
which makes these merchants more vulnerable to customer fraud than larger merchants. Because
substantially all of the merchants we serve are small merchants, we experience chargebacks arising
from cardholder fraud more frequently than providers of payment processing services that service
larger merchants.
Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or
counterfeit card or card number to record a false sales transaction, or intentionally fails to
deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is
unable to satisfy a chargeback, we are responsible for that chargeback. We have established
systems and procedures to detect and reduce the impact of merchant fraud, but we cannot be sure
that these measures are or will be effective. It is possible that incidents of fraud could
increase in the future. Failure to effectively manage risk and prevent fraud could increase our
chargeback liability.
Charges incurred by us relating to merchant losses were $3.5 million, or 0.5% of revenues in
2010, and were $4.9 million, or 0.7% of revenues, in 2009.
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We rely on bank sponsors, which have substantial discretion with respect to certain elements of our
business practices, in order to process bankcard transactions. If these sponsorships are
terminated and we are not able to secure or successfully migrate merchant portfolios to new bank
sponsors, we will not be able to conduct our business.
Because we are not a bank, we are unable to belong to and directly access the Visa and
MasterCard bankcard associations. Visa and MasterCard operating regulations require us to be
sponsored by a bank in order to process bankcard transactions. We are currently registered with
Visa and MasterCard through the sponsorship of banks that are members of the card associations.
The principal sponsoring bank through which we process the significant majority of our transactions
is Wells Fargo.
The initial term of our agreement with Wells Fargo lasts through December 2014 and will
thereafter automatically continue unless either party provides the other at least six months notice
of its intent to terminate. Our sponsoring banks may terminate their agreements with us if we
materially breach the agreements and do not cure the breach within an established cure period, if
our membership with Visa or MasterCard terminates, if we enter bankruptcy or file for bankruptcy,
or if applicable laws or regulations, including Visa and MasterCard regulations, change to prevent
either the applicable bank or us from performing services under the agreement. If these
sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able to
process bankcard transactions. Furthermore, our agreements with our sponsoring banks provide the
sponsoring banks with substantial discretion in approving certain elements of our business
practices, including our solicitation, application and qualification procedures for merchants, the
terms of our agreements with merchants, the processing fees that we charge, our customer service
levels and our use of ISGs. We cannot guarantee that our sponsoring banks actions under these
agreements will not be detrimental to us, nor can we provide assurance that any of our sponsoring
banks will not terminate their sponsorship of us in the future.
If we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard payment card
associations, our registrations with these associations could be terminated, and we could be
required to stop providing payment processing services for Visa and MasterCard.
Substantially all of the transactions we process involve Visa or MasterCard. If we or our
bank sponsors fail to comply with the applicable requirements of the Visa or MasterCard payment
card associations, Visa or MasterCard could suspend or terminate our registration. The termination
of our registration or any changes in the Visa or MasterCard rules that would impair our
registration could prevent us from providing payment processing services.
We rely on third party processors and service providers; if they fail or no longer agree to provide
their services, our merchant relationships could be adversely affected and we could lose business.
We rely on agreements with several large payment processing organizations to enable us to
provide card authorization, data capture, settlement and merchant accounting services and access to
various reporting tools for the merchants we serve. In particular, we
rely on FDMS with whom
we have agreed, pursuant to the terms of our agreement with FDMS, to process at least 75% of our
annual transactions. We are required to pay FDMS an annual processing fee through 2011 related to
the FDMS Merchant Portfolio and the FDMS Bank Portfolio. The minimum fee for 2011 will be at least
70% of such fee paid to FDMS in 2010, or at least $3.8 million. Our gross margins would be
adversely affected if we were required to pay this minimum fee as a result of insufficient
transactions processed by FDMS.
We also outsource to third parties other services, such as reorganizing and accumulating daily
transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the
accumulated data to the relevant bankcard associations. Many of these organizations and service
providers are our competitors, and we do not have long-term contracts with most of them.
Typically, our contracts with these third parties are for one-year and are subject to cancellation
upon limited notice by either party. The termination by our service providers of their
arrangements with us or their failure to perform their services efficiently and effectively may
adversely affect our relationships with the merchants whose accounts we serve and may cause those
merchants to terminate their processing agreements with us.
To acquire and retain merchant accounts, we depend on ISGs that do not serve us exclusively.
We rely primarily on the efforts of ISGs to market our services to merchants seeking to
establish a credit card processing relationship. ISGs are companies that seek to introduce both
newly-established and existing small merchants, including, but not limited to, retailers,
restaurants and other service providers to us and other providers of transaction payment processing
services. Generally, our agreements with ISGs that refer merchants to us are not exclusive and
they have the right to refer merchants to other service providers. Our failure to maintain our
relationships with our existing ISGs and to recruit and establish new relationships with other
groups could adversely affect our revenues and internal growth and increase our merchant attrition.
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Periodically, we experience increases in interchange costs; if we cannot pass these increases along
to our merchants, our profit margins will be reduced.
We pay interchange fees and assessments to card associations for each transaction we process
using their credit and debit cards. From time to time, the card associations increase the
interchange fees that they charge processors and the sponsoring banks. At their sole discretion,
our sponsoring banks have the right to pass any increases in interchange fees on to us. In
addition, our sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees to
us, all of which are based upon the dollar amount of the payment transactions we process. If we
are not able to pass these fee increases along to merchants through corresponding increases in our
processing fees, our profit margins will be reduced.
Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer
systems or otherwise, could expose us to protracted and costly litigation.
We may collect and store limited data about merchants and their principal owners, including
names, addresses, social security numbers, drivers license numbers, checking and savings account
numbers, and payment history records. In addition, we maintain a limited database of cardholder
data relating to specific transactions, including card numbers and cardholder addresses, in order
to process the transactions, for fraud prevention and other internal processes. If a person
penetrates our network security or otherwise misappropriates sensitive merchant or cardholder data,
we could be subject to liability or business interruption.
Although we generally require that our agreements with our ISGs and other service providers
who may have access to merchant and customer data include confidentiality obligations that restrict
these parties from using or disclosing any customer or merchant data except as necessary to perform
their services under the applicable agreements, we cannot guarantee that these contractual measures
will prevent the unauthorized disclosure of merchant or customer data by the ISGs or service
providers. In addition, our
agreements with financial institutions (as well as card association requirements) require us to
take certain protective measures to ensure the confidentiality of merchant and consumer data. Any
failure to adequately comply with these protective measures could
result in fees, penalties and/or
litigation.
The loss of key personnel or damage to their reputations could adversely affect our relationships
with ISGs, card associations, bank sponsors and our other service providers, which would adversely
affect our business.
Our success depends upon the continued services of our senior management and other key
employees, all of whom have substantial experience in the payment processing industry and the small
merchant markets in which we offer our services. In addition, our success depends in large part
upon the reputation and influence within the industry of our senior managers who have, over the
years, developed long standing and favorable relationships with ISGs, card associations, bank
sponsors and other payment processing and service providers. The loss of the services of one or
more of our senior managers or other key employees or damage to their reputations and influence
within the industry could have an adverse effect on our business, financial condition and results
of operations.
We do not maintain any key person life insurance on any of our employees other than a $25.0
million policy on Mr. Daily, as required by our senior secured credit facility.
The payment processing industry is highly competitive and such competition is likely to increase,
which may further adversely influence our prices to merchants, and as a result, our profit margins.
The market for credit and debit card processing services is highly competitive and has
relatively low barriers to entry. The level of competition has increased in recent years as other
providers of processing services have established a sizable market share in the small merchant
processing sector. Some of our competitors are financial institutions, subsidiaries of financial
institutions or well-established payment processing companies that have substantially greater
capital, technological, management and marketing resources than we have. There are also a large
number of small providers of processing services that provide various ranges of services to small
and medium sized merchants. This competition may effectively limit the prices we can charge and
requires us to control costs aggressively in order to maintain acceptable profit margins. Further,
if the use of cards other than Visa or MasterCard, such as American Express, grows, or if there is
increased use of certain debit cards, our average profit per transaction could be reduced. In
addition, our competitors continue to consolidate as large banks merge and combine their networks.
This consolidation may also require that we increase the consideration we pay for future
acquisitions and could adversely affect the number of attractive acquisition opportunities
presented to us. Our future competitors may develop or offer services that have price or other
advantages over the services we provide. If they do so and we are unable to respond
satisfactorily, our business and financial condition could be adversely affected.
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Increased attrition due to an increase in closed merchant accounts and a decrease in merchant
charge volume that we cannot anticipate or offset with new accounts may reduce our revenues.
We experience attrition in merchant accounts and merchant charge volume in the ordinary course
of business resulting from several factors, including but not limited to, business closures,
transfers of merchants accounts to our competitors and account closures that we initiate due to
heightened credit risks relating to, or contract breaches by, a merchant. We target small
merchants that generally have a higher rate of business failure than larger businesses. During
2010, we experienced volume attrition ranging from 1.0% to 2.0% per month on our various merchant
portfolios. Substantially all of our processing contracts with merchants may be terminated by
either party on relatively short notice, allowing merchants to move their processing accounts to
other providers with minimal financial liability and cost. In addition, we believe that
challenging economic conditions have adversely affected and may continue to adversely affect
merchant charge volume, thereby increasing attrition. We cannot accurately predict the level of
attrition in the future, particularly in connection with our acquisitions of portfolios of merchant
accounts. Increased attrition in merchant accounts and merchant charge volume may have a material
adverse effect on our business, financial condition and results of operations.
If our merchants experience adverse business conditions, they may generate fewer transactions for
us to process or become insolvent, increasing our exposure to chargeback liabilities.
We believe that challenging economic conditions have caused some of the merchants we serve to
experience difficulty in supporting their current operations and implementing their business plans.
If these merchants make fewer sales of their products and services, we will have fewer
transactions to process, resulting in lower revenues. In addition, in the current difficult
economic environment, the merchants we serve could be subject to a higher rate of business failure
which could adversely affect us financially. We bear credit risk for chargebacks related to
billing disputes between credit or debit card holders and bankrupt merchants. If a merchant seeks
relief under bankruptcy laws or is otherwise unable or unwilling to pay, we may be liable for the
full transaction amount of a chargeback.
The ability to adopt technology to changing industry and customer needs or trends may affect our
competitiveness or demand for our products, which may adversely affect our operating results.
Changes in technology may limit the competitiveness of and demand for our services. We operate
in industries that are subject to technological advancements, developing industry standards and
changing customer needs and preferences. In addition, our customers continue to adopt new
technology for business and personal uses. We must anticipate and respond to these industry and
customer changes in order to remain competitive within our markets. For example, the ability to
adopt technological advancements surrounding point-of-sale technology available to merchants could
have an impact on our business. Our inability to respond to new industry standards, trends and
technological advancements could negatively impact our operating results.
There may be a decline in the use of credit cards as a payment mechanism for consumers or adverse
developments with respect to the credit card industry in general which could adversely affect our
operating results.
If consumers do not continue to use credit cards as a payment mechanism for their transactions
or if there is a change in the mix of payments between cash, credit cards and debit cards, it could
have a material adverse effect on our financial position and results of operations. We believe
future growth in the use of credit cards will be driven by the cost, ease-of-use, and quality of
products and services offered to consumers and businesses. In order to consistently increase and
maintain our profitability, consumers and businesses must continue to use credit cards. Moreover,
if there is an adverse development in the credit card industry in general, such as new legislation
or regulation that makes it more difficult for our clients to do business, our financial condition
and results of operations may be adversely affected.
Adverse conditions in industries in which we obtain a substantial amount of our bankcard processing volume,
such as the automobile and restaurant industries, could negatively affect our operating results.
We obtain a substantial amount of our bankcard processing volume from merchants in certain industries. For
example, merchants in the automobile and restaurant industries represented 14% and 12% of our bankcard
processing volume, respectively, in 2010. As a result, any adverse economic or other conditions in the automobile
and restaurant industries, or other industries in which we obtain a substantial amount of our bankcard processing
volume, could negatively affect our revenue and materially and adversely affect our operating results.
Our operating results are subject to seasonality, and, if our revenues are below our seasonal norms
during our historically stronger quarters, our financial results could be adversely affected.
We have experienced in the past, and expect to continue to experience, seasonal fluctuations
in our revenues as a result of consumer spending patterns. Historically, revenues have been weaker
during the first quarter of the calendar year and stronger during the second, third and fourth
quarters. If, for any reason, our revenues are below seasonal norms during the second, third or
fourth quarter, our financial results could be adversely affected.
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Our systems may fail due to factors beyond our control, which could interrupt our business, cause
us to lose business and increase our costs.
We depend on the efficient and uninterrupted operations of our computer network systems,
software and data centers. Our systems and operations could be exposed to damage or interruption
from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and
computer viruses. Our property and business interruption insurance may not be adequate to
compensate us for all losses or failures that may occur, and we do not presently have fully
redundant systems to help ensure uninterrupted operations. Defects in our systems, errors or
delays in the processing of payment transactions or other difficulties could result in:
| additional development costs; | ||
| diversion of technical and other resources; | ||
| loss of merchants; | ||
| loss of merchant and cardholder data; | ||
| negative publicity; | ||
| harm to our business or reputation; or | ||
| exposure to fraud losses or other liability. |
Material breaches in the security of our systems may have a significant effect on our business.
The uninterrupted operation of our information systems and the confidentiality of the
customer/consumer information that resides on such systems are critical to the successful
operations of our business. We have security, backup and recovery systems in place, as well as a
business continuity plan to ensure the system will not be inoperable. We also have what we deem
sufficient security around the system to prevent unauthorized access to the system. However, our
visibility in the United States payment industry may attract hackers to conduct attacks on our
systems that could compromise the security of our data. An information breach in the system and
loss of confidential information such as credit or debit card numbers and related information could
have a longer and more significant impact on our business operations than a hardware failure. The
loss of confidential information could result in losing our customers confidence and thus the loss
of their business, as well as the imposition of fines and damages.
New and potential governmental regulations designed to protect or limit access to consumer
information could adversely affect our ability to provide the services we provide our merchants.
Due to the increasing public concern over consumer privacy rights, governmental bodies in the
United States and abroad have adopted, and are considering adopting, additional laws and
regulations restricting the purchase, sale and sharing of personal information about customers.
For example, the Gramm-Leach-Bliley Act requires non-affiliated third-party service providers to
financial institutions to take certain steps to ensure the privacy and security of consumer
financial information. We believe our present activities fall under exceptions to the consumer
notice and opt-out requirements contained in this law for third-party service providers to
financial institutions. We believe that current legislation permits us to access and use this
information as we do now. However, the laws governing privacy generally remain unsettled. Even in
areas where there has been some legislative action, such as the Gramm-Leach-Bliley Act and other
consumer statutes, it is difficult to determine whether and how existing and proposed privacy laws
or changes to existing privacy laws will apply to our business. Limitations on our ability to
access and use customer information could adversely affect our ability to provide the services we
offer to our merchants or impair the value of these services.
Several states have proposed legislation that would limit the use of personal information
gathered using the Internet. Some proposals would require proprietary online service providers and
website owners to establish privacy policies. Congress has also considered privacy legislation
that could further regulate the use of consumer information obtained over the Internet or in other
ways. Our compliance with these privacy laws and related regulations could materially affect our
operations.
Changes to existing laws or the passage of new laws could:
| create uncertainty in the marketplace that could reduce demand for our services; | ||
| limit our ability to collect and to use merchant and cardholder data; or | ||
| increase the cost of doing business as a result of litigation costs or increased operating costs; |
any of which could have a material adverse effect on our business, results of operations and
financial condition.
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If we are required to pay federal, state or local taxes on transaction processing, it could
negatively impact our profitability.
Transaction processing companies may become subject to federal, state or local taxation of
certain portions of their fees charged to merchants for their services. Application of these taxes
is an emerging issue in our industry and taxing jurisdictions have not yet adopted uniform
positions on this topic. If we are required to pay such taxes and are unable to pass this tax
expense through to our merchant clients, or produce increased cash flow to offset the taxes, these
taxes would negatively impact our profitability.
The markets for the services that we offer may fail to expand or may contract, which could
negatively impact our growth and profitability.
Our growth and continued profitability depend on the acceptance of the services that we offer.
If demand for our services decreases, our profitability would be negatively impacted. Changes in
technology may enable merchants and retail companies to directly process transactions in a
cost-efficient manner without the use of our services. Additionally, uncertainty in the economy or
a reduction in consumer spending may result in a decrease in the demand for our services. Further,
if our customers make fewer sales of their products and services, we will have fewer transactions
to process, resulting in lower revenue. Any decrease in the demand for our services for the
reasons discussed above or other reasons could have a material adverse effect on our growth and
revenue.
We are the subject of various legal proceedings which could have a material adverse effect on our
business, financial condition or operating results.
We are involved in various litigation matters. The Company may, from time to time, also be
involved in or be subject of governmental or regulatory agency inquiries or investigations. If the
Company is unsuccessful in its defense in the litigation matters, or any other legal proceeding, it
may be forced to pay damages or fines and/or change its business practices, any of which could have
a material adverse effect on the Companys business, financial condition or operating results. For
more information about the Companys legal proceedings, see Legal Proceedings.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of
a significant portion of these assets would negatively affect our operating results.
Our balance sheet includes goodwill and intangible assets that represent over 70% of our total
assets at December 31, 2010. These assets consist primarily of goodwill and identified intangible
assets associated with our acquisitions. We may engage in additional acquisitions, which may result
in our recognition of additional intangible assets and goodwill. On at least an annual basis, we
assess whether there have been impairments in the carrying value of goodwill and intangible assets.
If the carrying value of the asset is determined to be impaired, then it is written down to fair
value by a charge to operating earnings. An impairment of a significant portion of goodwill or
intangible assets could materially adversely affect our operating results.
Risks Relating to Acquisitions
We have previously acquired, and expect to continue to acquire, other providers of payment
processing services and portfolios of merchant processing accounts. These acquisitions entail
risks in addition to those incidental to the normal conduct of our business.
Revenues and profits generated by acquired businesses or account portfolios may be less than
anticipated, resulting in losses or a decline in profits, as well as potential impairment charges.
In evaluating and determining the purchase price for a prospective acquisition, we estimate
the future revenues and profits from that acquisition based on the historical revenue of the
acquired provider of payment processing services or portfolio of merchant accounts. Following an
acquisition, it is customary to experience some attrition in the number of merchants serviced by an
acquired provider of payment processing services or included in an acquired portfolio of merchant
accounts. Should the rate of post-acquisition merchant attrition exceed the rate we have
forecasted, the revenues and profits generated by the acquired providers of payment processing
services or portfolio of accounts may be less than we estimated, which could result in losses or a
decline in profits, as well as potential impairment charges.
We may fail to uncover all liabilities of acquisition targets through the due diligence process
prior to an acquisition, exposing us to potentially significant, unanticipated costs.
Prior to the consummation of any acquisition, we perform a due diligence review of the
provider of payment processing services or portfolio of merchant accounts that we propose to
acquire. Our due diligence review, however, may not adequately uncover all of the contingent or
undisclosed liabilities we may incur as a consequence of the proposed acquisition. For example, in
the past we were obligated to fund certain credits and chargebacks after discovering that a
merchant account from an acquired merchant
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processing portfolio was in substantial violation of the
Visa and MasterCard card association rules. In the future we may make acquisitions that may
obligate us to make similar payments resulting in potentially significant, unanticipated costs.
We may encounter delays and operational difficulties in completing the necessary transfer of data
processing functions and connecting systems links required by an acquisition, resulting in
increased costs for, and a delay in the realization of revenues from, that acquisition.
The acquisition of a provider of payment processing services, as well as a portfolio of
merchant processing accounts, requires the transfer of various data processing functions and
connecting links to our systems and those of our third-party service providers. If the transfer of
these functions and links does not occur rapidly and smoothly, payment processing delays and errors
may occur, resulting in a loss of revenues, increased merchant attrition and increased expenditures
to correct the transitional problems, which could preclude our attainment of, or reduce, our
anticipated revenue and profits.
Special non-recurring and integration costs associated with acquisitions could adversely affect our
operating results in the periods following these acquisitions.
In connection with some acquisitions, we may incur non-recurring severance expenses,
restructuring charges and change of control payments. These expenses, charges and payments, as
well as the initial costs of integrating the personnel and facilities of an acquired business with
those of our existing operations, may adversely affect our operating results during the initial
financial periods following an acquisition. In addition, the integration of newly acquired
companies may lead to diversion of management attention from other ongoing business concerns.
Our facilities, personnel and financial and management systems may not be adequate to effectively
manage the future expansion we believe necessary to increase our revenues and remain competitive.
We anticipate that future expansion will be necessary in order to increase our revenues. In
order to effectively manage our expansion, we may need to attract and hire additional sales,
administrative, operations and management personnel. We cannot be sure that our facilities,
personnel, financial and management systems and controls will be adequate to support the expansion
of our operations, and provide adequate levels of service to our merchants and ISGs. If we fail to
effectively manage our growth, our business could be harmed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in approximately 4,700 square feet of leased
office space in Nashville, Tennessee. We also lease approximately 32,000 square feet in Westlake
Village, California, approximately 9,600 square feet in Minden, Nevada, approximately 2,300 square
feet in Novi, Michigan, and approximately 13,500 square feet in Akron, Ohio. We believe that these
facilities are adequate for our current operations and, if necessary, can be replaced with little
disruption to our business.
ITEM 3. LEGAL PROCEEDINGS
Litigation
Bruns v. E-Commerce Exchange Inc. (ECX), 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 arises from a lawsuit filed in February 2000 by plaintiff Dana Bruns on her
own behalf and on behalf of a purported class of persons in California who, during the five years
prior to filing the lawsuit, allegedly received fax transmissions from third-party defendant
Fax.Com and its advertisers, including our subsidiary, E-Commerce Exchange, Inc. (ECX). The
complaint, as amended, alleges that the defendants sent fax blast transmissions to telephone
facsimile machines in violation of the provisions of the Telephone Consumer Protection Act of 1991
(TCPA) and seeks relief under the TCPA and/or under Californias Unfair Competition Act, Business
& Professions Code and for negligence, including for injunctive relief, damages and monetary
relief, attorneys fees and costs of suit and other relief deemed proper. In December 2006, ECX and
other defendants filed a Motion for Mandatory Dismissal and the trial court issued an Order of
Final Judgment dismissing the litigation with prejudice, which the
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plaintiff subsequently appealed.
In March 2009, California Court of Appeals reversed the Order of Final Judgment and we and other
defendants filed a petition for review with the California Supreme Court, which was granted. On
February 28, 2011 the California Supreme Court reversed the California Court of Appeals ruling and
remanded the case to the California Court of Appeals for further proceedings consistent with its
opinion. The plaintiff may file a supplemental opening brief in the California Court of Appeals by
April 14, 2011, after which ECX may file a supplemental respondents brief. We continue to believe
that the claims asserted against us in are without merit and that the trial court properly granted
our Motion for Mandatory Dismissal, however, we cannot predict with any certainty how the
California Court of Appeals might rule, nor can we predict the likely outcome it may have on the
lawsuit and the claims asserted against us. We intend to continue to vigorously defend ourselves in
this matter. However, there can be no assurance that we will be successful or prevail in our
defense, or in the event we are not successful and judgment is awarded against us, that the claims
or defense costs will be covered by insurance, or be sufficient to fully satisfy any judgment that
may be awarded against ECX, and, therefore, there can be no assurance that a failure to prevail
will not have a material adverse effect on our business, financial condition or results of
operations.
On or about January 29, 2010, a related declaratory judgment action was filed by Truck
Insurance Exchange (TIE) against ECX and Dana Bruns (individually and as alleged class
representative of all others similarly situated) (the TIC Declaratory Action). TIE asserts that
the insurance policies issued to ECX did not cover the claim tendered by ECX in regards to the
underlying Bruns Lawsuit. TIE has filed a Motion for Summary Adjudication seeking an order that
ECX has no defense as a matter of law to all of TIEs claims, except for its claim seeking to
recover the costs and expenses incurred by TIE in defending ECX in the Bruns Lawsuit. Our response
is due on or before March 31, 2011 and the hearing is set for April 14, 2011. As of the date of
this Annual Report, the trial date of May 16, 2011 has not been changed. Although we intend to
vigorously defend ourselves and we believe that
we have meritorious defenses to assert to the claims, the ultimate outcome of the TIC
Declaratory Action and the associated potential liability cannot be predicted with certainty and
there can be no assurance that we will be successful or prevail in our defenses. Should TIE prevail
on its Motion for Summary Adjudication, ECX will have to pay for the costs and expenses incurred in
defending the underlying Bruns Lawsuit and in the event we are not successful and judgment is
awarded against ECX in the underlying Bruns Lawsuit there will be no funds from insurance for
payment of any judgment that may be awarded against our subsidiary, ECX, and therefore, there can
be no assurance that a failure to prevail will not have a material adverse effect on our business,
financial condition or results of operations.
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 relates to a purported class action lawsuit initially 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 and one of our subsidiaries, Online Data Corporation
(ODC), and Northern Leasing
Systems, Inc. (NLS) as defendants. The First Amended Class Action Complaint (FAC), as amended
and filed on September 8, 2010, asserts claims for unjust enrichment and for a declaratory
judgment. In October 2010 we filed a motion to dismiss count one (unjust enrichment) of plaintiffs
FAC, and plaintiff filed an opposition to our motion. As of the date of this Annual Report, the
court has not issued a ruling on our motion to dismiss nor has it set a hearing date for our motion
to dismiss. At this time, we cannot predict with any certainty how the court might rule on our
motion to dismiss.
We intend to continue to vigorously defend ourselves and believe that we have meritorious
defenses to the claims asserted, however, 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.
Employment Development Department of the State of California, Notice of Assessment No. 00008
This matter relates to a Notice of Assessment No. 00008 dated July 10, 2007 sent to our
subsidiary, iPayment of California, LLC (iPOC) by the Employment Development Department of the
State of California (EDD) for amounts claimed to be due arising during the period starting April
1, 2004 and ending March 31, 2007. The EDD determined that during the covered period iPOC
improperly classified and treated certain individuals as independent contractors rather than as
employees, and therefore failed to properly report amounts paid as wages, failed to withhold (and
deposit) amounts for certain employee contributions on said wages, including withholdings for
California personal income tax, and failed to remit amounts for employer contributions otherwise
due on these unreported wages. As a result, the Notice of Assessment included an assessment of
approximately $1.4 million, plus an additional $0.1 million for accrued interest billed to the date
assessed (the Assessment)
We have been cooperating with the EDD auditor and have submitted all additional requested
records and information. Although we are still currently subject to the Assessment, based upon our
January 2011 communications and correspondence with the EDD auditor, we currently expect to receive
an adjustment to the Assessment and to have this matter resolved before the end of this calendar
year. Although the results cannot be predicted with certainty, we believe that the ultimate
outcome of this matter and our liability associated therewith should not have a material adverse
effect on our business, financial condition, or results of operations. However, in the event of
unexpected future developments or additional information, it is possible that this matter could be
unfavorable to us, and there can be no assurance that a failure to prevail will not have a material
adverse effect on our business, financial condition or results of operations.
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Other Contract Related
Vericomm v. iPayment, Inc., et al., United States District Court, Central District of
California, Case No. 2:2011-cv-00608-MMM-AGR
This matter relates to a claim by Vericomm, Inc. (Vericomm), one of our ISGs. Beginning in
2009, we received a series of settlement demand communications from counsel for Vericomm alleging
that since October 2006, we had incorrectly calculated, reported, and paid certain residual
compensation due to Vericomm and that we engaged in certain activities that Vericomm believed
wrongfully interfered with merchant relationships and deprived Vericomm from residual compensation
related to such merchants in violation of the terms of our contract. On January 20, 2011, Vericomm
filed a purported Class Action Complaint (the Complaint) against us in the District Court for the
Central District of California, Western Division. Vericomm alleges that iPayment terminated
merchant accounts that had been solicited by its ISGs such as Vericomm, and then re-solicited these
same accounts for iPayments in-house accounts. Vericomm claims that it suffered damages in an
amount in excess of $7 million. The Complaint also alleges claims for violation of Californias
Unfair Competition Law, Bus. & Prof. Code Section 17200 et seq., and violation of the Racketeer
Influenced and Corrupt Organizations Act (RICO) and seeks class action treatment and relief for
these class claims and for damages in an amount yet to be determined but believed to be in excess
of $7 million, to be trebled. The Complaint seeks relief, including for injunctive relief, general,
special and punitive damages and monetary relief, including restitution, an accounting, attorneys
fees and costs of suit and other relief deemed proper. As of the date of this Annual Report, we
have not yet been served with the Complaint and no discovery has taken place in the case.
Additionally, pursuant to the contract between Vericomm and
iPayment at issue in the Complaint, the parties are required to mediate, and then arbitrate,
any dispute. We are presently working to schedule a mediation pursuant to the contract. Because
this case is in its early stages, it is uncertain whether an adverse result in this matter may or
may not have a material adverse impact on the Companys business, financial condition or results of
operations. If a mutually acceptable resolution is not successful through the mediation process
and the litigation proceeds, we intend to vigorously defend ourselves against all of the claims
asserted in the Complaint. However, at this time the ultimate outcome and our potential liability
associated with the claims asserted in the Complaint cannot be predicted with any 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.
We are party to certain other legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the ultimate outcome of these other matters
cannot be predicted with certainty, based on information currently available, advice of counsel,
and available insurance coverage, we do not believe that the outcome of any of these claims will
have a materially 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 Financial Statements.
ITEM 4. (REMOVED AND RESERVED)
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
There is no established public trading market for our common stock. On May 10, 2006, Holdings
acquired all of our issued and outstanding common stock. Holdings is a wholly-owned subsidiary of
iPayment Investors. Pursuant to the terms of our senior secured credit facility, we are limited
in the amount of dividends we can declare or pay on our outstanding shares of common stock. 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
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. We did not pay any cash dividends in 2009.
ITEM 6. SELECTED FINANCIAL DATA
Period from | ||||||||||||||||||||||||
January 1 | May 11 | |||||||||||||||||||||||
through | through | Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||
May 10, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
2006 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Predecessor | Successor | Successor | Successor | Successor | Successor | |||||||||||||||||||
Statement of Operations Data (in
thousands): |
||||||||||||||||||||||||
Revenues |
$ | 252,514 | $ | 481,474 | $ | 759,109 | $ | 794,825 | $ | 717,928 | $ | 699,174 | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
145,459 | 279,653 | 437,955 | 450,570 | 397,530 | 380,577 | ||||||||||||||||||
Other cost of services |
76,994 | 147,055 | 228,537 | 240,880 | 228,253 | 216,873 | ||||||||||||||||||
Selling, general and administrative |
14,432 | 13,017 | 21,144 | 20,941 | 20,348 | 13,827 | ||||||||||||||||||
Total operating expenses |
236,885 | 439,725 | 687,636 | 712,391 | 646,131 | 611,277 | ||||||||||||||||||
Income from operations |
15,629 | 41,749 | 71,473 | 82,434 | 71,797 | 87,897 | ||||||||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest expense, net |
(5,229 | ) | (39,591 | ) | (60,216 | ) | (56,289 | ) | (46,488 | ) | (45,662 | ) | ||||||||||||
Other |
(6,729 | ) | (2,187 | ) | 179 | (750 | ) | (1,245 | ) | (1,058 | ) | |||||||||||||
Total other expense |
(11,958 | ) | (41,778 | ) | (60,037 | ) | (57,039 | ) | (47,733 | ) | (46,720 | ) | ||||||||||||
Income (loss) before income taxes |
3,671 | (29 | ) | 11,436 | 25,395 | 24,064 | 41,177 | |||||||||||||||||
Income tax provision |
3,690 | 674 | 6,005 | 10,105 | 8,736 | 18,349 | ||||||||||||||||||
Net income (loss) |
(19 | ) | (703 | ) | 5,431 | 15,290 | 15,328 | 22,828 | ||||||||||||||||
Less: Net income attributable to
noncontrolling interests |
869 | (187 | ) | | (987 | ) | (3,588 | ) | | |||||||||||||||
Net income (loss) attributable to iPayment,
Inc. |
$ | 850 | $ | (890 | ) | $ | 5,431 | $ | 14,303 | $ | 11,740 | $ | 22,828 | |||||||||||
Balance Sheet Data (as of period end)
(in thousands): |
||||||||||||||||||||||||
Cash and cash equivalents |
N/A | 96 | 33 | 3,589 | 2 | 1 | ||||||||||||||||||
Working capital (deficit) |
N/A | (9,279 | ) | (8,713 | ) | (10,591 | ) | (6,601 | ) | (9,732 | ) | |||||||||||||
Total assets |
N/A | 784,966 | 767,545 | 768,864 | 745,366 | 735,629 | ||||||||||||||||||
Total long-term debt, including current portion |
N/A | 714,656 | 697,357 | 687,326 | 651,519 | 619,114 | ||||||||||||||||||
Stockholders equity |
N/A | 16,890 | 17,216 | 26,605 | 43,138 | 72,441 | ||||||||||||||||||
Financial and Other Data: |
||||||||||||||||||||||||
Charge volume (in millions) (unaudited) (1) |
9,072 | 17,265 | 26,797 | 26,783 | 23,526 | 22,653 | ||||||||||||||||||
Capital expenditures (in thousands) |
587 | 1,510 | 1,110 | 2,374 | 2,304 | 2,925 | ||||||||||||||||||
Ratio of earnings to fixed charges (2) |
1.87 | 1.04 | 1.20 | 1.41 | 1.44 | 1.90 |
(1) | Represents the total dollar volume of all Visa and MasterCard transactions processed by our merchants. This data is provided to us by our third-party processing vendors. | |
(2) | Computed in accordance with Item 503(d) of Regulation S-K. For purposes of computing the ratio of earnings to fixed charges, fixed charges consist of interest expense on long-term debt and capital leases, amortization of deferred financing costs and that portion of rental expense deemed to be representative of interest. Earnings consist of income (loss) before income taxes and minority interest, plus fixed charges and minority interest in pre-tax losses of subsidiaries that have not incurred fixed charges. The ratio of earnings to fixed charges differs from the fixed charge coverage ratio computed for the purposes of the indenture governing our senior subordinated notes and from the consolidated interest coverage ratio computed for the purpose of the credit agreement governing the senior secured credit facility. |
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See Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Consolidated Financial Statements for information regarding
accounting changes, asset acquisitions and dispositions, litigation matters, and other costs and
other items affecting comparability.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with Item 6 Selected Financial Data and our Consolidated
Financial Statements and related notes included elsewhere in this Form 10-K. References in this
section to iPayment, Inc., iPayment, the Company, we, us, and our refer to iPayment,
Inc. and our direct and indirect subsidiaries on a consolidated basis unless the context indicates
otherwise.
Executive Overview
We are a provider of credit and debit card-based payment processing services to small
merchants across the United States.
During December 2010, we generated revenue from approximately 172,000
small merchants located across the United States. Of these merchants,
approximately 133,000 were active merchants. Our payment processing services enable our merchants
to accept credit cards as well as other forms of card-based payment, including debit cards, checks,
gift cards and loyalty programs in both traditional card-present, or swipe transactions, as well as
card-not-present transactions. We market and sell our services primarily through ISGs, which are
non-employee, external sales organizations. We also partner with 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 application processing,
underwriting, account set-up, risk management, fraud detection, merchant assistance and support,
equipment deployment, and chargeback services, in our main operating center in Westlake Village,
California.
Our strategy has been to increase profits by increasing our penetration of the small merchant
marketplace for payment services. However, the challenging economic environment in the United
States impacted the growth in charge volumes throughout the industry in 2010 and 2009. In 2010,
our year-to-year charge volume decline was less than 4% compared to 12% decline in 2009. Our
charge volume decreased to $22.7 billion in 2010 from $23.5 billion in 2009. We currently expect
this charge volume decline trend to moderate further in 2011. Our revenues decreased approximately
3% to $699.2 million in 2010 from $717.9 million in 2009. Our net revenue has decreased to $273.4
million in 2010 from $278.2 million in 2009. Income from operations increased 22% to $87.9 million
in 2010, from $71.8 million in 2009.
Net interest expense decreased to $45.7 million in 2010 from $46.5 million in 2009, reflecting
a lower average interest rate and lower funded debt. Our effective income tax rate increased to
approximately 44.6% in 2010, from approximately 36.3% in 2009, primarily due to adjustments to
certain deferred tax items relating to our intangible assets. The effective income tax rate also
increased due to a reduction in the value of our deferred tax assets as a result of an expected
future decrease in our state tax rate. Net income in 2010 totaled $22.8 million, compared to $11.7
million in 2009.
Acquisition by iPayment Holdings
On May 10, 2006, pursuant to an Agreement and Plan of Merger dated as of December 27, 2005, by
and among two new entities, iPayment, MergerCo and iPayment Holdings, MergerCo was merged with and
into iPayment, Inc. (the Transaction), with iPayment, Inc. remaining as the surviving corporation
and a wholly-owned subsidiary of iPayment Holdings. Holdings is a wholly-owned subsidiary of
iPayment Investors, which is a Delaware limited partnership formed by Gregory Daily, the Chairman
and Chief Executive Officer of iPayment, Carl Grimstad, the President of iPayment, and certain
parties related to them.
The total amount of consideration required to consummate the merger and the related
transactions was approximately $895.4 million, consisting of (1) approximately $800.0 million to
fund the payment of the merger consideration and payments in respect of the cancellation of
outstanding stock options, (2) approximately $70.0 million to repay certain existing indebtedness
of iPayment and (3) approximately $25.4 million to pay transaction fees and expenses. These funds
were obtained from equity and debt financings as follows:
| equity financing in an aggregate amount of $170.0 million provided through (1) the delivery of an aggregate of $166.6 million of iPayment common stock by Mr. Daily, on his own behalf and on behalf of certain related parties, and by Mr. Grimstad, on his own behalf and on behalf of certain related parties, and (2) approximately $3.4 million of cash provided by Mr. Daily; | ||
| a term loan of $515.0 million pursuant to a credit facility entered into between iPayment and a syndicate of lenders, which also included a $60.0 million revolving credit facility; |
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| approximately $202.2 million raised through the issuance by iPayment of private notes; and | ||
| approximately $8.2 million funded by cash on hand and borrowings under the revolving credit facility described above. |
Acquisitions
Since December 2003, we have expanded our card-based payment processing services through the
acquisition of five businesses, four significant portfolios and several smaller portfolios of
merchant accounts, as set forth below. These acquisitions have significantly impacted our
revenues, results of operations, and financial condition. Primarily due to these acquisitions, our
merchant portfolio base increased from approximately 56,000 active small merchants on January 1,
2003, to approximately 133,000 on December 31, 2010. In addition, primarily due to these
acquisitions, our revenues grew from $226.1 million in 2003 to $699.2 million in 2010, which
represents a 17.5% compound annual growth rate from 2003 to 2010.
The following table lists each of the acquisitions that we have made since December 2003:
Acquired Business or Significant Portfolio of Merchant Accounts | Date of Acquisition | |
FDMS Bank Portfolio |
December 2003 | |
Transaction Solutions |
September 2004 | |
FDMS Merchant Portfolio |
December 2004 | |
Petroleum Card Services |
January 2005 | |
iPayment ICE of Utah, LLC |
June 2005 | |
National Processing Management Group |
October 2005 | |
Cambridge Payment Systems |
December 2007 | |
Merchant Service Center |
April 2008 | |
Central Payment Co Portfolio |
November 2009 | |
Flagship Merchant Services Portfolio |
November 2010 | |
Existing ISG Portfolio |
December 2010 |
On December 19, 2003, we entered into an asset purchase agreement with FDMS pursuant to which
we acquired the FDMS Bank Portfolio for a price of $55.0 million in cash. Pursuant to the terms of
the asset purchase agreement, we commenced receiving revenue from these accounts on January 1,
2004. In order to finance the acquisition, we increased our borrowing capacity under our revolving
credit facility from $30.0 million to $65.0 million. We borrowed $45.0 million under our credit
facility and used available cash for the balance of the purchase price. We are currently a
customer of FDMS for merchant processing services.
On September 15, 2004, we entered into an agreement to purchase substantially all of the
assets of TS Black and Gold, LP (Transaction Solutions). Transaction Solutions is a provider of
card-based payment transaction processing services. Consideration included cash at closing and
contingent payments based upon future performance over two years, all of which was paid as of
December 31, 2006. The acquisition was recorded under the purchase method with the total
consideration allocated to the fair value of assets acquired and liabilities assumed. The
operating results of Transaction Solutions from September 1, 2004, were included in our
Consolidated Financial Statements.
On December 27, 2004, we entered into an asset purchase agreement with FDMS, pursuant to which
we acquired the FDMS Merchant Portfolio for a price of $130.0 million in cash. Pursuant to the
terms of the asset purchase agreement, the acquisition became effective on December 31, 2004, and
we commenced receiving revenue from the merchant accounts on January 1, 2005. We expanded our
existing credit facility from $80.0 million to $180.0 million to finance the purchase. The
transaction also strengthened our existing strategic relationship with FDMSs merchant services
unit. We will continue to utilize processing services from FDMS
for the acquired portfolio.
In January 2005, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of Petroleum Card Services. Consideration included cash at closing
and a contingent payment based on performance over the first two years. Petroleum Card Services is
a provider of card-based payment transaction processing services. The acquisition was recorded
under the purchase method with the total consideration allocated to the fair value of assets
acquired and liabilities assumed. The operating results of Petroleum Card Services from January 1,
2005, were included in our Consolidated Financial Statements.
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In June 2005, we acquired a 51% interest in the joint venture iPayment ICE of Utah, LLC
(ICE), a provider of card-based payment transaction processing services. The acquisition was
recorded under the purchase method with the total consideration allocated to the fair value of
assets acquired and liabilities assumed. The operating results of ICE from June 1, 2005 were
included in our Consolidated Financial Statements. During 2008, we acquired the remaining 49%
interest in this joint venture for less than $0.1 million, which caused this entity to become
wholly-owned. At that time, we legally dissolved the entity iPayment ICE of Utah, LLC and our
subsidiary iPayment ICE Holdings, Inc., which had previously held our 51% interest in ICE.
In October 2005, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of National Processing Management Group (NPMG). Consideration
included cash at closing and contingent payment based on performance in 2006 and 2007. NPMG is a
provider of card-based payment transaction processing services. The acquisition was recorded under
the purchase method with the total consideration allocated to the fair value of assets acquired and
liabilities assumed. The operating results of NPMG from October 1, 2005, were included in our
Consolidated Financial Statements.
In December 2007, we entered into an agreement to purchase substantially all the assets and to
assume certain liabilities of Cambridge Payment Systems (Cambridge). Consideration included cash
at closing and contingent payment based on performance in 2008, 2009, and 2010. Cambridge is a
provider of card-based payment transaction processing services. The acquisition was recorded under
the purchase method with the total consideration allocated to the fair value of assets acquired and
liabilities assumed. The operating results of Cambridge from January 1, 2008, were included in our
Consolidated Financial Statements.
In April 2008, we entered into an agreement to purchase substantially all of the assets and to
assume certain liabilities of Merchant Service Center, an ISG with a growing portfolio of over
7,000 merchants. Consideration included cash at closing and contingent payments based on
performance in 2008, 2009, and 2010. Merchant Service Center is a provider of card-based payment
transaction processing services. The acquisition was recorded under the purchase method with the
total consideration allocated to the fair value of assets acquired and liabilities assumed. The
operating results of Merchant Service Center were included in our
Consolidated Financial Statements
beginning April 1, 2008.
In November 2009, iPayment, Inc. entered into a Purchase and Sale Agreement with the
shareholders of Central Payment Co., LLC (CPC), whereby iPayment acquired a merchant portfolio
consisting of approximately 8,000 merchants from CPC. The transaction was effective as of November
1, 2009. Consideration at closing was $23.8 million in cash. As a result of the portfolio
purchase, iPayment recorded $23.8 million of intangible assets.
In November 2010, iPayment, Inc. entered into a Purchase and Sale Agreement with the
shareholders of Flagship Merchant Services (Flagship), whereby iPayment acquired a merchant
portfolio of 8,400 merchant accounts from Flagship. This acquisition constituted a permitted
acquisition under our senior secured credit facility. The consideration included cash at closing
from our cash on hand and from our revolving credit facility. The effect of the portfolio
acquisition was included in our Consolidated Income Statements beginning October 1, 2010 pursuant
to the provisions of the Asset Purchase Agreement. Consideration at closing was $20.0 million in
cash.
In December 2010, we entered into a Purchase and Sale Agreement with an existing ISG whereby
we acquired a merchant portfolio of approximately 2,500 merchant accounts. This acquisition
constituted a permitted acquisition under our senior secured credit facility. Consideration at
closing was $5 million in cash which was funded from our revolving credit facility. The effect of
the portfolio acquisition was included in our Consolidated Financial Statements beginning December
1, 2010.
We accounted for all of the acquisitions described above under the purchase method. For
acquisitions of a business, we allocate the purchase price based in part on valuations of the
assets acquired and liabilities assumed. For acquisitions of merchant portfolios, we allocate the
purchase price to intangible assets. For companies with modest growth prospects, our purchase
prices primarily reflect the value of merchant portfolios, which are classified as amortizable
intangible assets. Acquisition targets we identified as having entrepreneurial management teams,
efficient operating platforms, or proven distribution capabilities, all of which contribute to
higher growth prospects, commanded purchase prices in excess of their merchant portfolio values.
Consequently, purchase price allocations for these targets may reflect a greater proportion of
goodwill.
Critical Accounting Policies
The accompanying Consolidated Financial Statements have been prepared in accordance with GAAP,
which require that management make numerous estimates and assumptions. Actual results could differ
from those estimates and assumptions, impacting our reported results of operations and financial
position. Our significant accounting policies are more fully described in Note 2 to our
Consolidated Financial Statements included in Item 8 of this Form 10-K. The critical accounting
policies described here are those that are most important to the depiction of our financial
condition and results of operations and their application requires managements most subjective
judgment in making estimates about the effect of matters that are inherently uncertain.
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Accounting for Goodwill and Intangible Assets. We follow ASC 350 Intangibles Goodwill and
Other Topics (formerly known as Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets), which addresses financial accounting and reporting for acquired goodwill
and other intangible assets, and requires that goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at least an annual assessment for
impairment. If facts and circumstances indicate goodwill may be impaired, we perform a
recoverability evaluation. In accordance with ASC 350, the recoverability analysis is based on fair
value. The calculation of fair value includes a number of estimates and assumptions, including
projections of future income and cash flows, the identification of appropriate market multiples and
the choice of an appropriate discount rate.
We engage, on a regular basis, an independent third party to aid management in determining the
fair value of our goodwill. We completed our most recent annual goodwill impairment review as of
July 31, 2010, and updated our review as of December 31, 2010, using the present value of future
cash flows to determine whether the fair value of the reporting unit exceeds the carrying amount of
the net assets, including goodwill. We determined that no impairment charge to goodwill was
required.
We periodically evaluate the carrying value of long-lived assets in relation to the respective
projected future undiscounted cash flows to assess recoverability. An impairment loss is
recognized if the sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. The difference between the carrying amount of the long-lived
assets being evaluated and the fair value, calculated as the sum of the expected cash flows
discounted at a market rate, represents the impairment loss. We evaluated the carrying value of
our intangible assets as of December 31, 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. 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 our current Consolidated Income Statements and on a prospective basis until further
evidence becomes apparent. We identified an unfavorable trend of the current attrition rates being
used during the year ended December 31, 2009 on some of our portfolios. Accordingly, we recorded
an increase to amortization expense of approximately $2.1 million to better approximate the
distribution of cash flows generated by the merchant processing portfolios. In 2010 we did not
identify any unfavorable trend in attrition rates and accordingly, we did not record any increase
to amortization expense.
Revenue and Cost Recognition. Substantially all of our revenues are generated from fees
charged to merchants for card-based payment processing services. We typically charge these
merchants a bundled rate, primarily based upon each merchants monthly charge volume and risk
profile. Our fees principally consist of discount fees, which are a percentage of the dollar
amount of each credit or debit transaction. We charge all merchants higher discount rates for
card-not-present transactions than for card-present transactions in order to compensate ourselves
for the higher risk of underwriting these transactions. We derive the balance of our revenues from
a variety of fixed transaction or service fees, including fees for monthly minimum charge volume
requirements, statement fees, annual fees, technology fees, and fees for other miscellaneous
services, such as handling chargebacks. We recognize discounts and other fees related to payment
transactions at the time the merchants transactions are processed. Related interchange and
assessment costs are also recognized at that time. We recognize revenues derived from service fees
at the time 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 processing volume and are recognized at the time
transactions are processed. Revenues generated from certain bank portfolios acquired as part of
the FDMS acquisition are
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reported net of interchange, as required by ASC Topic 605, because we may
not have credit risk, portability or the ultimate responsibility for the merchant accounts.
Other cost of services included other costs of service attributable to processing and bank
sponsorship costs of $23.8 million, $30.9 million, and $38.1 million in the years ended December
31, 2010, 2009, and 2008, respectively. They also include related costs such as residual payments
to ISGs, which are commissions we pay to our ISGs 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 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 cost of services also includes 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 professional fees.
Reserve for Merchant Losses. Disputes between a cardholder and a merchant periodically arise
as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant
services. Such disputes may not be resolved in the merchants favor. In these cases, the
transaction is charged back to the merchant, which means the purchase price is refunded to the
customer through the merchants acquiring bank and charged to the merchant. If the merchant has
inadequate funds, we or, under limited circumstances, the acquiring bank and us, must bear the
credit risk for the full amount of the transaction. We evaluate the merchants risk for such
transactions and estimate its potential loss for chargebacks based primarily on historical
experience and other relevant factors and record a loss reserve accordingly. At December 31, 2010
and 2009, our reserve for losses on merchant accounts included in accrued liabilities and other
totaled $1.4 million and $1.5 million, respectively. We believe our reserve for charge-back and
other similar processing-related merchant losses is adequate to cover both the known probable
losses but also the incurred but not yet reported losses at December 31, 2010 and 2009.
We also maintain a reserve for merchant advance losses. In 2007, we began, on a selective
basis, offering advances to prospective and current merchants based on expected future processing
volume. We stopped offering new merchant advances to our customers in 2008. During the term of
our existing advances, there is risk that an advance may be deemed uncollectible. We evaluate the
risk of potential loss for each advance and record a loss reserve accordingly. As of December 31,
2010, our reserve for merchant advances was $0.4 million and is included in investment in merchant
advances in our Consolidated Balance Sheets. Our receivable for merchant advances was fully
reserved for at December 31, 2010.
Income Taxes. We account for income taxes pursuant to the provisions of ASC 740 Income Taxes
(formerly known as SFAS No. 109, Accounting for Income Taxes). Under this method, deferred tax
assets and liabilities are recorded to reflect the future tax consequences attributable to the
effects of differences between the carrying amounts of existing assets and liabilities for
financial reporting and for income tax purposes.
Noncontrolling Interest. We previously owned a 20% interest in a joint venture, Central
Payment Co, LLC (CPC). However, during the fourth quarter of 2009, we sold our 20% interest in
CPC for $4.3 million. The sale of our equity caused us to deconsolidate CPC and to recognize a
deferred gain of $2.8 million that will be recognized as income over a three-year period. As of
December 31, 2010, we had $0.9 million of short-term deferred gain within Accrued liabilities and
other and $0.8 million of long-term deferred gain within Other liabilities on our Consolidated
Balance Sheets. We recognized $0.9 million of gain during 2010 within Other income on our
Consolidated Income Statements. Although the sale of our equity in CPC does not require pro forma
disclosure within our financial statements, within Note 14 of the Notes to the Consolidated
Financial Statements we have provided pro forma quarterly financial information for 2009 presenting
the effect of CPC as a deconsolidated entity. The noncontrolling interest in CPC was $1.0 million
on December 31, 2008. There was no remaining noncontrolling interest at December 31, 2009 due to
the sale of our equity interest in CPC. We also previously owned a 51% interest in a second joint
venture, iPayment ICE of Utah,
LLC (ICE). However, during the third quarter of 2008, we acquired the remaining 49% of ICE
for less than $0.1 million, which caused ICE to be wholly-owned.
We accounted for our investments pursuant to the provisions of ASC 810 Consolidation
(formerly known as SFAS Interpretation No. 46R, Consolidation of Variable Interest Entities).
Under this method, if a business enterprise has a controlling financial interest in or is the
primary beneficiary of a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in Consolidated Financial Statements
with those of the business enterprise. As a result, we considered CPC a variable interest entity,
and as the primary beneficiary during our time as an equity holder, we consolidated CPC.
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During
the quarter ended March 31, 2009 and the quarter ended September 30, 2009, CPC made distributions
of profits to the Company and the majority shareholders of CPC. The distributions to the majority
shareholders reduced our noncontrolling interest balance prior to the sale of our equity.
Derivative Financial Instruments. We account for our derivative financial instruments in
accordance with ASC 815 Derivatives and Hedging (formerly known as SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities). Under ASC 815, we recognize all derivatives as
either other assets or other liabilities, measured at fair value. At December 31, 2010, we did not
carry any derivative financial instrument.
Components of Revenues and Expenses
Substantially all of our revenues are generated from fees charged to merchants for card-based
payment processing services. We typically charge these merchants a bundled rate, primarily based
upon the merchants monthly charge volume and risk profile. Our fees principally consist of
discount fees, which are a percentage of the dollar amount of each credit or debit transaction. We
charge all merchants higher discount rates for card-not-present transactions than for card-present
transactions in order to provide compensation for the higher risk of underwriting these
transactions. We derive the balance of our revenues from a variety of fixed transaction or service
fees, including fees for monthly minimum charge volume requirements, statement fees, annual fees,
technology fees, and fees for other miscellaneous services, such as handling chargebacks. We
recognize discounts and other fees related to payment transactions at the time the merchants
transactions are processed. Related interchange and assessment costs are also recognized at that
time. We recognize revenues derived from service fees at the time the service is performed. In
December 2007, we began, on a selective basis, offering advances to prospective and current
merchants based on expected future processing volume that will be collected through reductions in
amounts otherwise paid to them on future transactions we process. We discontinued making merchant
advances in 2008. These merchant advances are reflected in Investment in merchant advances in our
Consolidated Balance Sheets. At December 31, 2010 the balances were $0. The merchant advances are
generally collected over periods from six months to one year. Our discount income is recognized
over the term of the agreement as Revenues in our Consolidated Income Statements using the
effective interest method. In connection with the origination of certain of these advances, we may
incur origination or other fees. The amounts paid are deferred and amortized as a reduction of
deferred origination fees over the life of the advance. The objective of the method of income and
expense recognition is to record a constant effective yield on the investment in the related
advances.
We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent, included in the Revenue Recognition Topic of ASC Topic 605, in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and ultimate responsibility
for the merchant, revenues are reported at the time of sale on a gross basis equal to the full
amount of the discount charged to the merchant. This amount includes interchange paid to card
issuing banks and assessments paid to payment card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of merchants. Revenues
generated from certain agent bank portfolios acquired from First Data Merchant Services Corporation
(the FDMS Agent Bank Portfolio) are reported net of interchange, as required by EITF 99-19, where
we may not have credit risk, portability or the ultimate responsibility for the merchant accounts.
The most significant component of operating expenses is interchange fees, which are amounts we
pay to the card issuing banks. Interchange fees are based on transaction processing volume and are
recognized at the time transactions are processed.
Other costs of services include costs directly attributable to our provision of payment
processing and related services to our merchants and primarily includes residual payments to ISGs,
which are commissions we pay to our ISGs based upon a percentage of the net revenues we generate
from their merchant referrals, and assessment fees payable to card associations, which is a
percentage of the processing volume we generate from Visa and MasterCard. Other costs of services
include depreciation expense, which is recognized on a straight-line basis over the estimated
useful life of the assets, and amortization expense, which is recognized using an accelerated
method over a fifteen-year period. Amortization of intangible assets results from our acquisitions
of portfolios of merchant contracts or acquisitions of a business where we allocated a portion of
the purchase price to the existing merchant processing portfolios and other intangible assets. In
addition, other costs of services include telecommunications costs, personnel costs, occupancy
costs, losses due to merchant defaults, other miscellaneous merchant supplies and services
expenses, bank sponsorship costs and other third-party processing costs.
Selling, general and administrative expenses consist primarily of salaries and wages, as well
as other general administrative expenses such as professional fees.
Seasonality
Our revenues and earnings are impacted by the volume of consumer usage of credit and debit
cards at the point of sale. For example, we experience increased point of sale activity during the
traditional holiday shopping period in the fourth quarter. Revenues during the first quarter tend
to decrease in comparison to the remaining three quarters of our fiscal year on a same store basis,
particularly in comparison to our fourth quarter.
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Off-Balance Sheet Arrangements
We do not have transactions, arrangements and other relationships with unconsolidated entities
that are reasonably likely to affect our liquidity or capital resources. We have no special purpose
or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit
risk support, engage in leasing, hedging, research and development services, or other relationships
that expose us to liability that is not reflected on the face of the financial statements.
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Results of Operations
Years ended December 31, 2010 and 2009 (in thousands, except percentages)
The following table sets forth our operating results for the periods indicated as a percentage
of our revenues:
% of | % of | |||||||||||||||||||||||
Total | Total | Change | ||||||||||||||||||||||
2010 | Revenue | 2009 | Revenue | Amount | % | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 699,174 | 100.0 | % | $ | 717,928 | 100.0 | % | $ | (18,754 | ) | -2.6 | % | |||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
380,577 | 54.4 | % | 397,530 | 55.4 | % | (16,953 | ) | -4.3 | % | ||||||||||||||
Other cost of services |
216,873 | 31.0 | % | 228,253 | 31.8 | % | (11,380 | ) | -5.0 | % | ||||||||||||||
Selling, general and administrative |
13,827 | 2.0 | % | 20,348 | 2.8 | % | (6,521 | ) | -32.0 | % | ||||||||||||||
Total operating expenses |
611,277 | 87.4 | % | 646,131 | 90.0 | % | (34,854 | ) | -5.4 | % | ||||||||||||||
Income from operations |
87,897 | 12.6 | % | 71,797 | 10.0 | % | 16,100 | 22.4 | % | |||||||||||||||
Other expenses: |
||||||||||||||||||||||||
Interest expense, net |
(45,662 | ) | -6.5 | % | (46,488 | ) | -6.5 | % | 826 | -1.8 | % | |||||||||||||
Other, net |
(1,058 | ) | -0.2 | % | (1,245 | ) | -0.2 | % | 187 | -15.0 | % | |||||||||||||
Total other expense, net |
(46,720 | ) | -6.7 | % | (47,733 | ) | -6.6 | % | 1,013 | -2.1 | % | |||||||||||||
Income before income taxes |
41,177 | 5.9 | % | 24,064 | 3.4 | % | 17,113 | 71.1 | % | |||||||||||||||
Income tax provision |
18,349 | 2.6 | % | 8,736 | 1.2 | % | 9,613 | 110.0 | % | |||||||||||||||
Net income |
22,828 | 3.3 | % | 15,328 | 2.1 | % | 7,500 | 48.9 | % | |||||||||||||||
Less: Net income attributable to
noncontrolling interests |
| 0.0 | % | (3,588 | ) | -0.5 | % | 3,588 | -100.0 | % | ||||||||||||||
Net income attributable to iPayment, Inc. |
$ | 22,828 | 3.3 | % | $ | 11,740 | 1.6 | % | $ | 11,088 | 94.4 | % | ||||||||||||
Revenues. Revenues decreased 2.6% to $699.2 million in 2010 from $717.9 million 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 increased 0.2% to $699.2 million in 2010 from
$698.0 million 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 3.7% to $22,653 million during 2010 from
$23,526 million during 2009, reflecting a smaller total number of merchant customers in 2010
compared to 2009. Revenues decreased at a lower rate than charge volume due to increases in fees
charged to merchants.
Interchange. Interchange expenses decreased 4.3% to $380.6 million in 2010 from $397.5million
in 2009, 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 2.1% to $380.6
million in 2010 from $388.6 million 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 5.0% to $216.9 million in 2010 from
$228.3 million in 2009. The decline 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
32.0% to $13.8 million in 2010 from $20.3 million 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 3.0% to $13.8 million in
2010 as compared to $13.4 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 expense decreased 2.1% to $46.7 million in 2010 from $47.7 million in
2009. Other expense in 2010 primarily consisted of $45.7 million of net interest expense. Interest
expense decreased $0.8 million to $45.7 million in 2010 from $46.7 million in 2009, reflecting a
lower average interest rate and lower funded debt.
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Income Tax. Income taxes increased $9.6 million to $18.3 million in 2010 from $8.7 million in
2009 primarily due to an increase in our income before income taxes. Our effective income tax rate
increased to approximately 44.6% in 2010, from approximately 36.3% in 2009, primarily due to
adjustments to certain deferred tax items relating to our intangible assets. The effective income
tax rate also increased due to a reduction in the value of our deferred tax assets as a result of
an expected future decrease in our state tax rate. Additionally, the lower rate in 2009 compared
to 2010 was partly attributable to our adoption of ASC 810 (formerly known as SFAS No. 160), under
which our income before income taxes includes 100% of earnings of our former consolidated joint
venture, CPC, including earnings allocable to the noncontrolling interests in CPC, but the income
tax expenses do not include any tax expenses on the noncontrolling interests share of earnings of
CPC.
Noncontrolling Interests. There was no income attributable to noncontrolling interests in 2010
due to sale of our interest in CPC during the fourth quarter of 2009. Net income attributable to
noncontrolling interests was $3.6 million in 2009.
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Results of Operations
Years ended December 31, 2009 and 2008 (in thousands, except percentages)
The following table sets forth our operating results for the periods indicated as a percentage
of our revenues:
% of | % of | |||||||||||||||||||||||
Total | Total | Change | ||||||||||||||||||||||
2009 | Revenue | 2008 | Revenue | Amount | % | |||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||||||
Revenues |
$ | 717,928 | 100.0 | % | $ | 794,825 | 100.0 | % | $ | (76,897 | ) | -9.7 | % | |||||||||||
Operating expenses: |
||||||||||||||||||||||||
Interchange |
397,530 | 55.4 | % | 450,570 | 56.7 | % | (53,040 | ) | -11.8 | % | ||||||||||||||
Other cost of services |
228,253 | 31.8 | % | 240,880 | 30.3 | % | (12,627 | ) | -5.2 | % | ||||||||||||||
Selling, general and administrative |
20,348 | 2.8 | % | 20,941 | 2.6 | % | (593 | ) | -2.8 | % | ||||||||||||||
Total operating expenses |
646,131 | 90.0 | % | 712,391 | 89.6 | % | (66,260 | ) | -9.3 | % | ||||||||||||||
Income from operations |
71,797 | 10.0 | % | 82,434 | 10.4 | % | (10,637 | ) | -12.9 | % | ||||||||||||||
Other expenses: |
||||||||||||||||||||||||
Interest expense, net |
(46,488 | ) | -6.5 | % | (56,289 | ) | -7.1 | % | 9,801 | -17.4 | % | |||||||||||||
Other, net |
(1,245 | ) | -0.2 | % | (750 | ) | -0.1 | % | (495 | ) | 66.0 | % | ||||||||||||
Total other expense, net |
(47,733 | ) | -6.6 | % | (57,039 | ) | -7.2 | % | 9,306 | -16.3 | % | |||||||||||||
Income before income taxes |
24,064 | 3.4 | % | 25,395 | 3.2 | % | (1,331 | ) | -5.2 | % | ||||||||||||||
Income tax provision |
8,736 | 1.2 | % | 10,105 | 1.3 | % | (1,369 | ) | -13.5 | % | ||||||||||||||
Net income |
15,328 | 2.1 | % | 15,290 | 1.9 | % | 38 | 0.2 | % | |||||||||||||||
Less: Net income attributable to
noncontrolling interests |
(3,588 | ) | -0.5 | % | (987 | ) | -0.1 | % | (2,601 | ) | 263.5 | % | ||||||||||||
Net income attributable to iPayment,
Inc. |
$ | 11,740 | 1.6 | % | $ | 14,303 | 1.8 | % | $ | (2,563 | ) | -17.9 | % | |||||||||||
Revenues. Revenues decreased 9.7% to $717.9 million in 2009 from $794.8 million in 2008.
The decrease resulted from the challenging economic environment, as our merchant processing volume,
which represents the total value of transactions processed by us, declined 12.2% to $23,526 million
during 2009 from $26,783 million during 2008, reflecting lower consumer spending. Revenues
decreased at a lower rate than charge volume due to increases in fees charged to merchants.
Interchange. Interchange expenses decreased 11.8% to $397.5 million in 2009 from $450.6
million in 2008. Interchange expenses as a percentage of total revenues decreased to 55.4% in 2009
as compared to 56.7% in 2008. Average interchange costs increased in relation to charge volume,
but were offset by greater corresponding increases in average fees charged to merchants.
Other Costs of Services. Other costs of services decreased 5.2% to $228.3 million in 2009 from
$240.9 million in 2008. Other costs of services represented 30.3% of revenues in 2009 as compared
to 30.4% of revenues in 2008. The percentage increase was primarily attributable to increased
depreciation and amortization, partially offset by reductions in processing costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased
2.8% to $20.3 million in 2009 from $20.9 million in 2008. Selling, general and administrative
expenses as a percentage of revenues remained relatively consistent from 2008 to 2009.
Other Expense. Other expense decreased $9.3 million to $47.7 million in 2009 from $57.0
million in 2008. Other expense in 2009 primarily consisted of $46.5 million of net interest
expense. Interest expense in 2009 decreased $9.8 million from 2008, reflecting a lower average
interest rate and lower funded debt.
Income Tax. Income tax expenses decreased $1.4 million to $8.7 million in 2009 from $10.1
million in 2008. Income tax expenses as a percentage of income before taxes were 36.3% in 2009,
compared to 39.8% in 2008. The decline in the rate occurred in part due to our adoption of ASC 810
(formerly known as SFAS No. 160), under which our income before income taxes includes 100% of
earnings of our former consolidated joint venture, CPC, including earnings allocable to the
noncontrolling interests in CPC, but the income tax expenses do not include any tax expenses on the
noncontrolling interests share of earnings of CPC. CPC had greater pretax income during 2009 as
compared to 2008, which caused our effective income tax rate to decrease. The effective tax rate
in 2009 included an increase in the valuation allowances for net operating losses, which increased
the effective tax rate. The effective tax rate in 2008 included an increase in the valuation
allowance for certain state net operating losses and cancellation of debt income, both of which
increased the effective tax rate.
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Noncontrolling Interests. Net income attributable to noncontrolling interests was $3.6 million
in 2009 compared to $1.0 million in 2008. CPC was formed in February 2006 and turned profitable in
the second half of 2007. In 2008, though CPC was profitable throughout the year, we absorbed all
of CPCs income to the extent that we had recognized cumulative losses in CPC that exceeded our
previous investments. After our initial investment balance was restored, we began to recognize net
income attributable to noncontrolling interests. Following the sale of our interest in CPC during
the fourth quarter of 2009, there was no income attributable to previously existing noncontrolling
interests.
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Liquidity and Capital Resources
As of December 31, 2010 and 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 $3.7
million at December 31, 2010, compared to a deficit of $6.6 million as of December 31, 2009. The
working capital deficit decrease consisted primarily of an increase in the accounts receivable to
$27.5 million from $25.0 million in 2009.
We consistently have positive cash flow provided by operations and expect that our cash flow
from operations and proceeds from borrowings under our revolving credit facility will be our
primary sources of liquidity and will be sufficient to cover our current obligations. See
Contractual Obligations below for a description of future required uses of cash.
We have significant outstanding long-term debt as of December 31, 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 and cannot cure a breach of these covenants, 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 due and payable. Our debt-to-EBITDA ratio, as defined in
our senior secured credit facility, was 4.65 to 1.00 as of December 31, 2010, compared to the
allowed maximum of 4.75 to 1.00. Accordingly, we believe we will continue to meet our debt
covenants in the foreseeable future. The recessionary environment and credit contraction over the
past few years have affected cardholder spending behavior. While this trend has moderated in 2010,
there is 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 2011 could be worse than currently expected. If such deterioration were to occur, there is
a possibility we may be unable to comply with our debt covenants. Any amendment to or waiver of
our debt covenants, if available at all, would likely involve substantial upfront fees,
significantly higher annual interest costs and other terms significantly less favorable to us than
those contained in our current credit facilities.
Operating activities
Net cash provided by operating activities was $62.0 million in 2010, consisting of net income
of $22.8 million, adjusted for depreciation and amortization of $41.2 million, noncash interest
expense of $3.2 million and net unfavorable changes in operating assets and liabilities of $5.3
million. The net unfavorable change in operating assets and liabilities was primarily caused by an
increase in accounts receivable, a decrease in accounts payable due to the seasonality of the
timing of payments and an increase in income taxes payable due to higher income during 2010.
Net cash provided by operating activities was $62.7 million in 2009, consisting of net income
of $15.3 million, adjusted for depreciation and amortization of $45.8 million, noncash interest
expense of $2.6 million and net unfavorable changes in operating assets and liabilities of $1.0
million. The net unfavorable change in operating assets and liabilities was primarily caused by
increases in deferred taxes and accounts receivable after the effects of the sale of our equity in
CPC, offset by increases in accounts payable, income taxes payable and accrued liabilities.
Net cash provided by operating activities was $46.4 million in 2008, consisting of net income
of $15.3 million, adjusted for depreciation and amortization of $38.0 million, noncash interest
expense of $2.4 million and net unfavorable changes in operating assets and liabilities of $8.3
million. The net unfavorable change in operating assets and liabilities was primarily caused by an
increase in deferred tax assets, an increase in income taxes payable, and an increase in accounts
receivable.
Investing activities
Net cash used by investing activities was $34.1 million in 2010. Net cash used by investing
activities primarily consisted of $25.0 million for the acquisition of merchant portfolios, $6.3
million of payments for contract modifications for prepaid residual expenses and $2.9 million of
capital expenditures. We currently have no significant capital spending or purchase commitments
outstanding, but expect to continue to engage in capital spending in the ordinary course of
business.
Net cash used by investing activities was $27.6 million in 2009. Net cash used by investing
activities primarily consisted of $24.6 million for the acquisition of merchant portfolios, $2.7
million paid for earnout payments associated with acquisitions from a prior period, $5.1 million of
payments for contract modifications for prepaid residual expenses and $2.3 million of capital
expenditures, offset by a $4.5 million reduction in investments in merchant advances and $4.3
million received as consideration in our disposition of our noncontrolling interest in CPC, less
$1.5 million of cash disposed.
Net cash used by investing activities was $32.7 million in 2008. Net cash used by investing
activities primarily consisted of $22.1 million for the acquisition of businesses, $4.3 million of
investments in merchant advances, $4.2 million of payments for contract modifications for prepaid
residual expenses and $2.4 million of capital expenditures.
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Financing activities
Net cash used in financing activities was $27.9 million in 2010, primarily consisting of
repayments on our senior secured credit facility of $27.0 million. 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 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.
Net cash used in financing activities was $38.7 million in 2009, primarily consisting of
repayments on our senior secured credit facility of $47.0 million and $2.6 million of distributions
made to the majority shareholders of our former joint venture, CPC, partially offset by $10.9
million of net borrowings under our revolving credit facility.
Net cash used in financing activities was $10.2 million in 2008, consisting primarily of
repayments on our senior secured credit facility of $6.9 million, $2.2 million of repayments on our
revolving credit facility, and repurchases of our senior subordinated notes of $1.1 million.
On May 10, 2006, we replaced our existing credit facility with a new senior secured credit
facility with Bank of America as administrative agent. The senior secured credit facility consists
of $515.0 million of term loans and a $60.0 million revolving credit facility, further expandable
to $100.0 million. The senior secured credit facility contains a $25.0 million letter of credit
sublimit and is secured by the all of our assets. Interest on outstanding borrowings under the
term loans is payable at a rate of LIBOR plus a margin of 2.00% to 2.25% (currently 2.00%).
Interest on outstanding borrowings under the revolving credit facility is payable at prime plus a
margin of 0.50% to 1.25% (currently 1.25%) or at a rate of LIBOR plus a margin of 1.50% to 2.25%
(currently 2.25%) depending on our ratio of consolidated debt to EBITDA, as defined in the
agreement. Additionally, the senior secured credit facility requires us to pay unused commitment
fees of up to 0.50% (currently 0.50%) on any undrawn amounts under the revolving credit facility.
The senior secured credit facility contains customary affirmative and negative covenants, including
financial covenants requiring maintenance of a debt-to-EBITDA ratio (as defined therein), which is
currently 4.75 to 1.00, but which decreases periodically over the life of the agreement to a ratio
of 4.00 to 1.00 on December 31, 2011. The senior secured credit facility also contains an excess
cash flow (as defined therein) covenant, which requires us to make additional principal payments
after the end of every fiscal year. At December 31, 2010, the payment attributable to this
covenant was $5.8 million and was included in the current portion of long-term debt. At December
31, 2009, there was no additional payment attributable to this covenant. Principal repayments on
the term loans were due quarterly in the amount of $1.3 million which began on June 30, 2006, with
any remaining unpaid balance due on March 31, 2013. During 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 $39.9 million of
debt principal beyond the required quarterly principal payments. Outstanding principal balances on
the revolving credit facility are due when the revolving credit facility matures on May 10, 2012.
At December 31, 2010, we had outstanding $420.6 million of term loans at a weighted average
interest rate of 2.29% and $11.0 million of borrowings outstanding under the revolving credit
facility at a weighted average interest rate of 3.42%.
Under our senior secured credit facility, we were required to hedge at least 50% of the
outstanding balance through May 10, 2008, and accordingly, we entered into interest rate swap
agreements with a total notional amount of $260.0 million. These swap agreements expired on
December 31, 2010, and our interest rate swap balance at that date was $0. The swap agreements
effectively converted an equivalent portion of our outstanding borrowings to a fixed rate of 5.39%
(plus the applicable margin) over the entire term of the swaps. In September 2007, we entered into
two additional interest rate swap agreements. The first swap was for a notional value of $100.0
million and expired on September 17, 2008. This swap effectively converted an equivalent portion
of our outstanding borrowings to a fixed rate of 4.80% (plus the applicable margin) over the entire
term of the swap. The second swap was for a notional value of $75.0 million and expired on
September 28, 2008. This swap effectively converted an equivalent portion of our outstanding
borrowings to a fixed rate of 4.64% (plus the applicable margin) over the entire term of the swap.
The swap instruments qualified for hedge accounting treatment under ASC 815 Derivatives and
Hedging (see Note 2 in our Notes to Consolidated Financial Statements).
On May 10, 2006, we also issued senior subordinated notes in the aggregate principal amount of
$205.0 million. These senior subordinated notes were issued at a discount of 1.36%, with interest
payable semi-annually at 9.75% on May 15 and November 15 of each year. The senior subordinated
notes mature on May 15, 2014, but may be redeemed, in whole or in part, by the Company at
redemption prices specified in the indenture governing the senior subordinated notes, plus accrued
and unpaid interest. The senior subordinated notes contain customary restrictive covenants,
including restrictions on incurrence of additional indebtedness if our fixed charge coverage ratio
(as defined therein) is not at least 2.0 to 1.0.
During 2008, the Company spent $1.1 million on repurchases of senior subordinated notes. In
accordance with ASC 860 Transfers and Servicing, formerly known as SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and
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Extinguishment of Liabilities, the repurchase was accounted for as an extinguishment of debt.
We reflected this transaction as a reduction in long-term debt within the Consolidated Balance
Sheets as of December 31, 2008. We amended our senior secured credit facility in April 2007 to
allow for repurchases of our senior subordinated notes up to $10.0 million, and have now completed
note repurchases in compliance with that amendment. At December 31, 2010, we had $194.5 million of
outstanding senior subordinated notes and $1.2 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 $2.6 million and net capitalized debt issuance costs related to the senior subordinated
notes totaling $3.6 million as of December 31, 2010, which is materially consistent with amounts
computed using an effective interest method. These costs are being amortized to interest expense on
a straight-line basis over the life of the related debt instruments. Amortization expense related
to the debt issuance costs was $2.2 million for the years ended December 31, 2010, 2009, and 2008
and is included within interest expense on the Consolidated Income Statements.
Contractual Obligations
The following table of our material contractual obligations as of December 31, 2010 summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the periods
indicated. The table excludes contingent payments in connection with earnouts related to completed
acquisitions. We cannot quantify the exact amounts to be paid because they are based on future
EBITDA results. We had no earnout payments in 2010 compared to $2.7 million in 2009. We currently
do not anticipate that earnout payments will be made in the near future.
Payments due by period | ||||||||||||||||||||
Less than 1 | More than 5 | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 4-5 years | years | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Credit Facility |
$ | 431,638 | $ | | $ | 431,638 | $ | | $ | | ||||||||||
Senior Subordinated Notes |
194,500 | | | 194,500 | | |||||||||||||||
Interest (1) |
87,831 | 29,340 | 51,379 | 7,111 | | |||||||||||||||
Capital lease obligations |
| | | | | |||||||||||||||
Operating lease obligations |
6,188 | 1,325 | 2,257 | 1,760 | 846 | |||||||||||||||
Purchase obligations (2)(3)(4) |
4,100 | 3,771 | 329 | | | |||||||||||||||
Total contractual obligations |
$ | 724,257 | $ | 34,436 | $ | 485,603 | $ | 203,371 | $ | 846 | ||||||||||
(1) | Future interest obligations are calculated using current interest rates on existing debt balances as of December 31, 2010, and assume no principal reduction other than mandatory principal repayments in accordance with the terms of the debt instruments as described in Note 7 to our Consolidated Financial Statements. | |
(2) | Purchase obligations represent costs of contractually guaranteed minimum processing volumes with certain of our third-party transaction processors. | |
(3) | We are required to pay FDMS an annual processing fee through 2011 related to the FDMS Merchant Portfolio and the FDMS Bank Portfolio. The minimum fee for 2011 will be at least 70% of such fee paid to FDMS in 2010, or at least $3.8 million. | |
(4) | We have agreed to utilize FDMS to process at least 75% of our consolidated transaction sales volume in any calendar year through 2011. The minimum commitments for such years are not calculable as of December 31, 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 the repayment at maturity of the aggregate principal amount of (i)
term loans under our senior secured credit facility and (ii) our senior subordinated notes) 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.
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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. The rate of inflation
can also affect our revenues by affecting our merchant charge volume and corresponding changes to
processing revenue.
New Accounting Standards
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entitys results of operations, financial position and cash flows. SFAS No. 161 is effective for
all financial statements issued for fiscal years and interim periods beginning after November 15,
2008. For further detail on the Companys derivative instruments and hedging activities, see Note 2
to our Consolidated Financial Statements. The guidance in SFAS No. 161 is included in the
Derivatives and Hedging Topic of FASB ASC Topic 815.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value
of Financial Instruments, and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. This FSP is effective for interim reporting
periods ending after June 15, 2009. The adoption of this FSP resulted in additional interim
disclosures only. See Financial Instruments within Note 1 to our Consolidated Financial Statements.
The guidance in this FSP is included in the Investments and Fair Value Measurements and Disclosures
Topics of FASB ASC Topic 820.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which establishes
general standards of accounting for and disclosure of subsequent events that occur after the
balance sheet date. SFAS 165 is effective for financial statements for periods ending after June
15, 2009. The guidance in SFAS No. 165 is included in the Subsequent Events Topic of FASB ASC Topic
855.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value. This update
provides clarification for the fair value measurement of liabilities in circumstances in which a
quoted price in an active market for an identical liability is not available. This update is
effective for interim periods beginning after August 28, 2009. The adoption of this standard did
not have a material effect on our financial position or results of operations. The guidance in this
ASU is included in the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC
Topic 820.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our monetary assets, consisting primarily of cash and receivables, are not significantly
affected by inflation. Our non-monetary assets, consisting primarily of intangible assets and
goodwill, are not affected by inflation. We believe that replacement costs of equipment, furniture
and leasehold improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, such as those for employee compensation and telecommunications,
which may not be readily recoverable in the price of services offered by us. The rate of inflation
can also impact our revenues through changes to merchant charge volume as processing fees are
generally based on a percentage of charge volume.
We transact business with merchants exclusively in the United States and receive payment for
our services exclusively in United States dollars. As a result, our financial results are unlikely
to be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets.
Our interest expense is sensitive to changes in the general level of interest rates in the
United States because a majority of our indebtedness is at variable rates. As of December 31,
2010, $431.6 million of our outstanding indebtedness was at variable interest rates based on LIBOR.
A rise in LIBOR rates of one percentage point would result in net additional annual interest
expense of $4.3 million.
We do not hold any derivative financial or commodity instruments, nor do we engage in any
foreign currency denominated transactions, and all of our cash and cash equivalents are held in
money market and checking funds.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of iPayment, Inc.
We have audited the accompanying consolidated balance sheets of iPayment, Inc. (the Company) as of
December 31, 2010 and 2009, and the related consolidated statements of income, changes in
stockholders equity and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2010. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of iPayment, Inc. at December 31, 2010 and 2009, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 21, 2011
March 21, 2011
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iPAYMENT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1 | $ | 2 | ||||
Accounts receivable, net of allowance for doubtful accounts of $735 and $857 at
December 31, 2010 and 2009, respectively |
27,542 | 25,077 | ||||||
Prepaid expenses and other current assets |
1,191 | 1,463 | ||||||
Investment in merchant advances, net of allowance for doubtful accounts of $397 and
$527 at December 31, 2010 and 2009, respectively |
| | ||||||
Deferred tax assets |
2,073 | 2,353 | ||||||
Total current assets |
30,807 | 28,895 | ||||||
Restricted cash |
556 | 680 | ||||||
Property and equipment, net |
4,766 | 4,673 | ||||||
Intangible assets and other, net of accumulated amortization of $177,600 and $138,789
at December 31, 2010 and 2009, respectively. |
156,734 | 163,774 | ||||||
Goodwill |
527,978 | 527,978 | ||||||
Deferred tax asset |
4,324 | 8,219 | ||||||
Other assets, net |
10,464 | 11,147 | ||||||
Total assets |
$ | 735,629 | $ | 745,366 | ||||
LIABILITIES and STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,265 | $ | 4,132 | ||||
Income taxes payable |
11,818 | 8,529 | ||||||
Accrued interest payable |
2,573 | 2,735 | ||||||
Accrued liabilities and other |
17,060 | 20,100 | ||||||
Current portion of long-term debt |
5,823 | | ||||||
Total current liabilities |
40,539 | 35,496 | ||||||
Long-term debt |
619,144 | 651,519 | ||||||
Other liabilities |
3,505 | 15,213 | ||||||
Total liabilities |
663,188 | 702,228 | ||||||
Commitments and contingencies (Note 5) |
||||||||
Stockholders equity |
||||||||
Common stock, $0.01 par value; 1,000 shares authorized, 100 shares issued and
outstanding at December 31, 2010, and 2009 respectively |
20,055 | 20,055 | ||||||
Accumulated other comprehensive loss, net of tax benefits of $0 and $4,984 at
December 31, 2010, and 2009, respectively |
| (7,475 | ) | |||||
Retained earnings |
52,386 | 30,558 | ||||||
Total stockholders equity |
72,441 | 43,138 | ||||||
Total liabilities and stockholders equity |
$ | 735,629 | $ | 745,366 | ||||
See accompanying notes to Consolidated Financial Statements.
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iPAYMENT, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands)
CONSOLIDATED INCOME STATEMENTS
(In thousands)
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 699,174 | $ | 717,928 | $ | 794,825 | ||||||
Operating expenses: |
||||||||||||
Interchange |
380,577 | 397,530 | 450,570 | |||||||||
Other costs of services |
216,873 | 228,253 | 240,880 | |||||||||
Selling, general and administrative |
13,827 | 20,348 | 20,941 | |||||||||
Total operating expenses |
611,277 | 646,131 | 712,391 | |||||||||
Income from operations |
87,897 | 71,797 | 82,434 | |||||||||
Other expense: |
||||||||||||
Interest expense, net |
45,662 | 46,488 | 56,289 | |||||||||
Other expense, net |
1,058 | 1,245 | 750 | |||||||||
Income before income taxes |
41,177 | 24,064 | 25,395 | |||||||||
Income tax provision |
18,349 | 8,736 | 10,105 | |||||||||
Net income |
22,828 | 15,328 | 15,290 | |||||||||
Less: Net income attributable to noncontrolling interest |
| (3,588 | ) | (987 | ) | |||||||
Net income attributable to iPayment, Inc. |
$ | 22,828 | $ | 11,740 | $ | 14,303 | ||||||
See accompanying notes to Consolidated Financial Statements.
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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS EQUITY and COMPREHENSIVE INCOME
(In thousands, except share data)
CONSOLIDATED STATEMENTS of CHANGES IN STOCKHOLDERS EQUITY and COMPREHENSIVE INCOME
(In thousands, except share data)
Stockholder's Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | Retained | Non- | ||||||||||||||||||||||
Common Stock | Comprehensive | Earnings | controlling | |||||||||||||||||||||
Shares | Loss | (Deficit) | interest | Total | ||||||||||||||||||||
Balance at December 31, 2007 |
100 | $ | 20,055 | $ | (7,354 | ) | $ | 4,515 | $ | | $ | 17,216 | ||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||
Unrealized (loss) on fair value of derivatives, net of
tax benefits of $3,276 |
| | (4,914 | ) | | | (4,914 | ) | ||||||||||||||||
Net income |
| | | 14,303 | 987 | 15,290 | ||||||||||||||||||
Comprehensive Income: |
10,376 | |||||||||||||||||||||||
Balance at December 31, 2008 |
100 | $ | 20,055 | $ | (12,268 | ) | $ | 18,818 | $ | 987 | $ | 27,592 | ||||||||||||
Distributions to noncontrolling interest in equity of
subsidiary |
| | | | (2,640 | ) | (2,640 | ) | ||||||||||||||||
Sale of interest in equity of subsidiary |
| | | | (1,935 | ) | (1,935 | ) | ||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||
Unrealized gain on fair value of derivatives, net of tax
expense of $3,195 |
| | 4,793 | | | 4,793 | ||||||||||||||||||
Net income |
| | | 11,740 | 3,588 | 15,328 | ||||||||||||||||||
Comprehensive Income: |
20,121 | |||||||||||||||||||||||
Balance at December 31, 2009 |
100 | $ | 20,055 | $ | (7,475 | ) | $ | 30,558 | $ | | $ | 43,138 | ||||||||||||
Dividend paid to parent company |
| | | (1,000 | ) | | (1,000 | ) | ||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||
Unrealized gain on fair value of derivatives, net of tax
expense of $4,984 |
| | 7,475 | | | 7,475 | ||||||||||||||||||
Net income |
| | | 22,828 | | 22,828 | ||||||||||||||||||
Comprehensive Income: |
30,303 | |||||||||||||||||||||||
Balance at December 31, 2010 |
100 | $ | 20,055 | $ | | $ | 52,386 | $ | | $ | 72,441 | |||||||||||||
See accompanying notes to Consolidated Financial Statements.
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iPAYMENT, INC.
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS of CASH FLOWS
(In thousands)
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 22,828 | $ | 15,328 | $ | 15,290 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Depreciation and amortization |
41,221 | 45,828 | 38,041 | |||||||||
Noncash interest expense and other |
3,217 | 2,584 | 2,433 | |||||||||
Changes in assets and liabilities, excluding effects of acquisitions: |
||||||||||||
Accounts receivable |
(2,465 | ) | (1,001 | ) | (967 | ) | ||||||
Prepaid expenses and other current assets |
272 | 344 | 612 | |||||||||
Other assets |
(3,049 | ) | (5,804 | ) | (5,851 | ) | ||||||
Accounts payable and income taxes payable |
2,422 | 3,139 | (2,353 | ) | ||||||||
Accrued interest |
(151 | ) | (313 | ) | (218 | ) | ||||||
Accrued liabilities and other |
(2,301 | ) | 2,600 | (548 | ) | |||||||
Net cash provided by operating activities |
61,994 | 62,705 | 46,439 | |||||||||
Cash flows from investing activities |
||||||||||||
Change in restricted cash |
124 | 9 | 267 | |||||||||
Expenditures for property and equipment |
(2,904 | ) | (2,304 | ) | (2,374 | ) | ||||||
Investment in merchant advances |
| 4,460 | (4,344 | ) | ||||||||
Proceeds from disposition of noncontrolling interest, net of cash disposed |
| 2,772 | | |||||||||
Acquisitions of businesses and portfolios, net of cash acquired |
(25,000 | ) | (24,629 | ) | (22,063 | ) | ||||||
Payments related to businesses previously acquired |
| (2,734 | ) | | ||||||||
Payments for prepaid residual expenses |
(6,315 | ) | (5,126 | ) | (4,160 | ) | ||||||
Net cash used in investing activities |
(34,095 | ) | (27,552 | ) | (32,674 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Net borrowings (repayments) on line of credit |
100 | 10,900 | (2,200 | ) | ||||||||
Repayments of debt |
(27,000 | ) | (47,000 | ) | (8,009 | ) | ||||||
Dividend |
(1,000 | ) | | | ||||||||
Distributions to noncontrolling interest in equity of subsidiary |
| (2,640 | ) | | ||||||||
Net cash used in financing activities |
(27,900 | ) | (38,740 | ) | (10,209 | ) | ||||||
Net (decrease) increase in cash and cash equivalents |
(1 | ) | (3,587 | ) | 3,556 | |||||||
Cash and cash equivalents, beginning of period |
2 | 3,589 | 33 | |||||||||
Cash and cash equivalents, end of period |
$ | 1 | $ | 2 | $ | 3,589 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the period for income taxes |
$ | 14,197 | $ | 13,712 | $ | 13,917 | ||||||
Cash paid during the period for interest |
$ | 43,231 | $ | 44,218 | $ | 54,072 | ||||||
Supplemental schedule of non-cash activities: |
||||||||||||
Accrual of deferred payments for acquisitions of businesses |
$ | | $ | | $ | 2,456 | ||||||
Non-cash (decreases) increases in assets: |
||||||||||||
Goodwill |
$ | | $ | | $ | (2,277 | ) |
See accompanying notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business and Basis of Presentation
Organization and Business
iPayment, Inc. (iPayment) was originally incorporated as iPayment Holdings, Inc. in
Tennessee and was reincorporated in Delaware under the name iPayment, Inc. iPayment is a provider
of card-based payment processing services to small business merchants located across the United
States. We enable merchants to accept credit and debit cards as payment for their products and
services by providing card authorization, data capture, settlement, risk management, fraud
detection and chargeback services. Our
services also include data organization and retrieval, ongoing merchant assistance and
resolution support in connection with disputes with cardholders. We market and sell our services
primarily through independent sales groups (ISGs).
On May 10, 2006, the Company completed a merger transaction with iPayment Holdings, Inc.
(Holdings) pursuant to which iPayment MergerCo, Inc. (MergerCo) was merged with and into the
Company, with the Company remaining as the surviving corporation and a wholly-owned subsidiary of
Holdings (the Transaction). The Transaction has been accounted for as a purchase at the parent
company level (Holdings), with the related purchase accounting adjustments pushed down to the
Company.
We have significant outstanding long-term debt as of December 31, 2010. The terms of our
long-term debt contain various nonfinancial and financial covenants as further described in Note 7.
If we do not comply with these covenants or cannot cure a noncompliance, when the underlying
debt agreement allows for a cure, our debt becomes due and payable. We currently do not have
available cash and similar liquid resources available to repay our debt obligations if they were to
become due and payable. Our debt-to-EBITDA ratio was 4.65 to 1.00 as of December 31, 2010,
compared to the allowed maximum of 4.75 to 1.00. We believe we will continue to meet our debt
covenants in the foreseeable future. The recessionary environment and credit contraction in the
last few years have affected cardholder spending behavior and merchant attrition. Our charge
volume weakened in 2010 and total number of active merchants declined. As the economy recovers, we
expect these trends to moderate in 2011. 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 could cause our actual financial results during 2011 to 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.
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
interest of the portion of the entities that we do not own as Noncontrolling interest on our
Consolidated Balance Sheets in accordance with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160), now found within FASB Accounting Standards
Codification (ASC) Topic 810, Consolidation.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of iPayment, Inc. and its
wholly-owned subsidiaries iPayment of California, LLC, 1st National Processing, Inc., E-Commerce
Exchange, Inc., iPayment of Maine, Inc., Online Data Corporation, CardSync Processing, Inc.,
CardPayment Solutions, LLC, TS Acquisition Sub, LLC, PCS Acquisition Sub, LLC, Quad City
Acquisition Sub, Inc, NPMG Acquisition Sub, LLC, iFunds Cash Solutions, LLC, Cambridge Acquisition
Sub, LLC, MSC Acquisition Sub, LLC, iScan Solutions, LLC, and iPayment Acquisition Sub, LLC. All
significant accounts, transactions and profits between the consolidated companies have been
eliminated in consolidation. Significant accounts and transactions between iPayment, Inc.,
including its subsidiaries, and its directors and officers are disclosed as related party
transactions (Note 10).
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Use of Estimates
The preparation of the financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements. Estimates and
assumptions also affect the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue and Cost Recognition
Substantially all of our revenues are generated from fees charged to merchants for card-based
payment processing services. We typically charge these merchants a bundled rate, primarily based
upon the merchants monthly charge volume and risk profile. Our fees principally consist of
discount fees, which are a percentage of the dollar amount of each credit or debit transaction. We
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 service fees at the time the service is performed.
We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent, included in the Revenue Recognition Topic of ASC Topic 605, in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and ultimate responsibility
for the merchant, revenues are reported at the time of sale on a gross basis equal to the full
amount of the discount charged to the merchant. This amount includes interchange paid to card
issuing banks and assessments paid to payment card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of merchants.
Interchange fees are set by Visa and MasterCard and are based on transaction processing volume and
are recognized at the time transactions are processed. Revenues generated from certain bank
portfolios acquired as part of the First Data Merchant Services Corporation (FDMS) acquisition
are reported net of interchange, as required ASC Topic 605, because we may not have credit risk,
portability or the ultimate responsibility for the merchant accounts.
Other costs of services include costs directly attributable to processing and bank sponsorship
costs, which amounted to $23.8 million, $30.9 million, and $38.1 million in the years ended
December 31, 2010, 2009, and 2008, respectively. They also include related costs such as residual
payments to sales groups, which are commissions we pay to our sales groups based upon a percentage
of the net revenues we generate from their merchant referrals, and assessment fees payable to card
associations, which is a percentage of the charge volume we generate from Visa and MasterCard. In
addition, other costs of services include telecommunications costs, personnel costs, occupancy
costs, losses due to merchant defaults, other miscellaneous merchant supplies and services
expenses, bank sponsorship costs and other third-party processing costs directly attributable to
our provision of payment processing and related services to our merchants.
Other costs of services 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 professional fees.
Cash and Cash Equivalents
For purposes of reporting financial condition and cash flows, cash and cash equivalents
include cash and securities with original maturities of three months or less. Our cash accounts at
various banks are insured by the Federal Deposit Insurance Corporation (FDIC) without limit
through the Dodd-Frank Provision, effective from December 31, 2010 through December 31, 2012.
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements
to cover potential merchant losses, and funds held by lending institutions pursuant to loan
agreements to provide additional collateral.
Accounts Receivable, net
Accounts receivable are primarily amounts due from our clearing and settlement banks from
revenues earned, net of related interchange and bank processing fees, as required by GAAP, on
transactions processed during the month ending on the balance sheet date. Such balances are
typically received from the clearing and settlement banks within 30 days following the end of each
month. The allowance for doubtful accounts as of December 31, 2010 and 2009 was $0.7 million and
$0.9 million, respectively. We record allowances for doubtful accounts when it is probable that the
accounts receivable balance will not be collected.
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Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method for financial reporting purposes and primarily
accelerated methods for tax purposes. For financial reporting purposes, equipment is depreciated
over two to five years. Leasehold improvements are amortized over the useful life of the asset.
Depreciation expense for property and equipment for the years ended December 31, 2010, 2009, and
2008 was $1.5 million, $1.9 million, and $1.6 million, respectively. Maintenance and repairs are
charged to expense as incurred. Expenditures for renewals and improvements that extend the useful
life are capitalized.
Intangible Assets, net
Intangible assets primarily include merchant accounts from portfolio acquisitions (i.e. the
right to receive future cash flows related to transactions of these applicable merchants) (Note 3).
We utilize an accelerated method of amortization over a fifteen-year period, which we believe
approximates the distribution of actual cash flows generated by our merchant processing portfolios.
All other intangible assets are amortized using the straight-line method over an estimated life of
three to seven years. In addition, we have implemented both quarterly and annual procedures to
determine whether a significant change in the trend of the current attrition rates being used
exists on a portfolio by portfolio basis. In reviewing the current attrition rate trends, we
consider relevant benchmarks such as merchant processing volume, revenues, gross profit and future
expectations of the aforementioned factors versus historical amounts and rates. If we identify any
significant changes or trends in the attrition rate of any portfolio, we will adjust our current
and prospective estimated attrition rates so that the amortization expense would better approximate
the distribution of actual cash flows generated by the merchant processing portfolios. Any
adjustments made to the amortization schedules would be reported in the current Consolidated Income
Statements and on a prospective basis until further evidence becomes apparent. We identified an
unfavorable trend of the attrition rates being used during the year ended December 31, 2008 on some
of our portfolios. Accordingly, we recorded an increase to amortization expense of approximately
$2.4 million to better approximate the distribution of actual cash flows generated by the merchant
processing portfolios. This trend continued during the first half of 2009, during which we
recorded an increase to amortization expense of $2.1 million to better approximate the distribution
of cash flows generated by the merchant processing portfolios.
We monitor indicators of impairment on our merchant processing portfolios on a periodic basis
and at least on a quarterly basis.
Further, we perform quantitative tests quarterly or annually (annually for portfolios that are
smaller in value) by estimating the cash
flows over the remaining useful life of each portfolio and comparing to its carrying value. To the
extent that the estimated cash flows
exceed the carrying value of each portfolio, no impairment of the value of the portfolio is
necessary. The sum of the cash flows
exceeded the carrying value of each portfolio during the years ended December 31, 2010 and 2009.
Therefore, we concluded that there were no instances of impairment on our merchant processing
portfolios as of those dates.
Estimated useful lives are determined for merchant processing portfolios based on the life of
the expected cash flows from the underlying merchant accounts and for other intangible assets
primarily over the remaining terms of the contracts. During the years ended December 31, 2010,
2009, and 2008, amortization expense related to intangible assets was $39.0 million, $43.7 million,
and $36.3 million, respectively. As of December 31, 2010, estimated amortization expense for each
of the five succeeding years is expected to be as follows (in thousands):
Year ended December 31, | Amount | |||
2011 |
$ | 37,942 | ||
2012 |
31,380 | |||
2013 |
23,584 | |||
2014 |
17,886 | |||
2015 |
12,752 |
Estimated future amortization expense is based on intangible amounts recorded as of December 31,
2010. Actual amounts will increase if additional amortizable intangible assets are acquired.
Goodwill
We follow ASC 350 Intangibles Goodwill and Other Topics (formerly known as SFAS No. 142,
Goodwill and Other Intangible Assets), which addresses financial accounting and reporting for
acquired goodwill and other intangible assets, and requires that goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment and in addition, if facts and circumstances indicate goodwill may be
impaired, we perform a recoverability evaluation. In accordance with ASC 350, the recoverability
analysis is based on fair value. The calculation of fair value includes a number of estimates and
assumptions, including projections of future income and cash flows, the identification of
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appropriate market multiples of other publicly traded institutions in our industry, the
current economic environment, and the choice of an appropriate discount rate.
We completed our most recent annual goodwill impairment review as of July 31, 2010, and
updated our review as of December 31, 2010, using the present value of future cash flows to
determine whether the fair value of the reporting unit exceeded the carrying amount of the net
assets, including goodwill. All goodwill impairment testing includes an independent third party
valuation. We determined that no impairment charge to goodwill was required as the fair value of
our reporting unit sufficiently exceeded the carrying value.
Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets, in relation to the
respective projected future undiscounted cash flows, to assess recoverability. An impairment loss
is recognized if the sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. The difference between the carrying amount of the long-lived
assets being evaluated and the fair value, calculated as the sum of the expected cash flows
discounted at a market rate, represents the impairment loss. Based on the analyses we performed as
of December 31, 2010, we concluded that none of our long-lived assets were impaired.
Other Assets
Other assets at December 31, 2010 and 2009, include approximately $1.0 million and $0.1
million, respectively, of notes receivable (the current portions of $0.5 million and $0.7 million
are included in prepaid expenses and other current assets at December 31, 2010 and 2009,
respectively), representing amounts advanced to sales agents. The notes bear interest at amounts
ranging from 6% to 15%, and are payable back to us through 2015. We secure the loans by the ISGs
assets, including the rights they have to receive residuals and the fees generated by the merchants
they refer to us and any other accounts receivable and typically by obtaining personal guarantees
from the individuals who operate the ISGs.
Also included in other assets at December 31, 2010 and 2009, are approximately $6.2 million
and $8.7 million of debt issuance costs (net of accumulated amortization of $10.3 million and $8.1
million, respectively), which are being amortized over the terms of the related debt agreements
using the straight-line method which approximates the effective interest method. Other assets also
include sales-type leases held for investment, which are stated at the present value of the future
minimum lease payments and estimated residual values discounted at the rate implicit in the lease,
net of allowances for losses. There were no sales-type leases held for investment included in other
assets at December 31, 2010, and approximately $0.1 million at December 31, 2009.
Reserve for Losses on Merchant Accounts
We maintain a reserve for merchant losses necessary to absorb chargeback and other losses for
merchant transactions that have been previously processed and which have been recorded as revenue.
We analyze the adequacy of our reserve for merchant losses each reporting period. The reserve for
merchant losses is comprised of three components: (1) specifically identifiable reserves for
merchant transactions for which losses are probable and estimable, (2) a calculated reserve based
upon historical loss experience applied to the previously processed transactions, and (3) a
management analysis component for concentration issues and general macroeconomic and other factors.
The reserve for losses on merchant accounts is decreased by merchant losses (arising primarily
from chargebacks) and is increased by provisions for merchant losses and recoveries of merchant
losses. Provisions for merchant losses of $3.5 million, $4.9 million, and $4.2 million for the
years ended December 31, 2010, 2009, and 2008, respectively, are included in other costs of
services in the accompanying Consolidated Income Statements. At December 31, 2010 and 2009, our
reserve for losses on merchant accounts included in accrued liabilities and other totaled $1.4
million and $1.5 million, respectively.
We also maintain a reserve for merchant advance losses. In 2007, we began, on a selective
basis, offering advances to prospective and current merchants based on expected future processing
volume. We stopped offering new merchant advances to our customers in 2008. During the term of
our existing advances, there is risk that an advance may be deemed uncollectible. We evaluate the
risk of potential loss for each advance and record a loss reserve accordingly. Our receivable for
merchant advances was fully reserved for at December 31, 2010.
Financial Instruments
ASC 820 Fair Value Measurement and Disclosures (formerly known SFAS No. 157, Fair Value
Measurements) establishes a framework for measuring fair value, establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements
for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to
the valuation of an asset or liability as of the measurement date. The three levels are defined as
follows:
| Level 1: Observable quoted prices in active markets for identical assets and liabilities. |
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| Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. | ||
| Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash-flow models and similar techniques. |
We believe the carrying amounts of financial instruments at December 31, 2010 approximate fair
value. Due to the short maturities of the cash and cash equivalents and accounts receivable,
carrying amounts approximate the respective fair values. The carrying value of our senior
subordinated notes, net of discount, is $193 million at December 31, 2010. We estimate the fair
value to be approximately $182 million, considering executed trades occurring around December 31,
2010. The carrying value of the senior secured credit facility is $421 million at December 31,
2010. We estimate the fair value to be approximately $407 million, considering executed trades
occurring around December 31, 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
The Company uses certain variable rate debt instruments to finance its operations. These debt
obligations expose the Company to variability in interest payments due to changes in interest
rates. If interest rates increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases.
The Company may 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, the Company receives variable interest rate payments and makes fixed
interest rate payments, thereby effectively creating fixed-rate debt. The Company enters into
derivative instruments solely for cash flow hedging purposes, and the Company does not speculate
using derivative instruments.
The Company accounts for its derivative financial instruments in accordance with ASC 815
Derivatives and Hedging (formerly known as SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities). Under ASC 815, we recognize all derivatives as either other assets or
other liabilities, measured at fair value. Under our senior secured credit facility, we were
required to hedge at least 50% of the outstanding balance through May 10, 2008, and accordingly, we
entered into interest rate swap agreements with a total notional amount of $260.0 million. These
swap agreements expired on December 31, 2010, and our interest rate swap balance at that date was
$0. ASC 815 also requires that any ineffectiveness in the hedging relationship, resulting from
differences in the terms of the hedged item and the related derivative, be recognized in earnings
each period. The underlying terms of our interest rate swaps, including the notional amount,
interest rate index, duration, and reset dates, are identical to those of the associated debt
instruments and therefore the hedging relationship results in no material ineffectiveness.
Accordingly, such derivative instruments are classified as cash flow hedges, and any changes in the
fair market value of the derivative instruments are included in accumulated other comprehensive
loss in our Consolidated Balance Sheets.
Income Taxes
We account for income taxes 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 financial reporting and for income tax
purposes.
Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future
years in which temporary differences are expected to reverse. The impact on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that the rate change
is enacted. A deferred tax valuation reserve is established if it is more likely than not that a
deferred tax asset will not be realized.
Advertising Costs
We recognize advertising costs as incurred. For the years ended December 31, 2010, 2009, and
2008, advertising costs were $142,000, $148,000, and $146,000, respectively, and were included in
selling, general and administrative expenses.
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Noncontrolling Interest
We previously owned a 20% interest in a joint venture, Central Payment Co, LLC (CPC).
However, during the fourth quarter of 2009, we sold our 20% interest in CPC for $4.3 million. The
sale of our equity caused us to deconsolidate CPC and to recognize a deferred gain of $2.8 million
that will be recognized as income over a three-year period. As of December 31, 2010, we had $0.9
million of short-term deferred gain within Accrued liabilities and other and $0.8 million of
long-term deferred gain within Other liabilities on our Consolidated Balance Sheets. We
recognized $0.2 million of gain during the fourth quarter of 2009 within Other income on our
Consolidated Income Statements. Although the sale of our equity in CPC does not require pro forma
disclosure within our financial statements, within Note 14 of the Notes to the Consolidated
Financial Statements we have provided pro forma quarterly financial information presenting the
effect of CPC as a deconsolidated entity. We have also included unaudited pro forma quarterly
results from 2009 that remove the operating results of CPC resulting from the sale of our equity in
CPC. There was no remaining noncontrolling interest at December 31, 2010 and 2009 due to the sale
of our equity interest in CPC.
We also previously owned a 51% interest in a second joint venture, iPayment ICE of Utah, LLC
(ICE). However, during the third quarter of 2008, we acquired the remaining 49% of ICE for less
than $0.1 million, which caused ICE to be wholly-owned. We accounted for our investments pursuant
to the provisions of ASC 810 Consolidation (formerly known as FAS Interpretation No. 46R,
Consolidation of Variable Interest Entities). Under this method, if a business enterprise has a
controlling financial interest in or is the primary beneficiary of a variable interest entity, the
assets, liabilities, and results of the activities of the variable interest entity should be
included in Consolidated Financial Statements with those of the business enterprise. As a result,
we considered CPC a variable interest entity, and as the primary beneficiary during our time as an
equity holder, we consolidated CPC. During the quarter ended March 31, 2009 and the quarter ended
September 30, 2009, CPC made distributions of profits to the Company and the majority shareholders
of CPC. The distributions to the majority shareholders reduced our noncontrolling interest balance
prior to the sale of our equity.
Common Stock
The Company has 100 shares of common stock outstanding at December 31, 2010. The Company has
elected not to present earnings per share data as management believes such presentation would not
be meaningful.
New Accounting Pronouncements
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), which establishes
general standards of accounting for and disclosure of subsequent events that occur after the
balance sheet date. SFAS 165 is effective for financial statements ending after June 15, 2009.
The guidance in SFAS No. 165 is included in the Subsequent Events Topic of FASB ASC Topic 855.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value. This update
provides clarification for the fair value measurement of liabilities in circumstances in which a
quoted price in an active market for an identical liability is not available. This update is
effective for interim periods beginning after August 28, 2009. The adoption of this standard did
not have a material effect on our financial position or results of operations. The guidance in this
ASU is included in the Investments and Fair Value Measurements and Disclosures Topics of FASB ASC
Topic 820.
3. Acquisitions
The effective date of each of the acquisitions discussed in this Note is the date the
acquisition was recognized in our financial statements, unless otherwise noted. For the years ended
December 31, 2010, 2009, and 2008, amortization expense related to our merchant processing
portfolios and other intangible assets was $39.0 million, $43.7 million, and $36.3 million,
respectively.
Earnout Payments
Certain purchase agreements for acquisitions made in prior periods contained earnout payments
based on the subsequent performance of the business acquired. As the terms of these earnout
provisions are met, we accrue the amount owed in our Consolidated Balance Sheets and record an
increase to goodwill. We provided for $2.5 million in earnout payments in 2008. There were no
earnout provisions provided for in 2009 and 2010.
Other Acquisitions
We made various purchases of residual cash flow streams and one business, Cambridge Payment
Systems LLC (Cambridge), collectively totaling $14.1 million during 2007. Cambridge was acquired
on December 28, 2007, and the results of operations were
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included in our Consolidated Income Statements beginning January 1, 2008. Consideration for
this acquisition included cash at closing and a contingent payment based upon future performance
over three years. The Cambridge acquisition was recorded under the purchase method. The purchase
prices for the residual cash flow streams and merchant processing portfolios were primarily
assigned to intangible assets and are amortized over their expected useful lives. As a result of
the Cambridge acquisition, we recorded approximately $4.6 million of intangible assets and $8.3
million of goodwill during 2007.
On April 1, 2008, we entered into an agreement to purchase substantially all of the assets and
to assume certain liabilities of Merchant Service Center (MSC), an ISG with a portfolio of over
7,000 merchants. Consideration included cash at closing and contingent payments based on
performance in 2008, 2009, and 2010. MSC is a provider of card-based payment transaction
processing services. The acquisition was recorded under the purchase method with the total
consideration allocated to the fair value of assets acquired and liabilities assumed. The
operating results of MSC were included in our Consolidated Income Statements beginning April 1,
2008. As a result of the MSC acquisition, we recorded approximately $10.2 million of intangible
assets and $11.5 million of goodwill.
In November 2009, we entered into a Purchase and Sale Agreement with Central Payment Co., LLC
(CPC), whereby we acquired a merchant portfolio consisting of approximately 8,000 merchants from
CPC. The transaction was effective as of November 1, 2009. Consideration at closing was $23.8
million in cash. As a result of the portfolio purchase, we recorded $23.8 million of intangible
assets.
In November 2010,we entered into a Purchase and Sale Agreement with the shareholders of
Flagship Merchant Services (Flagship), whereby we acquired a merchant portfolio of approximately
8,400 merchant accounts from Flagship. This acquisition constituted a permitted acquisition under
our senior secured credit facility. Total consideration at closing was $20 million in cash, which
was funded from our cash on hand and from our revolving credit facility. The effect of the
portfolio acquisition was included in our Consolidated Income Statements beginning October 1, 2010.
In December 2010, we entered into a Purchase and Sale Agreement with an existing ISG, whereby
we acquired a merchant portfolio of approximately 2,500 merchant accounts. This acquisition
constituted a permitted acquisition under our senior secured credit facility. Consideration at
closing was $5 million in cash which was funded at closing from our revolving credit facility. The
effect of the portfolio acquisition was included in our Consolidated Income Statements beginning
December 1, 2010.
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4. Details of Balance Sheet Accounts
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Property and Equipment, net: |
||||||||
Machinery and equipment |
$ | 4,636 | $ | 3,665 | ||||
Furniture and fixtures |
1,068 | 1,336 | ||||||
Leasehold improvements |
601 | 457 | ||||||
Computer software and equipment |
4,103 | 4,454 | ||||||
10,408 | 9,912 | |||||||
Less: accumulated depreciation |
(5,642 | ) | (5,239 | ) | ||||
$ | 4,766 | $ | 4,673 | |||||
Goodwill: |
||||||||
Beginning balance |
$ | 527,978 | $ | 527,912 | ||||
Acquired during the period |
| | ||||||
Divested during the period |
| (212 | ) | |||||
Adjustments to goodwill acquired in prior period |
| 278 | ||||||
$ | 527,978 | $ | 527,978 | |||||
5. Commitments and Contingencies
Leases
Our facilities include locations in Nashville, Tennessee; Westlake Village, California;
Minden, Nevada; Novi, Michigan; and Akron, Ohio. Our future minimum lease commitments under
noncancelable leases are as follows at December 31, 2010 (in thousands):
Year ended December 31, | Amount | |||
2011 |
1,325 | |||
2012 |
1,161 | |||
2013 |
1,096 | |||
2014 |
938 | |||
2015 |
822 | |||
Thereafter |
3,461 | |||
Total |
$ | 8,803 | ||
Total rent expense for the years ended December 31, 2010, 2009, and 2008 was $2.0 million,
$2.3 million, and $2.1 million, respectively.
Minimum Processing Commitments
We have non-exclusive agreements with several processors to provide us services related to
transaction processing and transmittal, transaction authorization and data capture, and access to
various reporting tools. Certain of these agreements require us to submit a minimum monthly number
of transactions for processing. If we submit a number of transactions that is lower than the
minimum, we are required to pay to the processor the fees that it would have received if we had
submitted the required minimum number of transactions. As of December 31, 2010, such minimum fee
commitments were as follows (in thousands):
Year ended December 31, | Amount | |||
2011 |
4,593 | |||
2012 |
329 | |||
2013 |
| |||
2014 |
| |||
2015 |
| |||
Thereafter |
| |||
Total |
$ | 4,922 | ||
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In conjunction with our purchase of a merchant portfolio from First Data Merchant
Services (FDMS) in 2004, we also entered into service agreements with FDMS (the Service
Agreements), pursuant to which FDMS agreed to perform certain data processing and related services
with respect to the acquired merchant contracts through 2011. In consideration for entering into
the Service Agreements, we are required to pay FDMS a processing fee related to these accounts of
at least 70% of the amount paid during the immediately preceding year. The minimum commitments for
years after 2010 included in the table above are based on the preceding year minimum amounts. The
actual minimum commitments for such years may vary based on actual fees paid in the preceding
years.
We also have agreed to utilize FDMS to process at least 75% of our consolidated transaction
sales volume in any calendar year through 2011. The minimum commitments for such years are not
calculable as of December 31, 2010, and are excluded from this table.
Contingent Acquisition Price Obligations
Certain of our acquisitions include purchase price escalations that are contingent upon future
performance. For acquisitions prior to January 1, 2009 (the effective date of SFAS 141R), we
accrue such obligations once all contingencies are met. There were no contingent purchase price
obligations accrued at December 31, 2010.
Reserves on Merchant Accounts
Some of our merchants are required to maintain reserves (cash deposits) that are used to
offset chargebacks incurred. Our sponsoring banks hold these reserve cash deposits related to our
merchant accounts as long as there is an exposure to loss resulting from a merchants processing
activity. As of December 31, 2010, these reserve cash deposits totaled approximately $38.1
million. We have no legal title to the cash accounts maintained at the sponsor bank in order to
cover potential chargeback and related losses under the applicable merchant agreements. We also
have no legal obligation to these merchants with respect to these reserve cash accounts, and
accordingly, we do not include these accounts and the corresponding obligation to the merchants in
our Consolidated Financial Statements.
If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor
of the merchant, the disputed transaction is charged back to the merchants bank and credited to
the account of the cardholder. After the chargeback occurs, we attempt to recover the chargeback
either directly from the merchant or from the merchants reserve account. If we or our sponsoring
banks are unable to collect the chargeback from the merchants account, or, if the merchant refuses
or is financially unable due to bankruptcy or other reasons, to reimburse the merchants bank for
the chargeback, we bear the loss for the amount of the refund paid to the cardholders bank. At
December 31, 2010 and 2009, our reserve for losses on merchant accounts included in accrued
liabilities and other totaled $1.4 million and $1.5 million, respectively.
Legal
We are subject to certain legal proceedings that have arisen in the ordinary course of our
business and have not been fully adjudicated. Although the ultimate outcome of these other legal
proceedings cannot be predicted with certainty, based on information currently available, advice of
counsel, and available insurance coverage, in our opinion, the outcome of such legal proceedings is
not expected to have a material adverse effect on our business, financial condition or results of
operations. However, the results of legal proceedings cannot be predicted with certainty and in
the event of unexpected future developments, it is possible that the ultimate resolution of one or
more of these matters could be unfavorable. Should we fail to prevail in any of these legal
matters or should several of these legal matters be resolved against us in the same reporting
period, our consolidated financial position or operating results could be materially adversely
affected. Regardless of the outcome, any litigation may require us to incur significant litigation
expenses and may result in significant diversion of managements attention. All litigation
settlements are recorded within other expense on our Consolidated Income Statements.
6. Investments
Investments in Merchant Advances
In 2007, we began, on a selective basis, offering advances to prospective and current
merchants based on expected future processing volume. We stopped offering new merchant advances to
our customers in 2008. Our merchant advances are reflected in Investment in merchant advances in
the Consolidated Balance Sheets. Investments in merchant advances were $0, net of
allowance for doubtful accounts of $0.4 million, at December 31, 2010 and $0, net of allowance
for doubtful accounts of $0.5 million, at December 31, 2009. The allowance for doubtful accounts
is further described in Reserve for Losses on Merchant Accounts within Note 2.
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Payments for Prepaid Residual Expenses
During the year ended December 31, 2010, we made payments totaling $6.3 million to several
ISGs in exchange for contract modifications which lower our obligations for future payments of
residuals to them. These payments have been assigned to intangible assets in the accompanying
Consolidated Balance Sheets and are amortized over their expected useful lives.
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Senior secured credit facility: |
||||||||
Term loans |
$ | 420,638 | $ | 447,638 | ||||
Revolver |
11,000 | 10,900 | ||||||
Senior subordinated notes, net of discount |
193,329 | 192,981 | ||||||
624,967 | 651,519 | |||||||
Less: current portion of long-term debt |
(5,823 | ) | | |||||
$ | 619,144 | $ | 651,519 | |||||
The senior secured credit facility consists of $515.0 million of term loans and a $60.0
million revolving credit facility, further expandable to $100.0 million. The senior secured credit
facility contains a $25.0 million letter of credit sublimit and is secured by the Companys assets.
Interest on outstanding borrowings under the term loans is payable at a rate of LIBOR plus a margin
of 2.00% to 2.25% (currently 2.00%). Interest on outstanding borrowings under the revolving credit
facility is payable at prime plus a margin of 0.50% to 1.25% (currently 1.25%) or at a rate of
LIBOR plus a margin of 1.50% to 2.25% (currently 2.25%) depending on our ratio of consolidated debt
to EBITDA, as defined in the agreement. Additionally, the senior secured credit facility requires
us to pay unused commitment fees of up to 0.50% (currently 0.50%) on any undrawn amounts under the
revolving credit facility. The senior secured credit facility contains customary affirmative and
negative covenants, including financial covenants requiring maintenance of a debt-to-EBITDA ratio
(as defined therein), which is currently 4.75 to 1.00, but which decreases periodically over the
life of the agreement to a ratio of 4.00 to 1.00 on December 31, 2011. The senior secured credit
facility also contains an excess cash flow covenant (as defined therein), which requires us to make
additional principal payments after the end of every fiscal year. At December 31, 2010, the
payment attributable to this covenant was $5.8 million and was included in the current portion of
long-term debt. At December 31, 2009, there was no additional payment attributable to this
covenant. Principal repayments on the term loans were due quarterly in the amount of $1.3 million
which began on June 30, 2006, with any remaining unpaid balance due on March 31, 2013. During 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 $39.9 million of debt principal beyond the required quarterly principal
payments. Outstanding principal balances on the revolving credit facility are due when the
revolving credit facility matures on May 10, 2012. At December 31, 2010, we had outstanding $420.6
million of term loans at a weighted average interest rate of 2.29% and $11.0 million of borrowings
outstanding under the revolving credit facility at a weighted average interest rate of 3.42%.
Under our senior secured credit facility, we were required to hedge at least 50% of the
outstanding balance through May 10, 2008, and accordingly, we entered into interest rate swap
agreements with a total notional amount of $260.0 million that expired on December 31, 2010. The
swap agreements effectively converted an equivalent portion of our outstanding borrowings to a
fixed rate of 5.39% (plus the applicable margin) over the entire term of the swaps. In September
2007, we entered into two additional interest rate swap agreements. The first swap was for a
notional value of $100.0 million and expired on September 17, 2008. This swap effectively
converted an equivalent portion of our outstanding borrowings to a fixed rate of 4.80% (plus the
applicable margin) over the entire term of the swap. The second swap was for a notional value of
$75.0 million and expired on September 28, 2008. This swap effectively converted an equivalent
portion of our outstanding borrowings to a fixed rate of 4.64% (plus the applicable margin) over
the entire term of the swap. The swap instruments qualified for hedge accounting treatment under
ASC 815 Derivatives and Hedging (see Note 2 of Notes to Consolidated Financial Statements).
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; |
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| 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 redemption prices specified in the
indenture governing the senior subordinated notes, plus accrued and unpaid interest. The senior
subordinated notes contain customary restrictive covenants, including restrictions on incurrence of
additional indebtedness if our fixed charge coverage ratio (as defined therein) is not at least
2.00 to 1.00. We were in compliance with all such covenants as of December 31, 2010.
During 2008, the Company spent $1.1 million on repurchases of senior subordinated notes. The
Company intends to hold the senior subordinated notes until maturity. In accordance with ASC 860
Transfers and Servicing, formerly known as SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, the repurchase was accounted for as an
extinguishment of debt. We reflected this transaction as a reduction in long-term debt within the
Consolidated Balance Sheets as of December 31, 2008. We amended
our senior secured credit facility in April 2007
to allow for repurchases of our senior subordinated notes up to $10.0 million, and have now
completed note repurchases in compliance with that amendment. At December 31, 2010, we had $194.5
million of outstanding senior subordinated notes and $1.5 million of remaining unamortized discount
on the senior subordinated notes.
We had net capitalized debt issuance costs related to the senior secured credit facility
totaling $2.6 million and net capitalized debt issuance costs related to the senior subordinated
notes totaling $3.7 million as of December 31, 2010, which is materially consistent with amounts
computed using an effective interest method. These costs are being amortized to interest expense on
a straight-line basis over the life of the related debt instruments. Amortization expense related
to the debt issuance costs was $2.2 million for the years ended December 31, 2010, 2009, and 2008
and is included within interest expense on the Consolidated Income Statements.
The maturities of long-term debt (before unamortized discount) are as follows (in thousands):
Year ending December 31, | Amount | |||
2011 |
| |||
2012 |
11,000 | |||
2013 |
420,638 | |||
2014 |
193,329 | |||
2015 |
| |||
Thereafter |
| |||
Total |
$ | 624,967 | ||
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8. Income Taxes
The provision for income taxes and liabilities for the years ended December 31, 2010, 2009 and
2008, was comprised of the following (in thousands):
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 14,374 | $ | 11,736 | $ | 13,743 | ||||||
State |
1,942 | 2,435 | 2,778 | |||||||||
Total current |
16,316 | 14,171 | 16,521 | |||||||||
Deferred |
993 | (5,146 | ) | (6,327 | ) | |||||||
Change in valuation allowance |
(238 | ) | 81 | 523 | ||||||||
Changes in uncertain tax positions |
1,278 | (370 | ) | 178 | ||||||||
Total income tax provision |
$ | 18,349 | $ | 8,736 | $ | 10,895 | ||||||
The differences between the federal statutory tax rate of 35% and effective tax rates are
primarily due to state income tax provisions, and changes in uncertain positions, as follows:
2010 | 2009 | 2008 | ||||||||||
Statutory Rate |
35 | % | 35 | % | 35 | % | ||||||
Increase (decreases) in taxes resulting from the following: |
||||||||||||
State income taxes net of federal tax benefit |
5 | % | 5 | % | 4 | % | ||||||
Permanent differences |
0 | % | -4 | % | 0 | % | ||||||
Increase to valuation allowance |
0 | % | 0 | % | 2 | % | ||||||
Increase (decreases) in uncertain positions |
3 | % | -2 | % | 0 | % | ||||||
Other |
2 | % | 2 | % | 0 | % | ||||||
Total |
45 | % | 36 | % | 41 | % | ||||||
Deferred income tax assets are included as a component of other assets in the accompanying
Consolidated Balance Sheets as of December 31, 2010 and 2009 and were comprised of the following
(in thousands):
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2010 | 2009 | |||||||
Current deferred tax assets: |
||||||||
Reserves |
$ | 1,063 | $ | 1,971 | ||||
Gain on sale of noncontrolling interest |
362 | 367 | ||||||
Other |
790 | 966 | ||||||
Valuation allowances |
(31 | ) | (116 | ) | ||||
Total current deferred tax assets |
2,184 | 3,188 | ||||||
Current deferred tax liabilities: |
||||||||
Prepaid expenses |
(111 | ) | (212 | ) | ||||
Other |
| (623 | ) | |||||
Total current deferred tax liabilities |
(111 | ) | (835 | ) | ||||
Net current deferred tax asset |
$ | 2,073 | $ | 2,353 | ||||
Long-term deferred tax assets: |
||||||||
Tax benefit of unrealized loss on fair value of derivatives |
$ | | $ | 4,976 | ||||
Net operating loss |
1,865 | 1,898 | ||||||
Cancellation of debt income |
549 | 704 | ||||||
Gain on sale of noncontrolling interest |
258 | 889 | ||||||
Other |
15,810 | 7,188 | ||||||
Valuation allowances |
(558 | ) | (711 | ) | ||||
Total long-term deferred tax assets |
17,924 | 14,944 | ||||||
Long-term deferred tax liabilities: |
||||||||
Intangible assets, net of depreciation and amortization |
(4,088 | ) | (6,725 | ) | ||||
Goodwill |
(9,512 | ) | | |||||
Total long-term deferred tax liabilities |
(13,600 | ) | (6,725 | ) | ||||
Net long-term deferred tax asset |
$ | 4,324 | $ | 8,219 | ||||
We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 clarifies the
accounting and reporting for uncertainties in income tax law by prescribing a comprehensive model
for the financial statement recognition, measurement, presentation and disclosure for uncertain tax
positions taken or expected to be taken in income tax returns.
As of December 31, 2010, our liabilities for unrecognized tax benefits totaled $2.7 million,
included in other long-term liabilities. Interest and penalties related to income tax liabilities
are included in income tax expense. The balance of accrued interest and penalties recorded in the
Consolidated Balance Sheets at December 31, 2010 was $0.2 million.
The following presents a rollforward of our unrecognized tax benefits (in thousands):
Unrecognized | ||||
Tax Benefits | ||||
Balance at December 31, 2008 |
$ | 1,140 | ||
Decrease in prior year tax positions |
(604 | ) | ||
Increase for tax positions taken during the current period |
551 | |||
Balance at December 31, 2009 |
$ | 1,087 | ||
Reductions due to lapse of the applicable statute of limitations |
(125 | ) | ||
Increase in prior year tax positions |
1,129 | |||
Increase for tax positions taken during the current period |
634 | |||
Balance at December 31, 2010 |
$ | 2,725 | ||
As of December 31, 2010, the total amount of unrecognized tax benefits that would affect the
tax rate, if recognized, would be $1.0 million.
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We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
With limited exception, we are no longer subject to federal, state and local income tax audits by
taxing authorities for the years through 2005.
At December 31, 2010, we had state net operating loss carryforwards of approximately $30.3
million, which begins to expire in 2022. ASC 740 also requires that deferred tax assets be reduced
by a valuation allowance if it is more likely than not that some portion or all of the deferred tax
assets will not be realized. At December 31, 2010, we had $0.6 million of valuation allowances on
deferred tax assets. The net deferred taxes recorded at December 31, 2010, represent amounts that
are more likely than not to be utilized in the near term.
During the first quarter of 2011, we made tax payments totaling $11.9 million to cover all federal and state taxes payable relating to 2010.
9. Comprehensive Income (Loss)
Comprehensive income (loss) includes our net income plus the net-of-tax impact of fair market
value changes in our interest rate swap agreements, which expired on December 31, 2010. The
accumulated elements of other comprehensive loss, net of tax, are included within stockholders
equity on the Consolidated Balance Sheets. Other comprehensive income (loss) for years ended
December 31, 2010, 2009 and 2008 was $7.5million, $4.8 million, and ($4.9) million, respectively.
Changes in fair value, net of tax,
on our swap agreements amounted to $7.5 million, $4.8 million, and ($4.9) million for the
years ended December 31, 2010, 2009 and 2008, respectively. The related deferred tax expense
(benefit) was $5.0million, $3.2 million and ($3.3) million for the years ended December 31, 2010,
2009 and 2008, respectively.
10. Related Party Transactions
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.
In November 2010, we entered into a sublease agreement with Fortis Payment Systems, LLC,
an ISG owned by an iPayment employee, through Cambridge Acquisition Sub, LLC, a wholly owned subsidiary. The lease agreement extends
through 2013, with an option of extending the contract through 2015. The lease agreement provides
annual minimum payments of $60,000 beginning November 2010 for three years.
11. Significant Concentration
Our customers consist of a diverse portfolio of small merchants whose businesses frequently
are newly established. As of December 31, 2010, we provided services to small business merchants
located across the United States in a variety of industries. A substantial portion of our
merchants transaction volume comes from card-not-present transactions, which subject us to a
higher risk of merchant losses. No single customer accounted for more than 3% of revenues during
any periods presented. We believe that the loss of any single merchant would not have a material
adverse effect on our financial condition or results of operations.
We have agreed to utilize FDMS to process at least 75% of our consolidated transaction sales
volume in any calendar year through 2011. The principal sponsoring bank through which we process
the significant majority of our transactions is Wells Fargo.
12. Segment Information and Geographical Information
We consider our business activities to be in a single reporting segment as we derive greater
than 90% of our revenue and results of operations from processing revenues and other fees from
card-based payments. Substantially all revenues are generated in the United States.
13. Employee Agreements and Employee Benefit Plans
During 2002 and 2001, we entered into employment agreements with various officers to secure
employment. Under the terms of the agreements, we provided the employees with salary, incentive
compensation and stock grants and/or options in return for various periods of employment. On
November 10, 2008, Messrs. Daily and Grimstad each provided us with notice of their intention to
not renew their respective employment agreements with us. Accordingly, Messrs. Dailys and
Grimstads respective employment agreements terminated on February 25, 2009 pursuant to their
terms. Following the termination of their employment agreements, Messrs. Daily and Grimstad
continue to serve as our chief executive officer and president, respectively, pursuant to at-will
employment arrangements.
On March 4, 2011, the Company entered into an employment agreement with its Chief Financial
Officer, Mark C. Monaco. Mr. Monaco has served as the Companys Chief Financial Officer since
October 15, 2010.
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We sponsor a defined contribution plan (the Plan) under Section 401(k) of the Internal
Revenue Code, covering employees of iPayment, Inc. and certain of its subsidiaries. Under the Plan,
we may match contributions of up to 3% of a participants salary. Employer contributions for the
years ended December 31, 2010, 2009, and 2008 were $188,000, $179,000, and $197,000, respectively.
14. Summarized Quarterly Financial Data
The following unaudited schedule indicates our quarterly results of operations for 2010, 2009
and 2008 (in thousands, except charge volume). We have also included unaudited pro forma quarterly
results from 2009 that remove the operating results of CPC resulting from the sale of our equity in
CPC. Within the unaudited pro forma results for 2009, we have also included the financial impact
of the merchant portfolio acquisition made during the fourth quarter of 2009 as if the acquisition
had occurred on January 1, 2009.
1st | 2nd | 3rd | 4th | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Audited) | ||||||||||||||||
2010 |
||||||||||||||||||||
Revenue |
$ | 159,540 | $ | 183,933 | $ | 175,098 | $ | 180,603 | $ | 699,174 | ||||||||||
Interchange |
90,997 | 98,544 | 97,200 | 93,836 | 380,577 | |||||||||||||||
Other cost of services |
50,601 | 55,605 | 54,064 | 56,603 | 216,873 | |||||||||||||||
Selling, general, and administrative |
3,082 | 3,303 | 3,771 | 3,671 | 13,827 | |||||||||||||||
Income from operations |
14,860 | 26,481 | 20,063 | 26,493 | 87,897 | |||||||||||||||
Depreciation and amortization |
10,625 | 10,148 | 9,683 | 10,765 | 41,221 | |||||||||||||||
Net income attributable to iPayment,
Inc. |
2,220 | 8,309 | 5,217 | 7,082 | 22,828 | |||||||||||||||
Charge Volume (in millions, unaudited) |
5,541 | 5,853 | 5,718 | 5,541 | 22,653 | |||||||||||||||
2009 |
||||||||||||||||||||
Revenue |
$ | 170,053 | $ | 190,745 | $ | 182,716 | $ | 174,414 | $ | 717,928 | ||||||||||
Interchange |
96,910 | 103,575 | 101,975 | 95,070 | 397,530 | |||||||||||||||
Other cost of services |
55,368 | 60,574 | 56,147 | 56,164 | 228,253 | |||||||||||||||
Selling, general, and administrative |
4,992 | 5,138 | 5,149 | 5,069 | 20,348 | |||||||||||||||
Income from operations |
12,783 | 21,456 | 19,445 | 18,113 | 71,797 | |||||||||||||||
Depreciation and amortization |
11,956 | 12,160 | 10,781 | 10,931 | 45,828 | |||||||||||||||
Net income (loss) attributable to
iPayment, Inc. |
(210 | ) | 4,224 | 3,741 | 3,985 | 11,740 | ||||||||||||||
Charge Volume (in millions, unaudited) |
5,737 | 6,091 | 6,030 | 5,668 | 23,526 | |||||||||||||||
2009 - PRO FORMA |
||||||||||||||||||||
Revenue, unaudited |
$ | 165,349 | $ | 185,082 | $ | 175,766 | $ | 171,765 | $ | 697,962 | ||||||||||
Interchange, unaudited |
95,254 | 100,814 | 98,645 | 93,862 | 388,575 | |||||||||||||||
Other cost of services, unaudited |
54,915 | 59,551 | 54,835 | 55,625 | 224,926 | |||||||||||||||
Selling, general, and administrative,
unaudited |
3,091 | 3,083 | 2,971 | 4,283 | 13,428 | |||||||||||||||
Income from operations, unaudited |
12,089 | 21,635 | 19,314 | 17,994 | 71,032 | |||||||||||||||
Depreciation and amortization,
unaudited |
12,905 | 13,110 | 11,728 | 11,247 | 48,990 | |||||||||||||||
2008 |
||||||||||||||||||||
Revenue |
$ | 185,455 | $ | 212,580 | $ | 203,654 | $ | 193,136 | $ | 794,825 | ||||||||||
Interchange |
108,381 | 121,855 | 116,188 | 104,146 | 450,570 | |||||||||||||||
Other cost of services |
55,610 | 61,892 | 61,286 | 62,092 | 240,880 | |||||||||||||||
Selling, general, and administrative |
4,981 | 5,078 | 5,166 | 5,716 | 20,941 | |||||||||||||||
Income from operations |
16,483 | 23,755 | 21,014 | 21,183 | 82,434 | |||||||||||||||
Depreciation and amortization |
8,563 | 8,988 | 9,665 | 10,825 | 38,041 | |||||||||||||||
Net income attributable to iPayment,
Inc. |
1,331 | 5,772 | 3,729 | 3,471 | 14,303 | |||||||||||||||
Charge Volume (in millions, unaudited) |
6,535 | 7,280 | 6,924 | 6,044 | 26,783 |
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15. Guarantor Financial Information
In connection with the May 2006 issuance of 9.75% senior subordinated notes due 2014, all of
our existing and future subsidiaries (the Guarantors) that guarantee our other debt or debt of
the guarantors have fully and unconditionally guaranteed, on a joint and several basis, our
obligations under the related indenture (the Guarantees). iPayment, Inc., the issuer of the
senior subordinated notes and parent company of the Guarantors, has no independent assets or
operations. Any subsidiary of iPayment, Inc. other than the Guarantors is minor, and there are no
significant restrictions on our ability to obtain funds from our subsidiaries by dividend or loan.
16. Significant Developments
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. 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. See Risk
Factors In the event of a change of control, we may not be able to repurchase our senior
subordinated notes as required by the indenture, which would result in a default under our
indenture, A change of control under our senior secured credit facility could cause a material
adverse effect on our liquidity, financial condition or results of operations and A change of
control under the indenture governing our senior subordinated notes could cause a material adverse
effect on our liquidity, financial condition or results of operations.
The Company has entered into a new lease through November 2019 for 31,665 square feet in
Westlake Village, California that commenced in December 2009. In December 2009, the Calabasas
operating center moved from its current location in Calabasas, California to the new location in
Westlake Village, California. Annual commitments under this lease will approximate $0.8 million.
In August 2009, the Company entered into an eighth amendment to the Service Agreement, dated
as of July 1, 2002, as amended by amendments dated October 25, 2002, November 27, 2002, January 8,
2004, July 11, 2005 and September 29, 2006, with First Data Merchant Services Corporation (FDMS).
The amendment sets forth a new schedule of fees charged by FDMS for processing
services and extends the term of the Service Agreement to December 31, 2014. The Company also
amended its Sponsorship Agreement with FDMS and Wells Fargo Bank, N.A. to be coterminous with the
FDMS Service Agreement.
17. Subsequent Events
The Company has completed an evaluation of all subsequent events through the issuance of these
Consolidated Financial Statements. There were no subsequent events that required disclosure.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our management, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), as of the end of the period covered by this Annual Report (the Evaluation Date).
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of
the Evaluation Date that our disclosure controls and procedures were effective such that the
information relating to our Company, including our consolidated subsidiaries, required to be
disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
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Internal Control over Financial Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f) promulgated under the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and board of directors regarding the reliability of
financial reporting and the preparation and fair presentation of published financial statements for
external purposes in accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation, pursuant to Rule 13a-15(c)
promulgated under the Exchange Act, of the effectiveness, as of the end of the period covered by
this Annual Report, of its internal control over financial reporting. Based on the results of this
evaluation, management concluded that our internal control over financial reporting was effective
as of the Evaluation Date.
This Annual Report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this Annual Report.
iPayment assesses the effectiveness of its internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2010, based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment and those criteria, management believes that
the Company maintained effective internal control over financial reporting as of December 31, 2010.
During the twelve months ended December 31, 2010, there have been no changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information about our directors and executive officers as of
December 31, 2010:
Name and Age | Principal Occupation, Business Experience, Directorships and Education | |
Gregory S. Daily Chairman and CEO Age 51 |
Greg Daily co-founded iPayment and has served as Chairman of the board of directors and Chief Executive Officer since the Companys founding in 2001. In 1984, Mr. Daily co-founded PMT Services, Inc., a credit card processing company, and served as President of PMT Services, Inc. Mr. Daily served as the Vice-Chairman of the board of directors of NOVA Corporation from September 1998 until May 2001. Mr. Daily has served as the Chief Manager and President of Caymas, LLC, a private investment company, since January 2001 and he has served as the Chief Executive Officer of Hardsworth, LLC, a private investment company, since May 1997. Mr. Daily graduated with a B.A. in Business Administration from Trevecca Nazarene University. | |
Carl A. Grimstad Director and President Age 43 |
Carl Grimstad co-founded iPayment and has served as the Companys President since the Companys founding in 2001. In 2003, Mr. Grimstad led iPayment in a successful IPO (NASDAQ: IPMT). Mr. Grimstad was instrumental in taking iPayment private in 2006. Mr. Grimstad has served as the managing partner of GS Capital, LLC, a private investment company since 1995. Mr. Grimstad and his family are active supporters of various charities including the Nashville Zoo and the Sexual Assault Center. Mr. Grimstad currently serves as a trustee of the Cheekwood Botanical Gardens, as a board member of the Nashville Symphony and as a board member of the Oasis Center, a safe haven for children in trouble. Mr. Grimstad graduated with a B.A. in Economics from Boston University in 1989. |
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Name and Age | Principal Occupation, Business Experience, Directorships and Education | |
Mark C. Monaco Chief Financial Officer Age 45 |
Mr. Monaco has served as our Chief Financial Officer since October 2010. From February 2007 to January 2009, Mr. Monaco served as Head of Principal Investments at Brooklyn NY Holdings, LLC, the investment organization of the Alfred Lerner Family. From June 1996 to January 2007, Mr. Monaco was a Managing Director at Windward Capital Management, LLC, a middle market private equity firm focused on financial and business services investments. During his tenure at Windward, Mr. Monaco served as Chairman of Retriever Payment Systems, Inc., a merchant acquiring organization, from 2000 to 2004, when it was acquired by National Processing Company. Prior to joining Windward Capital, Mr. Monaco was at Credit Suisse First Boston, serving as the Director of Finance and Corporate Development after several years in the financial institutions group with the firms investment banking department. Mr. Monaco earned his MBA in finance from The University of Pennsylvania, The Wharton Graduate School of Business, and received his undergraduate degree from Harvard University. | |
Robert S. Torino COO and Executive Vice President Age 57 |
Robert Torino has served as our Chief Operating Officer since 2006. From 2002 to 2006, he served as our Executive Vice President of Financial Operations and from January 2001 to September 2002, he served as our Chief Financial Officer. From October 1999 to April 2000, Mr. Torino served as Chief Executive Officer of M80 Technologies, Inc., a start-up software development company. Mr. Torino served as President and Chief Executive Officer of TRUE Software Inc., a software development company, from April 1995 until its acquisition by McCabe & Associates in October 1999. Mr. Torino graduated magna cum laude from Boston College with a degree in accounting. | |
Afshin M. Yazdian Executive Vice President, General Counsel and Secretary Age 38 |
Afshin Yazdian has served as our Executive Vice President and General Counsel since the Companys founding in 2001. Mr. Yazdian previously served as General Counsel and Vice President of Mergers and Acquisitions for eConception, a technology venture fund. Prior to that, Mr. Yazdian practiced in the Corporate and Mergers & Acquisitions groups at the law firm of Waller Lansden Dortch & Davis, PLLC in Nashville, Tennessee. Mr. Yazdian is currently on the board of the Nashville Jewish Federation and is involved in a variety of other local and national charities. Mr. Yazdian graduated from Emory University with a BBA in business, and graduated with honors from the University of Miami School of Law. |
In May 2009, a jury in the Superior Court of the State of California for the County of Los Angeles
handed down a verdict in the amount of $300 million, plus punitive damages in the amount of $50
million, against Mr. Daily, our Chairman and Chief Executive Officer, in connection with litigation
over Mr. Dailys beneficial ownership in us. In response to the verdict, Mr. Daily filed for
personal bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in Nashville,
Tennessee.
Director Qualifications
When considering whether directors and nominees have the experience, qualifications, attributes or
skills, taken as a whole, to enable our board of directors to satisfy its oversight
responsibilities effectively in light of our business and structure, the board of directors focused
primarily on each persons background and experience as reflected in the information discussed in
each of the directors individual biographies set forth above. We believe that our directors are
committed to employing their skills and abilities to aid the long-term interests of the
stakeholders of the Company. Our directors are knowledgeable and experienced in multiple business
endeavors which further qualifies them for service as members of the board of directors. In
particular, the members of our board of directors considered the following important
characteristics: (i) Mr. Daily has extensive business experience in the payment processing industry
and has experience in management, having served as President of PMT Services, Inc. and as the
Vice-Chairman of the board of directors of NOVA Corporation and (ii) Mr. Grimstad has extensive
knowledge of our business and the payment processing industry generally, having served as President
of the Company since its inception and having significant involvement in the day-to-day oversight
of the Companys business operations.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics (the Code of Ethics), which applies to
all directors, consultants and employees, including the Chief Executive Officer and the Chief
Financial Officer and any other employee with any responsibility for the preparation and filing of
documents with the SEC. A copy of the Code of Ethics is incorporated by reference in this Form
10-K. We will disclose amendments to provisions of the Code of Ethics by posting such amendments
on our website. In addition, any such amendments, as well as any waivers of the Code of Ethics for
directors or executive officers will be disclosed in a report on Form 8-K.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers and persons who own more than ten percent of the our common stock (Section 16
Persons) to file reports of ownership and changes in ownership in our common stock with the SEC.
Based on our records and other information we believe that all Section 16(a) filing requirements
for the Section 16 Persons have been complied with during or with respect to the fiscal year ended
December 31, 2010. As a result of the Transaction, beginning May 11, 2006, the Company no longer
has a class of equity securities registered with the SEC and therefore its directors, officers and
10% shareholders are no longer required to make Section 16 filings.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The primary goals of our executive compensation program are to link the interests of
management and stockholders, attract and retain a highly-skilled executive team, and base rewards
on both personal and corporate performance.
As a private company, we do not have a compensation committee. Our board of directors is
currently composed of Mr. Daily and Mr. Grimstad. The board, in consultation with the other
executive officers, establishes policies and makes decisions regarding compensation of directors
and executive officers. The executive compensation program currently contains two elements:
| competitive base salaries, and | ||
| annual cash incentives determined by the performance of each executive officer and the Company against predetermined targets. |
The program is designed so that the combination of these two elements, assuming performance
targets are met, will generally be comparable to similar positions with peer companies.
Base Salaries. Base salaries for our executive officers are determined, in part, through (a)
comparisons with peer companies with which we compete for personnel and (b) general geographic
market conditions. Additionally, the board evaluates individual experience and performance and our
overall performance during the period under consideration. The board reviews each executive
officers salary on an annual basis and may increase salaries based on (i) the individuals
contribution to the Company compared to the preceding year, (ii) the individuals responsibilities
compared to the preceding year and (iii) any increase in median pay levels at peer companies.
Annual Bonuses. The boards policy is to award annual bonuses in order to motivate and reward
the Companys executive officers, as individuals and as a team, and to attain our annual financial
goals and operating objectives. Annual bonuses typically reflect competitive industry practice and
certain performance metrics. There is currently no formal bonus plan in place for executive
officers.
Stock-based Compensation. Upon closing the Transaction on May 10, 2006, all outstanding
options were exercised or cancelled and all stock-based compensation plans were terminated. We
currently have no share-based compensation plans.
Retirement Plan. Mr. Daily, Mr. Monaco, and Mr. Yazdian participate in iPayments defined
contribution plans. iPayments contributions to its defined contribution plans on behalf of the
named executive officers are shown in the All Other Compensation column of the Summary
Compensation Table below.
Summary. The board believes that the combination of competitive base salaries and annual
incentives paid in cash comprise a highly-effective and motivational executive compensation
program, which works to attract and retain talented executives and strongly aligns the interests of
senior management with those of the stockholders of the Company in seeking to optimize long-term
performance. The board has reviewed the total compensation received by the executive officers
during the year ended December 31, 2010, and has determined that those amounts were not excessive
or unreasonable.
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The following table shows the cash and other compensation paid or earned and certain long-term
awards made to our Chief Executive Officer, Chief Financial Officer, and each of our three most
highly compensated executive officers (the Named Executives) for all services to us in all
capacities for 2010, 2009 and 2008.
SUMMARY COMPENSATION TABLE
Name and | Annual Compensation | All Other | ||||||||||||||||||
Principal Position | Year | Salary | Bonus | Compensation | Total | |||||||||||||||
Gregory S. Daily |
2010 | $ | 708,000 | $ | | $ | 16,500 | (1) | $ | 724,500 | ||||||||||
Chairman and |
2009 | 187,500 | 1,000,000 | 3,750 | (1) | 1,191,250 | ||||||||||||||
Chief Executive Officer |
2008 | | | | | |||||||||||||||
Carl A. Grimstad |
2010 | $ | 708,000 | $ | | $ | | $ | 708,000 | |||||||||||
Director and President |
2009 | 300,000 | 1,000,000 | | 1,300,000 | |||||||||||||||
2008 | 300,000 | | | 300,000 | ||||||||||||||||
Mark C. Monaco |
2010 | $ | 125,000 | (2) | $ | | $ | | $ | 125,000 | ||||||||||
Chief Financial Officer |
2009 | | | | | |||||||||||||||
2008 | | | | | ||||||||||||||||
Afshin M. Yazdian |
2010 | $ | 185,000 | $ | | $ | 14,000 | (1) | $ | 199,000 | ||||||||||
Executive Vice President, |
2009 | 185,000 | 165,000 | 10,050 | (1) | 360,050 | ||||||||||||||
General Counsel and Secretary |
2008 | 185,000 | 150,000 | 7,950 | (1) | 342,950 | ||||||||||||||
Robert S. Torino |
2010 | $ | 296,000 | $ | | $ | 59,820 | (3) | $ | 355,820 | ||||||||||
Chief Operating Officer |
2009 | 296,000 | 220,000 | 59,820 | (3) | 575,820 | ||||||||||||||
and Executive Vice President |
2008 | 230,000 | 200,000 | | 430,000 |
(1) | Represents Companys matching of 401(k) plan contributions made by executive officers. | |
(2) | Represents Mr. Monacos salary for the period commencing upon his hiring on October 15, 2010 and ending on December 31, 2010 | |
(3) | Represents housing reimbursements made to Mr. Torino. |
Compensation of Directors
Following the closing of the Transaction in 2006, we have not paid our directors, Gregory S.
Daily and Carl. A. Grimstad, any compensation for their service as directors.
Compensation Committee Interlocks and Insider Participation
As a private company, we do not have a compensation committee. Our board of directors, which
is currently composed of Mr. Daily and Mr. Grimstad, in consultation with the other executive
officers, establishes policies and makes decisions regarding compensation of directors and
executive officers.
Compensation Committee Report
Our board of directors has reviewed and discussed with our management the Compensation
Discussion and Analysis set forth above. Based on the review and discussion, our board of directors
has recommended that the Compensation Discussion and Analysis be included in this Form 10-K for the
year ended December 31, 2010.
By the board of directors:
Gregory S. Daily
Carl A. Grimstad
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EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Gregory S. Daily
In February 2001, we entered into an employment agreement with Gregory S. Daily, our Chairman
of the Board and Chief Executive Officer. The employment agreement was originally for one year,
with successive one-year terms unless either party provides written notice to the other party
ninety days prior to the expiration of the term. In connection with the execution of his employment
agreement with us, Mr. Daily purchased 156,161 shares of our common stock in April 2001 at a price
of $0.02 per share. Pursuant to the terms of his employment agreement, Mr. Daily was initially
entitled to an annual salary of $12,000, plus a bonus, as determined by the board of directors in
its sole discretion, based on Mr. Dailys performance, our business and financial condition and the
operating results achieved. Commencing in 2004, our compensation committee approved an increase in
Mr. Dailys base salary to $300,000. From July 1, 2006 through May 15, 2009, he elected to draw no
annual salary. Beginning May 16, 2010, Mr. Daily resumed drawing his annual salary of $300,000.
The Board of Directors determined to increase the annual base salary of Mr. Daily to $1.0 million
as of June 1, 2010. In addition, Mr. Daily is entitled to receive those employee benefits
generally provided to our executive employees.
On November 10, 2008, Mr. Daily provided us with notice of his intention to not renew his
employment agreement with us. Accordingly, Mr. Dailys employment agreement terminated on February
25, 2009 pursuant to its terms. Following the termination of his employment agreement, Mr. Daily
intends to continue to serve as our Chief Executive Officer, pursuant to at-will employment
arrangements, the terms of which remain subject to negotiation.
Carl A. Grimstad
In February 2001, we entered into an employment agreement with Carl A. Grimstad, our
President. The employment agreement was originally for one year, with successive one-year terms
unless either party provides written notice to the other party ninety days prior to the expiration
of the term. In connection with the execution of his employment agreement, Mr. Grimstad purchased
147,601 shares of our common stock in April 2001 at a price of $0.02 per share. Pursuant to the
terms of his employment agreement, Mr. Grimstad was initially entitled to an annual salary of
$180,000, plus a bonus, as determined by the board of directors in its sole discretion, based on
Mr. Grimstads performance, our business and financial condition and the operating results
achieved. Our compensation committee approved an increase in Mr. Grimstads base salary to $300,000
in 2005. The Board of Directors determined to increase the annual base salary of Mr. Grimstad to
$1.0 million as of June 1, 2010. In addition, Mr. Grimstad is entitled to receive those employee
benefits generally provided to our executive employees.
On November 10, 2008, Mr. Grimstad provided us with notice of his intention to not renew his
employment agreement with us. Accordingly, Mr. Grimstads employment agreement terminated on
February 25, 2009 pursuant to its terms. Following the termination of his employment agreement,
Mr. Grimstad intends to continue to serve as our President, pursuant to at-will employment
arrangements, the terms of which remain subject to negotiation.
Mark C. Monaco
On March 4, 2011, we entered into an employment agreement with our Chief Financial Officer,
Mark C. Monaco. Mr. Monaco has served as the Companys Chief Financial Officer since October 15,
2010.
Mr. Monacos employment agreement provides for an initial employment period of three years,
with automatic successive one-year extensions unless terminated by either party. As provided in the
employment agreement, Mr. Monaco will receive (i) a minimum base salary of $600,000 per year; (ii)
the potential to earn an annual bonus equal to 100% of his then-current base salary based on his
achievements and certain corporate performance goals that may be established by the Board of
Directors of the Company from time to time; (iii) the grant of equity awards if and when iPayment
Investors, L.P. adopts an equity compensation program; (iv) reimbursement of up to $21,000 for
professional fees incurred in connection with the negotiation of the employment agreement and (v)
other benefits, such as participation in the Companys employee benefit plans, policies, programs
and arrangements, as well as reimbursement of certain business and entertainment expenses and
indemnification on the same basis as other executives of the Company.
The employment agreement further provides that, if Mr. Monacos employment with the Company is
terminated due to death, mutual agreement, cause, disability or otherwise without good
reason, as those terms are defined in the employment agreement, Mr. Monaco will be entitled to
receive (i) any accrued and unpaid base salary as of the termination date; (ii) all accrued and
unpaid benefits under any benefit plans, policies, programs or arrangements; and (iii) any unpaid
reasonable and necessary business expenses incurred by him in connection with his employment on
behalf of the Company on or prior to the termination date (the Accrued Compensation). If Mr.
Monacos employment with the Company is terminated without cause or disability or with good
reason, as those terms are defined in the employment agreement, Mr. Monaco will be entitled to
receive (i) the Accrued
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Compensation; (ii) severance payments equaling two times the highest base
salary amount during his employment term, payable in 24 monthly installments following the date his
employment is terminated and (iii) a number of monthly installments of cash equal to the monthly
cost of COBRA continuation coverage, payable at the end of each month following the date his
employment is terminated so long as he has not become actually covered by the medical plan of a
subsequent employer during such month, up to a maximum of 18 monthly installments. To receive these
severance and post-termination benefits, Mr. Monaco is required to execute a general release of
claims in form and manner reasonably satisfactory to the Company.
Mr. Monacos employment agreement also contains restrictive covenants which generally prohibit
Mr. Monaco from (a) disclosing the Companys trade secrets and confidential information, (b) making
disparaging statements about the Company and (c) during his employment term and for the 18-month
period following termination of employment (1) soliciting on behalf of a competing business the
Companys customers, (2) soliciting the Companys employees or (3) participating in any competing
business.
The foregoing description is a summary only and is qualified in its entirety by the full text
of Mr. Monacos employment agreement which is attached as Exhibit 4.1 to our Form 8-K filed with
the SEC on March 8, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
On May 10, 2006, Holdings acquired all of our issued and outstanding common stock. Holdings
is a wholly-owned subsidiary of iPayment Investors. The general partner of iPayment Investors is
iPayment GP, LLC (GP). Under the limited partnership agreement of iPayment Investors, GP is
granted full authority to act on behalf of iPayment Investors and the limited partners of iPayment
Investors may not participate in management of iPayment Investors or vote for the election, removal
or replacement of GP. The board of directors of GP is comprised of Gregory S. Daily and Carl A.
Grimstad and any action by the board requires the vote of
both directors. As a result, Messrs. Daily and Grimstad may be deemed to share beneficial
ownership of all of our outstanding shares. Messrs. Daily and Grimstad disclaim beneficial
ownership of such shares except to the extent of their respective pecuniary interests therein. Mr.
Dailys indirect percentage interest in us is 65.8% (including shares held in trust for the benefit
of certain family members of Mr. Daily) and Mr. Grimstads indirect percentage interest in us is
34.2% (including shares held by certain members of Mr. Grimstads immediate family). None of our
other executive officers beneficially own any of our shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In the ordinary course of business, the Company and its subsidiaries from time to time engage
in transactions with other corporations or financial institutions whose officers or directors are
also directors or officers of the Company or a subsidiary. Transactions with such corporations and
financial institutions are conducted on an arms-length basis and may not come to the attention of
the directors or officers of the Company or of the other corporations or financial institutions
involved. The board of directors of the Company does not consider that any such transactions would
interfere with the exercise of independent judgment in carrying out the responsibilities of a
director and the board of directors of the Company is not currently aware of any related party
transactions other than those set forth below.
During 2008, our shareholders repurchased $14.2 million of our senior subordinated notes.
These repurchases caused us to recognize cancellation of debt income for tax purposes for the year
ended December 31, 2008, which resulted in an increase to both our tax expense and our deferred tax
assets of $1.3 million. The deferred tax asset will be realized as an income tax benefit over the
remaining life of the senior subordinated notes. During 2009, we made adjustments that decreased
the cancellation of debt income, which reduced income tax expense and deferred taxes by $0.6
million.
The Company does not have securities listed on a national securities exchange or inter-dealer
quotation system with requirements that a majority of the board of directors be independent.
Accordingly, the Company is not subject to rules requiring certain of its directors to be
independent. The board of directors has determined that Messrs. Daily and Grimstad were not
independent under the listing standards of the Nasdaq Stock Market. However, if we were a listed
company, we believe we would be eligible for the controlled company exception set forth in Nasdaq
Listing Rule 5615(c) (if that were the exchange on which we were listed) from the rule that would
ordinarily require that a majority of a listed issuers board of directors be independent and from
certain other rules.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We do not have an audit committee. As a result, our board of directors performs the duties of
an audit committee. Our board of directors evaluates and approves in advance the scope and cost of
the engagement of an auditor before the auditor renders audit and
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non-audit services. We do not
rely on pre-approval policies and procedures. The following table sets forth the aggregate fees
billed to iPayment, Inc. for the years ended December 31, 2010 and 2009, by Ernst & Young LLP:
2010 | 2009 | |||||||
Audit Fees |
$ | 467,000 | (a) | $ | 463,000 | (b) | ||
Audit Related Fees |
| | ||||||
Tax Fees |
74,000 | 176,000 | ||||||
All Other Fees |
| | ||||||
$ | 541,000 | $ | 639,000 | |||||
(a) | Comprised of fees for the fiscal 2010 financial statement audit and review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. | |
(b) | Comprised of fees for the fiscal 2009 financial statement audit and review of financial statements included in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. |
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The Consolidated Financial Statements, together with the report thereon of Ernst & Young LLP
dated March 21, 2011, are included as part of Item 8, Financial Statements and Supplementary Data,
commencing on page 43, above. Schedule II Valuation and Qualifying Accounts is included
below. All other schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the respective financial statements or notes thereto.
Schedule II Valuation and Qualifying Accounts
iPayment, Inc.
iPayment, Inc.
Additions | ||||||||||||||||||||
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other | End of | |||||||||||||||||
Description | Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 768,000 | $ | 304,000 | $ | | $ | 74,000 | (1) | $ | 998,000 | |||||||||
Valuation allowance on deferred tax asset |
223,000 | | 523,000 | | 746,000 | |||||||||||||||
Reserve for merchant advance losses |
| 4,283,000 | | 461,000 | 3,822,000 | |||||||||||||||
Reserve for merchant losses |
1,020,000 | 4,200,000 | | 3,901,000 | (3) | 1,319,000 | ||||||||||||||
Total |
$ | 2,011,000 | $ | 8,787,000 | $ | 523,000 | $ | 4,436,000 | $ | 6,885,000 | ||||||||||
Year Ended December 31, 2009: |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 998,000 | $ | 704,000 | $ | | $ | 845,000 | (1) | $ | 857,000 | |||||||||
Valuation allowance on deferred tax asset |
746,000 | | 73,000 | | 819,000 | |||||||||||||||
Reserve for merchant advance losses |
3,822,000 | 206,000 | | 3,501,000 | 527,000 | |||||||||||||||
Reserve for merchant losses |
1,319,000 | 4,900,000 | | 4,695,000 | (3) | 1,524,000 | ||||||||||||||
Total |
$ | 6,885,000 | $ | 5,810,000 | $ | 73,000 | $ | 9,041,000 | $ | 3,727,000 | ||||||||||
Year Ended December 31, 2010: |
||||||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 857,000 | $ | 262,000 | $ | | $ | 384,000 | (1) | $ | 735,000 | |||||||||
Valuation allowance on deferred tax asset |
819,000 | | | 230,000 | 589,000 | |||||||||||||||
Reserve for merchant advance losses |
527,000 | | | 130,000 | 397,000 | |||||||||||||||
Reserve for merchant losses |
1,524,000 | 3,501,000 | | 3,640,000 | (3) | 1,385,000 | ||||||||||||||
Total |
$ | 3,727,000 | $ | 3,763,000 | $ | | $ | 4,384,000 | $ | 3,106,000 | ||||||||||
(1) | Write-off of previously reserved accounts receivables. | |
(2) | Write-off of previously reserved merchant losses. | |
(3) | Write-off of previously reserved merchant advances. |
2. Exhibits
Reference is made to the Exhibit Index beginning on page 73 hereof.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IPAYMENT INC. | ||||||
By: | /s/ Gregory S. Daily
|
|||||
Title: Chairman and Chief Executive Officer | ||||||
March 21, 2011 |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on March 21, 2011.
Signature | Title | |
/s/ Gregory S. Daily
|
Director | |
Gregory S. Daily |
||
/s/ Carl A. Grimstad
|
Director | |
Carl A. Grimstad |
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Table of Contents
EXHIBIT INDEX
2.1
|
Agreement and Plan of Merger, dated as of December 27, 2005, among iPayment Holdings, Inc., iPayment MergerCo, Inc. and iPayment, Inc., (incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K filed with the SEC on December 28, 2005). | |
2.2
|
Guarantee, dated as of December 27, 2005, by Gregory S. Daily in favor of iPayment, Inc. (incorporated by reference to Exhibit 2.2 of the Registrants Current Report on Form 8-K filed with the SEC on December 28, 2005). | |
2.3
|
Guarantee, dated as of December 27, 2005, by Carl A. Grimstad in favor of iPayment, Inc. (incorporated by reference to Exhibit 2.3 of the Registrants Current Report on Form 8-K filed with the SEC on December 28, 2005). | |
3.1
|
Certificate of Incorporation of iPayment, Inc., attached as Exhibit A to the Certificate of Merger of iPayment Merger Co., Inc. into iPayment, Inc. (incorporated by reference to Exhibit 3.1 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
3.2
|
Bylaws of Merger Co., as adopted by iPayment, Inc. (incorporated by reference to Exhibit 3.2 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
4.1
|
Indenture, dated as of May 10, 2006, among iPayment, Inc., the Subsidiary Guarantors named therein and Wells Fargo Bank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
4.2
|
Purchase Agreement, dated as of May 3, 2006, among iPayment, Inc., the Subsidiary Guarantors named therein, Banc of America Securities LLC and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit 4.2 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
4.3
|
Registration Rights Agreement, dated as of May 10, 2006, among iPayment, Inc., the Subsidiary Guarantors named therein, Banc of America Securities LLC and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit 4.3 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
4.4
|
Form of Note (included as Exhibit A to Exhibit 4.1 hereto) (incorporated by reference to Exhibit 4.4 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
10.1
|
Credit Agreement, dated May 10, 2006, among iPayment, Inc., as Borrower, iPayment Holdings, Inc., the Subsidiary Guarantors named therein, Bank of America, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent and Banc of America Securities LLC, as Sole Lead Arranger (incorporated by reference to Exhibit 10.1 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
10.2
|
Security Agreement, dated May 10, 2006, among iPayment, Inc., iPayment Holdings, Inc., the Subsidiary Guarantors named therein and Bank of America N.A. (incorporated by reference to Exhibit 10.2 of the Registrants Form S-4 filed with the SEC on July 21, 2006). | |
10.3
|
Pledge Agreement, dated May 10, 2006, among the Pledgors named therein and Bank of America N.A. (incorporated by reference to Exhibit 10.3 of the Registrations Form S-4 filed with the SEC on July 21, 2006). |
10.4
|
Service Agreement, dated July 1, 2002, between First Data Merchant Services Corporation and iPayment Holdings, Inc. (incorporated by reference to Exhibit 10.16 of the Registration Statement on Form S-1 (File No. 333-101705) filed with the SEC on March 4, 2003). | |
10.5
|
First Amendment to Service Agreement, dated October 25, 2002, between First Data Merchant Services Corporation and iPayment, Inc. (incorporated by reference to Exhibit 10.17 of the Registration Statement on Form S-1 (File No. 333-101705) filed with the SEC on December 6, 2002). | |
10.6
|
Second Amendment to Service Agreement, dated as of November 27, 2002, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.7
|
Third Amendment to Service Agreement, dated as of January 8, 2004, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.8
|
Fourth Amendment to Service Agreement, dated as of May 25, 2004, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.9
|
Asset Purchase Agreement, dated December 27, 2004, between iPayment Inc., iPayment Acquisition Sub LLC, First Data Merchant Services Corporation and Unified Merchant Services (incorporated by reference to Exhibit 10.32 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.10
|
Service Agreement, dated December 27, 2004, between iPayment, Inc. and First Data Merchant Services Corporation (incorporated by reference to Exhibit 10.33 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2004).* | |
10.11
|
Letter Agreement regarding Asset Purchase Agreement and Service Agreement, dated May 1, 2005, among iPayment, Inc., iPayment Acquisition Sub LLC, First Data Merchant Services Corporation and Unified Merchant Services, filed herewith.* | |
10.12
|
Fifth Amendment to Service Agreement, dated as of July 11, 2005, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.13
|
Sixth Amendment to Service Agreement, dated as of August 31, 2006, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.14
|
Seventh Amendment to Service Agreement, dated as of September 29, 2006, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.15
|
Sponsorship Agreement, dated as of January 29, 2007, among iPayment, Inc., First Data Merchant Services Corporation and Wells Fargo Bank, N.A., (incorporated by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).* | |
10.16
|
Sixth Amendment to Service Agreement dated as of January 29, 2007, between First Data Merchant Services Corporation and iPayment, Inc. (incorporated by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).* | |
10.17
|
Letter Amendment No. 1 to Credit Agreement, dated April 19, 2007, among iPayment, Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K filed with the SEC on May 10, 2007). |
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10.18
|
First Data POS Value ExchangeSM Amendment to Service Agreement, dated as of July 12, 2007, by and between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.19
|
APRIVA Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.20
|
Gift Card Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.21
|
Amendment to Service Agreement, dated as of October 18, 2007, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.22
|
Discover Amendment to Service Agreement, dated as of September 2008, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.23
|
Ninth Amendment to Service Agreement, dated as of June 11, 2009, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.24
|
First Amendment to Service Agreement dated as of October 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.25
|
Eighth Amendment to Service Agreement, dated as of October 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.26
|
Ninth Amendment to Service Agreement, dated as of November 9, 2009, between First Data Merchant Services Corporation and iPayment, Inc., filed herewith.* | |
10.27
|
Tenth Amendment to Service Agreement, dated as of November 12, 2009, by and between First Data Merchant Services Corporation and iPayment, Inc., filed herewith. | |
10.28
|
Employment Agreement, dated March 4, 2011, between Mark C. Monaco and iPayment, Inc. (incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K filed with the SEC on March 8, 2011). | |
14.1
|
Code of Ethics (incorporated by reference to Exhibit 14.1 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2003). | |
21.1
|
Subsidiaries of the Registrant, filed herewith. | |
31.1
|
Certification of Gregory S. Daily, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
31.2
|
Certification of Mark C. Monaco, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.1
|
Certification of Gregory S. Daily, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. |
32.2
|
Certification of Mark C. Monaco, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith. |
* | Portions of the exhibit omitted and filed separately with the SEC pursuant to a request for confidential treatment. |
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